AER Summit on the Crisis and the Regions

      Pescara, Italy, 21-22 September 2012

      “Facing the crisis: The regions are part of the solutions”

      Speech by Barbara TOCE, Vice-Chair of the Current Affairs Committee

      Co-rapporteur on the impact of the economic crisis on local and regional authorities, Congress of Local and Regional Authorities of the Council of Europe

      Dear colleagues,

      Ladies and Gentlemen,

      It is a great pleasure for me to be here today and to address this Summit not only as Vice-Chair of the Current Affairs Committee of the Congress of Local and Regional Authorities, but also as a co-rapporteur on the impact of the economic crisis on local and regional authorities.

      This issue has been on top of the agenda of the Council of Europe Congress since the onset of the crisis in 2008. The Congress held three plenary debates on its consequences for local communities and regions – in 2009, 2010 and most recently in March this year. We have just discussed it again at a general meeting of national and European associations of local and regional authorities in Strasbourg last week, and we are pleased that Madame Michele Sabban, President of this Assembly of European Regions, took an active part in these discussions.

      Such debates have been taking place all across Europe indeed, of which this Summit is an excellent example. It shows that we are in synch with regard to the main challenge to local and regional authorities today, and priorities for our action. I would like to thank the organisers of this event, the Assembly of European Regions, which is a close partner of our Congress, for this excellent initiative. A report which is currently being prepared in the Congress will take into account the concerns raised and proposals put forward during these discussions.

      It is not surprising that the local and regional situation is increasingly becoming the centre of attention when we speak about the economic and financial crisis, its impact and ways to respond to it. First, it is due to the economic importance of local communities and regions today. Local and regional authorities represent 65 per cent of all public investment and 30 per cent of public spending, and they account for some 16 per cent of public debt and almost 13 per cent of public deficits.

      Second, it is due to the social importance of the subnational level. As a result of increasing decentralisation of power just before the crisis, key responsibilities with regard to social protection of citizens have been transferred to local and regional level, including housing, health care, education, sickness and disability, care for the elderly, family and children, measures against unemployment and exclusion. For example, local and regional authorities today represent 60 per cent of public spending on education and more than 30 per cent of spending on health.

      In other words, local and regional governments underpin to a great extent the economic and social situation at national and European levels today. Measures taken at local and regional level to stimulate growth are therefore crucial for the overall economic revival. At the same time, local and regional authorities are the first line of social support to citizens who were hit hard by the crisis, especially vulnerable groups. Consequently, they have a central role to play in both preventing the crisis from becoming a social disaster, and in kick-starting the economic revival of Europe.

      This role has been increasingly recognised by both national parliaments and national governments. The Parliamentary Assembly of the Council of Europe, at its latest session last June, debated a report on the impact of the crisis for local and regional authorities and adopted a recommendation to central governments with proposals for policy action to address the local and regional situation.

      As for national authorities themselves, already in 2009, Ministers responsible for local and regional government of the 47 Council of Europe member states, at their conference in Utrecht, stressed in the final Declaration that – and I quote – “because of their knowledge of communities, people and businesses at local and regional level, local and regional government can be extremely powerful actors in addressing the needs of citizens and facilitating business in overcoming the economic crisis” – end of quote.

      The Ministers reiterated this importance at their conference in Kyiv in November last year, when they stressed the need for both national and local and regional authorities to join their efforts in responding to the crisis. This was reflected in both the adopted Kyiv Guidelines for policy responses to the crisis and an Agenda in common approved by the Ministers, which identifies joint action in response to the crisis as one of the top priorities.

      Thus, all levels of governance agree on the need to address the consequences of the crisis at the grassroots, where they have the most tangible impact on our citizens. It is also clear that the effectiveness of national and European anti-crisis policies and measures should be seen through the prism of their implementation and impact in local and regional communities.


      Ladies and Gentlemen,

      Indeed, local communities and regions have been most severely affected by the current financial and economic crisis, as they have to face at the same time a shrinking revenue base due to the economic downturn, cuts in budgetary transfers from national governments, need to manage debt – excessive sometimes because of so-called “toxic loans” – as well as the obligation to increase social support to citizens, against the background of growing demands for assistance to vulnerable groups affected by the crisis.

