When is growth unstable?

European economic policy suggests that there is a trade-off between stability and growth. Builders know that the taller your building grows, the more difficult it is to keep upright. Likewise, it is assumed, the more we borrow, the shakier our financial foundations become.

However, when a structure grows to become wider, it is far less likely to topple. According to André Sobczak, chair of the Eurocites Economic Development Forum and Nantes’ vice-president on Corporate Social Responsibility and EU affairs, “Stability does not need to come at the expense of growth, nor vice versa; long-term investments in cities present an opportunity for growth and stability to be mutually reinforcing.”

The European Commission’s Stability and Growth Pact places strict limits on borrowing, without taking into account the separation between stabilising and destabilising growth. This policy is not in line with the common sense approach recommended by former IMF chief economist Oliver Blanchard in the Financial Times, “It’s pretty straightforward: if borrowing is cheaper you should probably do more of it.” Sobczak concurs, “It is not clear that austerity was ever a sound policy, but in this moment of extremely low interest rates, borrowing for the future makes sense.”

With interest rates currently sitting at next to nothing, safe investments in our future that encourage growth may not provoke instability but actually restrain it. Conversely, the hangover of a failed austerity policy, bolstered by mistaken economic analysis, which has seen chronic underfunding of cities, and hence underinvestment in physical and social infrastructure may pose a threat to European stability. However, Paolo Gentilloni, the Commissioner-designate for Economy, has said that he will make use of the flexibility allowed in the current rules, for example by exempting certain categories like, potentially, construction of sustainable infrastructure.

Spending spree?

This does not mean that cities are to go on a spending spree with money they do not have. Rather, cities want to capitalise on historically low interest rates to make sustainable long-term investments with high returns that can battle climate change, encourage social cohesion and improve quality of life for everyone. Sobczak wants to see “immediate action from the Commission to give cities the financial flexibility to deal with pressing social demands such as an aging population and the need for hospital infrastructure.”

He further issued a warning about delaying such action: “Social and environmental issues are not waiting for us to make up our minds; more money spent sooner means less money spent overall, because every moment of inaction makes these issues tougher to tackle.” When cities demand greater flexibility, they are not asking for a general relaxation of the rules, but for specific and strictly delineated space to manoeuvre. “A good example of such flexibility” according to Sobczak,”could be only counting the annual depreciation rate of large projects in the public debt and deficit, rather than the whole cost which obscures the value that such projects create.” Cities demand sustainable growth

This is not just good policy, it is essential if cities are to tackle climate change before it becomes too late. Investments in sustainable infrastructure yield serious returns. For example, analysis revealed that a new multi-level roundabout that allows cyclists to stay safe in Bruges generated €1.50 for every €1 invested; in Arad, Romania, a cost benefit analysis showed that the host of sustainable mobility measures it has implemented will generate €2.2 for every €1 invested. Those returns are way above the yields of the stock-market, and they make cities better places for the people in them while combatting climate change.

More flexibility in the Stability and Growth Pact around public debt and deficit, allowing investments that produce long-term value would allow for investment in sustainable infrastructure. “Cities need budgetary flexibility. An investment that increases the long-term value of local government assets is a productive investment, and it must be treated as such.” Sobczak explains.

Cities find smart mechanisms for investment

Cities are used to working with constrained budgets, and have designed innovative funding mechanisms that can ensure they extract the maximum value for what resources they do have access to. These include digital planning tools that map costs, trade-offs, and stakeholder preferences, as well as financial structures such as ‘revolving funds’ that allow projects in certain areas to become self-perpetuating.

  • Cologne: “Financial constraints mean many cities have a backlog of public infrastructure refurbishment projects and are unable to respond to future infrastructure challenges.” Said Helmut Dedy, managing director, Association of German Cities, and advisory council member of the Cologne sustainable infrastructure financing project. Cologne has set a course to safeguard its long-term strategies by ensuring sufficient financial resources would be available across the entire implementation process. The city has created a new tool to assist its planning process, ‘Leistungsfähige Infrastruktur generationengerecht finanzier,’ in collaboration with the public infrastructure and services enterprise owned by the city, Stadtwerke Köln, the German Institute of Urban Affairs and the FiFo Institute for Public Economics. This technology can be used in two main ways: To evaluate the city’s finances and identify the amount of money it would have to find through cuts or revenue increases to remain financially sustainable; and estimating the financial resources required to implement proposed strategies, to make the affordability of different options more tangible, decision-making more informed and strategies more realistic and sustainable.

  • The Hague: “We are in the business of building cities not making money.” Explained Ton Overmeire, fund manager of The Hague Economic Investment Holding Fund Foundation, regarding the city’s decision to create a revolving city fund for sustainable investment. A revolving fund is an investment whose returns are fed back into itself towards further investment in the same area. The Hague is using two such funds: The Hague Energy Fund (ED) which invests in innovative sustainable energy projects, and The Hague Spatial and Economic Fund (FRED), which focuses on the development of small scale commercial premises. An initial fund of €8 million and has gone on to invest €25 million, with some of the money allocated already being spent twice as loans and investments have been paid back. The fund currently has €48 million available to invest and is working on securing another €100 million from national and European sources for investment in energy efficiency projects. The fund’s investments have also achieved non-financial objectives including reducing greenhouse gas emissions by approximately 93,000 CO2 equivalent and creating 18 new jobs.

Bottom up

Paolo Gentilloni has argued for the importance of investments in energy transition and meeting our carbon targets, investments in research, innovation and digitalisation, investments in sustainable infrastructure and social investments as focal points of InvestEU, which will be the new Commission’s funding mechanism.

While this is welcome, Sobczak insists that it is not enough for the EU to invest in these areas – cities must be enabled to invest in their own futures. “It is the local government that has the insight and the know-how to deal with local solutions to global problems. Without more flexibility for cities in the Sustainability and Growth pact, Europe cannot hope to achieve its social or environmental targets.”

Anthony Colclough Eurocities Writer