Regional policy

The European Union’s regional policy has the goal to foster convergence in per-capita earnings at purchasing power parity, to limit poverty and unemployment in peripheral regions, and to foster economic as well as social cohesion at large, while upholding environmental protection and respecting fiscal autonomy (see European Union, 1987). The removal of barriers to international transactions among the EU member countries and, in particular, the inception of the four fundamental freedoms of movement – of people, goods, services, and capital – between all member countries through the Single Market Program paved the way for some convergence in factor prices and incomes with the expected benefits (to consumers, firms, etc.) and costs (increased tax competition, the export and import of consequences of market imperfections such as credit constraints and unemployment). It is unquestioned that the fundamental heterogeneity among the member countries and regions (in institutions, climate, geography, the endowment with immobile factors, the age profile of the populations, in currencies, etc.) creates an obstacle to such convergence that market forces established by the four freedoms may not be able to surmount. Hence, it is held at the European Commission – as in all national federations – that a system of transfers should be established in order to extend equalization (in purchasing power parity and fiscal capacity) to where the market itself cannot provide it, at least not in the short run.