      In other words, local and regional governments are faced with increasing social costs while challenged to increase investment in order to revive local economy. This is a challenge indeed: over 2010 and 2011, local budget investment has fallen by 14 per cent, as grassroots authorities had to face an almost 5 per cent drop in intergovernmental transfers last year alone, which almost completely offset a 5.5 per cent rise in local tax revenues.

      Over the first two years of the crisis, in 2008 and 2009, regional output was shrinking on average by 3.4 per cent, with such extremes as a 20 per cent fall in Latvia. However, it was on the rebound in the next two years, 2010 and 2011, which saw an upswing in most regions, with an average growth of above 3 per cent.

      While the impact of the crisis varies considerably from country to country and from region to region – as do policy responses and anti-crisis measures – several common trends can be identified. Among these are:

      - the contraction of the economic base and a reduction of local revenues as a result;
      - an overall decrease in transfers from national budgets – by 18 per cent in some cases – and significant reductions in earmarked grants for infrastructure;
      - a diminishing capacity to raise own local revenues (known as “local revenue authority”) due to local tax restrictions imposed by national fiscal policy – such as on introducing or abolishing taxes and charging tax rates – which limits space for tax revenue increase;
      - spending limitations and control, with most countries requiring local and regional authorities to participate in national fiscal consolidation efforts, by introducing budget deficit targets and expenditure limits;
      - cuts in local public investment after initial stimulus in 2008-2009;
      - a rise in social expenditure – in particular for the unemployed and their families as well as for the elderly;
      - finally, in some cases, efforts by national governments to recentralise, taking competences or funding sources away from the regional and local level.

      On the positive side, some countries are considering the possibility of increasing tax autonomy of local and regional governments, and are encouraging them to explore other types of revenues – such as fees – along with increasing the effectiveness of public spending. However, in some countries – in this country, Italy, for example – this has led to stronger controls by national authorities of regional spending through spending reviews, and a number of sanctions are envisaged for regions breaking the rules for expenditure reduction targets.

      In addition, the crisis revealed the deficiencies of the existing equalisation systems, with many economically weak regions suffering from insufficient programmes for equalisation between regions in their countries. In response, a number of countries have carried out equalisation reforms to improve the regional distribution of wealth and therefore regional economic growth – for example, Estonia, the Czech Republic and France, which created new equalisation and intercommunal funds in 2011 and the reinforcement of the capital region fund in 2012. Negotiations are underway in Belgium to improve the burden-sharing between different governments.

      In Italy, for example, payments to regions are now based on detailed uniform standards of service provision for health care, education and social welfare, and relevant ministries closely supervise local government management in these sectors. At the same time, this country’s Internal Stability Pact exempts health care and a number of other sectors from spending cuts.

      Some countries are also introducing grant system reforms – such as the Czech Republic, Finland and the United Kingdom where local authorities received more control over budgets and earmarking was abandoned, except for school and public health grants. Still others are reforming their local tax systems – examples include France, Ireland and Slovakia.

      This list of reforms can be completed with territorial organisation reforms and municipal mergers that are being promoted in several countries (Finland, France, Greece, Ireland, the United Kingdom). In this context of territorial reform, certain governments are considering abolishing intermediate government tiers, such as provinces in Italy; pursue radical amalgamation of municipalities, which is the case in Finland; or abandon further regionalisation, for example in Hungary, Latvia, Lithuania, Portugal, Slovenia and Sweden. Finally, the allocation of tasks and responsibilities between different tiers of government is also under review, for example in Hungary, Greece and Ireland, with a clear emphasis on recentralisation and greater control by central government.

      Another crucial issue has been addressing the debt situation. Borrowing has been subject to greater restrictions in several countries, replaced in some cases by dedicated local government loans from specially created funds. In Finland, for example, the Municipal Finance Limited Company was set up by local authorities themselves, through which municipalities can get loans without prior authorisation from other tiers of governments. So-called “debt brakes” are also being introduced, notably in Germany, to ensure that sub-national budgets are financed without any structural deficits.

