Spatial effects of regional income disparities and growth in the EU countries and regions Tiiu Paas 1 , Friso Schlitte 2 1 University of Tartu, Estonia, tiiu.paas@ut.ee 2 HWWI, Germany, schlitte@hwwi.org Abstract The paper aims to offer empirical insights in the regional income disparities and growth giving emphasis on exploring spatial effects of income growth and convergence in the EU countries and their NUTS3 level regions. Spatial econometric methods are applied in order to identify existing spatial interaction and control effects of spatial autocorrelation. We have based our analysis on the assumption that there are two types of spatial effects and therefore regional convergence equations are specified taking into account that first, observations from adjacent regions can be correlated (Spatial Lag Models – SLM) and second, a functional relationship can vary across regions, there can be measurement errors (Spatial Error Models – SER). The estimators based on the EU countries’ and their NUTS 3 level data of per capita GDP (PPP) confirmed that both spatial lag and spatial error dependence matter between observations. However, in the conditional convergence models, the effects of spatial spillovers are captured by country dummies reflecting country-specific effects, i.e. national policies, legislation, tax systems etc. The results of the empirical study demonstrate that national macroeconomic factors exert a greater influence on regional growth than spatial interactions. Spatial growth spillovers seem to stop at national borders, which indicate that border impediments still matter for the intensity of economic cross-border integration in the EU. Keywords: regional disparities, income convergence, spatial econometrics 1. Introduction The issues of regional income disparities, growth and convergence have been the subject of a large body of empirical research since the beginning of the 1990s ((e.g. Barro and Sala-i- Martin 1995, Armstrong 1995, Tondl 2001, Cuadrado Roura 2001, Baumont et al. 2003, Arbia and Piras 2005, Meliciani and Peracchi 2006, Anagnostou et al 2008). Despite the great interest in this matter, information on regional income disparities, growth and convergence in the enlarged EU is still relatively scarce. Owing to data restrictions, previous empirical research on regional convergence in Europe is mainly focused on EU-15 regions. Empirical analysis on regional convergence in the enlarged EU is able to show recent developments, but it cannot identify long-term trends. This paper aims at providing more distinct information on regional income disparities and convergence processes in the enlarged EU during the period between 1995 and 2003. Although the explanatory capacity for long-run developments is limited, we believe that analysing the period after 1995 may yield important insights into recent tendencies in the development of income disparities in the enlarged EU. Attention is paid to differences in regional income growth between the EU-15 and the new member states (NMS) and to the role