Why EU economic governance reform must protect municipalities’ ability to invest
The Council of European Municipalities and Regions (CEMR) has warned that the upcoming reform of the EU’s economic governance framework, including the Stability and Growth Pact (SGP), could risk undermining the investment capacity of municipalities and regions across Europe.
Local and regional governments are responsible for almost half of all public investments in the EU. These investments are essential to deliver on European priorities such as the green transition, digitalisation, and resilient infrastructure. However, the proposed introduction of net expenditure ceilings risks unintentionally penalising local governments, who generally borrow only for long-term investments in capital assets.
Reform and its implications
The European Commission has announced plans to simplify the SGP by replacing certain rules, including the medium-term objective (MTO), with a new system of net expenditure ceilings. While CEMR welcomes the move away from the MTO, which had previously constrained local investment through deficit limits and reduced transfers from central governments, it raises serious concerns about the impact of the new ceilings.
Applying net expenditure limits to municipalities would create three major risks:
- Higher administrative burdens arise because local governments do not use the net expenditure concept in their accounting.
- Political mismatches, since local electoral cycles rarely align with national fiscal programming.
- Cuts in public investment, as postponing infrastructure projects, are often the only quick adjustment available under tight expenditure ceilings.
This is even though local government debt levels are prudent in every EU Member State, and are already strictly monitored under national rules.
The solution: exclude local expenditure
CEMR is therefore calling for the exclusion of local government expenditure from the definition of net expenditure ceilings in the reformed SGP. Much like cyclical unemployment spending is excluded, removing local investment from these calculations would ensure municipalities can continue to provide essential services, maintain infrastructure, and invest in the future without being penalised by centralised fiscal targets.
At a time when Europe urgently needs stronger local action to address climate, digital, and social challenges, weakening municipalities’ ability to invest would be counterproductive. Protecting local public investment within the EU’s economic governance reform is not just about budgets, it is about safeguarding Europe’s capacity to deliver on its ambitions.
For more information, contact:
Advisor – Territorial Cohesion & Local Finances