      Against this range of actions at national level, local and regional authorities have been undertaking significant efforts of their own,

      - taking measures to increase their own taxes or fees (when they have sufficient autonomy to do so);

      - increasing revenues by fighting tax evasion – in this case, examples of Ireland, Spain and Greece are worth mentioning;

      - seeking efficiency gains – for example, by benefiting from the economies of scale through shared services and administrative costs as well as through joint procurement, with notable examples of Hungary, Ireland and the Netherlands, as the crisis gave a boost to inter-municipal co-operation;

      - and increasing transparency of public procurement, ranging from online competitive bidding in Slovakia and electronic auctioning in Russia to extensive use of benchmarking in Denmark and Ireland.


      Ladies and Gentlemen,

      However, the most crucial area of both national and local and regional action in this time of crisis is social protection. The crisis is tearing indeed at the very fabric of our democratic societies, threatening to undermine the social rights of our citizens. Social consequences of the crisis cannot be measured by economic indicators alone: growing unemployment and rising costs of living also aggravate the risks of domestic violence, child abuse and other forms of social ills with which local and regional social services have to grapple.

      Unemployment in the Eurozone alone stood at 11.2 per cent in June 2012, with a high end of 21.7 per cent in Spain. At the same time, the number of households where essential household costs (such as rent, mortgage payments and utility charges) exceed 40 per cent of income has grown by 13 per cent, pushing local social expenditure on these households by 16 per cent.

      Local and regional authorities have key social responsibilities, bearing in particular all or part of the rising cost of housing and utility allowances; safety net payments to the long-term unemployed; emergency aid to families; protection for an increasing number of children from distressed families; and care for a growing population of elderly people as well as for people with disabilities.

      Social protection is one area where the crisis brought about an additional transfer of competences to local and regional level in several countries: Romanian municipalities have become responsible for most hospitals, Dutch municipalities for specialised social services, English and Welsh districts for public health, German gemeinde for crèches and services to the handicapped. The Kalikratis reforms in Greece devolved child protection, elderly care and preventive health services. I should mention that the trend in Hungary has been in the opposite direction, with much devolved responsibility for education, health care and social service reverting to state agencies.

      At national level, some countries have protected priority sectors (such as education, health or social protection), either by preserving earmarked grants for these sectors, or by excluding these expenditures from the expenditure limits and fiscal rules. This is the case for example in Estonia, Slovakia, Italy and the United Kingdom.

      Local and regional authorities are implementing a wide range of their own measures to mitigate the social consequences of the crisis. For example, many of them have been cutting employment costs but not employment, avoiding layoffs. These include salary cuts (for example, 25% in Romania in 2010, 20% in Greece in 2011), pay or vacancy freezes, fewer work hours (to four days per week in Latvia) or abandoning bonus payments, among others. These widespread efforts to reduce payroll costs without imposing redundancy are a good example to follow.

      Closing underused service institutions has been another cost-saving strategy, with examples reported by Bulgaria, Denmark, Hungary, Iceland, Moldova, Romania, Ukraine and the United Kingdom. However, this practice must be applied with great care because in some cases, the target was small rural schools or schools providing native language education to ethnic minorities, day care centres for the elderly, etc., which clearly brings about additional social consequences – closing a primary school can rob a village of its social and cultural heart.

      Efficiency savings have also been achieved through innovation and greater use of new technologies – for example, by computerising certain public services and through online service provision. For example, in Orenburg, Russia, patients register their own attendance at the polyclinic, saving time as well as money. In Salford, United Kingdom, staff can work from home to save office space. Much of the progress has also been linked to energy savings.

