Policy papers

Cities must invest in our future

12 October 2022

Why do people take out mortgages to buy homes? It’s a big investment that takes a long time to pay off, but for many people it means stability, and the knowledge that they’re investing in their future. It’s for the same reason that cities want to be able to borrow to make large, long-term investments. But cities aren’t just looking for a roof over their heads; they want to fight climate change, and make sure that Europe is digitally and socially resilient for the coming decades. 

Current EU legislation prevents this. The Stability and Growth Pact effectively means that our cities cannot raise the money to make the large investments we need to secure our future. Cities are responsible for almost half of European investment, funding the policies that we need to get free of Russian energy dependence and fight climate change.

As the importance of investing in our future grows more urgent by the day, the level of actual long-term investment available to our cities continues in the downward spiral that it has been caught in for over ten years. The European Investment Bank found that 70% of cities reported significant gaps between the investments needed for social, digital and climate infrastructure and the money available – and that was before the pandemic.

It has been shown that when cities invest in public goods, especially by trialling innovative approaches, private investors follow with their own money. A recent European Investment Bank report shows a clear link between cities’ green and digital capacity and private investment in innovation to support these areas. 

When public investment dwindles, especially for as long as it has, it jeopardises public services and local economies for generations to come. Today’s missing investments in renewables and digital skills will translate into tomorrow’s energy poverty, economic deprivation and climate catastrophe. 

Stability and growth?

Eurocities’ economic development expert Denisa Naidin explains why the Stability and Growth Pact can achieve neither stability nor growth in its current form: “The pact says that all EU countries must limit their debt and deficit, and those that exceed their limit have to seriously slash spending.” 

That may sound reasonable on the face of it, but Naidin elaborates, “thanks to the pandemic, that means that more than half of European countries have to cut their spending, right as we’re seeing an economic crisis looming. That’s exactly when cities should be injecting money to stimulate local economies.” 

Naidin has a simple message: “If our investment policy is stuck in the mode of short-term reaction to each problem as it comes along, we’re not going to be ready for the big problems that we can all see on the horizon. It’s like spending your time shooting at sharks while your ship is headed for an iceberg.” 

Practically speaking, this has led to budgetary issues for public service provision, impacted private investment and resulted in a much slower green and digital transition. The size of the challenge is massive. According to a report from the Bruegel think tank, we are spending €300 billion less than we need to be every single year if we are serious about the EU’s 2030 climate goals. 

Radical changes

Luckily, it’s not too late to make radical changes to ensure the fiscal flexibility we need to invest in the assets and skills required for a fair, green and digital transition in Europe. In a new policy paper, Eurocities urges the European institutions to redirect funding to the just transition, support the leveraging of private funding, create a golden rule that exempts long-term spending on social and environmental goals from debt calculations, and create an EU budget to invest in public goods. 

Eurocities’ new policy paper sets out the urgent need for more European funding for long-term investment at city level. This requires major changes to the Stability and Growth Pact. Nonetheless, short term measures will be necessary in the interim. For instance, the EU should increase the funding set aside for local investment into social infrastructure and the transition to climate neutrality and digital resilience. Current allocations are insufficient for the EU to achieve its targets. 

There is money available on hand to provide an interim solution: The policy paper insists that any unspent money from the Recovery and Resilience Facility should be channelled directly to local investment projects for social, green and digital actions.

Eurocities long-term investment policy paper

Generating investment

Public investment attracts private capital. However, this process should be made more efficient by giving public authorities guidance on the best ways to trigger such investment. The policy paper calls for a new EU programme that opens communication between cities and investors to boost capacity and confidence on both sides. 

Support from the European Investment Bank, European advisory services and national investment banks could be complemented by a facility to advise cities on alternative models for financing long-term investment, including through combining existing sources. 

Call for flexibility

At the moment, the EU treats spending on long-term measures to fight climate change in the same way that it treats spending on office supplies. To really achieve climate neutrality, the policy paper insists, these figures need to be treated differently. If general public spending were reported separately and governed by appropriate rules, we could ensure that investments in our future are properly prioritised.

Therefore, Eurocities proposes a golden rule that exempts pro-growth public investment into social, green and digital assets from current debt rules. With more fiscal flexibility, the progress that Europe needs could be achieved. 

A stronger EU

Beyond remedies to the current system, Eurocities’ new policy paper also proposes substantial reforms that could help shape Europe for the better. The paper calls for increased transparency and new mechanisms for a rapid response to economic downturns across the EU. It also calls for economic governance rules that are simple, clear, predictable, and enforceable, and even a new European-level budget that could fund key European public goods. 

Everyone wants more stability and growth in the EU, but Eurocities makes it clear that the current Stability and Growth Pact is not fit for purpose. True stability and growth, the new policy paper contends, will emerge from long-term investment in the things that matter to Europe’s people: preventing climate change, creating social justice, and ensuring digital resilience. Europe’s cities have laid out a clear plan for how this can be achieved – they just need the EU to be brave and take the reins.