Macro-regional evaluation of the Structural Funds using the HERMIN modelling framework

b. Domestic public sector co-financing as set out in the Structural Funds treaties;⁵
c. Domestic private sector co-financing as set out in the Structural Funds treaties.

Inclusion of the private sector co-financing is at best problematic, and they are
ignored in our analysis. Of course, there are indirect impacts of publicly financed
Structural Funds investment on private sector investment, and these are included in
the analysis. However, since considerable uncertainty and ambiguity surrounds the
driving mechanisms behind the private sector Structural Funds expenditures, and
since no methodology exists to model them, they are best excluded.⁶

Structural Funds actions influence the Objective 1 economies through a mixture of
supply and demand effects. Short-term demand (or Keynesian) effects arise in the
models as a consequence of increases in the expenditure and income policy
instruments associated with Structural Funds policy initiatives. Through the
“multiplier” effects contained in the models, there will be knock-on increases in all
the components of domestic expenditure (e.g., total investment, private consumption,
the net trade surplus, etc.) and the components of domestic output and income. These
demand effects are of transitory importance and are not the raison d’etre of the
Structural Funds, but merely a side-effect. Rather, the Structural Funds interventions
are intended to influence the long-run supply potential of the economy. These so-
called “supply-side” effects arise through policies designed to:

-   increase investment in order to improve physical infrastructure as an input to

private sector productive activity;

- increase in human capital, due to investment in training, an input to private
sector productive activity;

- channel public funding assistance to the private sector to stimulate investment,
thus increasing factor productivity and reducing sectoral costs of production
and of capital.

⁵ Note that “domestic” public sector co-finance in the case of East Germany includes a large intra-
German transfer from West to East, and similarly for Northern Ireland a transfer from Great Britain to
Northern Ireland.

⁶ In the simulations carried out for the European Commission, we were asked to exclude all private
sector co-finance, so as to identify the impact of the EU and public expenditure only.

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