Recovery frontlines

By Peter McGoldrick

The European Union hopes to use the hundreds of billions of euros it is mobilising for the COVID-19 recovery to reshape the European economy, making it more green and digital. Public investment – municipal investment, in particular – will play an important part.

Local authorities like municipalities account for 45% of all government investment. Their investment includes basic infrastructure, such as public transport or water utilities. They also modernise public buildings, such as schools, hospitals or social housing. Prioritising energy efficiency in these projects will help Europe meet its ambitious climate goals. Municipalities are also responsible for about 70% of all greenhouse gas emissions. Their role in implementing local development strategies and enforcing regulation will be key for climate change and for protecting biodiversity.

Municipalities, however, have suffered from a decade of low investment, a legacy of the financial crisis and resulting austerity measures. That low investment resulted in persistent infrastructure gaps. Municipalities had just begun to address those gaps and newly urgent digital and climate needs when the pandemic hit.

To better gauge municipalities’ spending and investment priorities, the European Investment Bank’s Economics Department conducted a Municipality Survey in the summer of 2020. That survey interviewed 685 municipalities between May and August 2020, asking them to assess their infrastructure gaps, investment needs and constraints. The results are analysed in a new report, The state of local infrastructure investment in Europe: EIB Municipalities Survey 2020.

Investment uptick

Municipal investment started growing again around 2017. Nearly two-thirds of EU municipalities had increased investments in infrastructure in the three years before the pandemic. That investment tended to focus on certain kinds of infrastructure, like digital infrastructure (70% of municipalities) and social services (60%), as well as climate change mitigation (56%).

The survey points to sizable gaps between different European regions, however. Southern Europe, which was still suffering after the financial crisis, continued to hold back on spending. The majority of municipalities surveyed in Southern Europe decreased or maintained their investment spending, and they dedicated most of their spending to maintenance and repair and only a small share to new infrastructure. By contrast, nearly three-quarters of municipalities in the rest of Europe increased infrastructure investment.

While municipalities were largely increasing spending, many of them felt that their investment was inadequate to meet future challenges. They were most frequently concerned about the level of investment dedicated to climate change mitigation (65%) and adaptation (69%), as well as digitalisation (47%) and public transport (46%). Concerns about urban transport were particularly common in Southern Europe.

Several things stand in the way of fresh investment. Municipalities most commonly cite a lack of funds as a major barrier, followed by regulatory red tape (both the length of the process and uncertainty about regulations), and a dearth of technical skills to execute projects. Municipalities cite the same constraints for climate-related investment, although they say that lack of finance is even more pronounced.

The pandemic weakens climate focus

Before the pandemic, over two-thirds of municipalities had planned to increase infrastructure investment in the next five years. Key priorities included digital infrastructure  and climate change mitigation and adaptation. Spending on climate change adaption increased the most, underlining growing recognition of its importance.

The pandemic may have weakened municipalities’ climate resolve, however. They refocused investment intentions towards digital (38%) and social infrastructure (31%). A quarter of local authorities surveyed said that the pandemic exposed weaknesses in their health services. These trends were particularly pronounced in Southern Europe and, if to a lesser extent, in in Central and Eastern Europe.

While the pandemic underlined the importance of having adequate digital and social infrastructure, climate-related investments need attention and resources. Municipalities acknowledge that climate-related investment is inadequate. Policy makers need to address the barriers to green investment and provide the support municipalities require.

A different crisis response

A decade ago, governments reacted to the global financial crisis and to the sovereign debt crisis by radically cutting spending to stabilise public finances. That austerity had a profound impact on growth and led to a prolonged drop in investment.

The response to the COVID-19 crisis, however, is different. Recovery plans submitted by EU members include a focus on public investment. Some of that investment will be supported by EU funds, like the Recovery and Resilience Facility, €672.5 billion in loans and grants that aim to soften the socio-economic impact of the coronavirus pandemic. Under the Recovery and Resilience Facility, 37% of funds will be dedicated to climate and 20% to the digital transition, helping make European economies more sustainable. The devil will be in the details, however. Municipalities will need the right capacities to deploy the funds effectively while also addressing regulatory requirements, especially for environmental and digital investments.

Municipalities are at the forefront of EU policy implementation. They are poles of socio-economic activity, and as such, they will play a crucial role in helping societies prepare for and prevent climate change. Survey results suggest, however, that two-thirds of municipalities need to build capacity to execute green projects and that nearly half lag behind in digital sophistication. Municipalities in Southern Europe and Central and Eastern Europe face particular challenges.   

To meet its goals, Europe must help municipalities develop the capacities necessary to deal with climate change and to promote the digitalisation of their economies and societies. The good news is that municipalities, particularly those in less-developed regions, are eager to catch up.