      Overall, we can speak of three strategies variously pursued at local and regional level for coping with social budget pressures. The first is to target social assistance to those most in need, by allocating subsidies directly to households and individuals based on their financial means, rather than to service providers. In a number of countries this strategy also involve substituting cash benefits for in-kind services to physically dependent people, enabling the beneficiaries to buy the help they most need from whomever they choose.
      The second strategy is to prefer community care to institutional care for the elderly and people with disabilities. This involves correcting administrative and financial incentives in favour of hospital treatment and large residential homes. It also involves the third strategy which favours co-operation with non-governmental organisations active in community care, as well as support of voluntary and family carers.
      This strategy of increasing partnership with the third sector deserves particular attention as non-governmental organisations, usually charitable, are widely involved in specialised forms of social and health care. In Spain, 80 per cent of residential care is provided by the private sector, with religious bodies particularly specializing in mental health care. Home carers in Bulgaria are funded by co-operation between municipalities, the Red Cross and UniCredit Bank. However, as provision of social service by private enterprise is often shunned by public opinion, the compromise is increasingly seen to be outsourcing to social enterprise where ownership is vested in employees or charitable trusts.


      Ladies and Gentlemen,

      It is clear that the issue of the crisis, its impact and possible responses at local and regional level is vast indeed. However, the experience of coping with the crisis over the past four years allows us to draw some conclusions and provide recommendations for further action, based on certain key principles.

      First, local and regional authorities must be recognised as fully-fledged stakeholders in the economic recovery and consequently be involved in decision-making on revival policies and strategies. Iceland is a good example to follow in this regard, where direct consultations with local authorities produced excellent results. Furthermore, regions and local communities must have their say in financial policy-making and become partners in national and European financial mechanisms.

      Accordingly, national governments must involve local and regional authorities in consultations on national anti-crisis measures and policy development, to ensure the coherence between national and local responses, as well as in decision-making on budgetary reductions, and to provide them with an advance warning on the reduction in transfers – if possible, one year in advance.

      Second, we are convinced that the way out of the crisis is through further decentralisation and greater budgetary autonomy. The crisis has revealed the fact that many local communities and regions in fact did not have enough responsibilities to respond to it adequately. A study commissioned by this Assembly of European Regions three years ago showed that, at regional level, decentralisation is a key to better economic performance and growth. Local and regional authorities know best the needs and circumstances of their communities, and they are in a position to act more effectively and more efficiently and to ensure an optimal use of local resources – not least also for reason of better transparency and accountability to citizens.

      Decentralisation fosters economic performance and welfare through greater consideration of citizens’ wishes and needs. It also has an impact on the innovative capacity of regions and local communities, and higher decentralisation means better development of employment and a lower increase in unemployment. The current analysis of the four years of the crisis also shows that, while decentralised economies are no more immune to its impact than the centralised ones, they recover better as they adapt quicker to changing circumstances and show greater resilience overall.

      Slowing down the decentralisation process is therefore the wrong answer to the current crisis. Regions and local communities need more power and responsibility; accordingly, national governments must reverse the recentralisation trend and provide further decentralisation in budgetary decision-making, giving local and regional authorities more liberty to decide how to allocate their budgets and further possibilities to raise their own funds (for example, through local taxation). Regions in particular must be given full responsibility in such policy areas as infrastructure, education and research, recreation and culture, and health care.

      Third, the debate over austerity vs. growth stimulus must be decided in favour of growth. Reviving investment in regional and local infrastructure must be a priority in order to promote local competitiveness, encourage private sector investment and stimulate employment. The current fiscal consolidation constraints on local and regional governments may create cascade effects on local labour markets, mainly through public procurement, and threaten local growth possibilities. Consolidation constraints can also provoke or increase inequalities in local public service access and quality.

      Local and regional financing must therefore be seen as an investment in local economic recovery, and it must be revised to provide a balance between allocations into social support programmes and investments into projects to stimulate local innovation and kick-start the local economy. Innovative approaches and practices are one area where local and regional communities represent a great potential and must play a major role.

      Fourth, local and regional authorities must introduce or increase elements of direct democracy in order to enhance citizen participation. Voters are usually more reasonable than politicians and feel more responsible for a longer-term development.

      Finally, active participation of citizens in community revival also means actively building partnerships between public authorities and non-governmental as well as private sectors, and pursuing co-operation both horizontally, with other local and regional authorities – including across national borders – and vertically, with other tiers of government, in order to benefit from the economies of scale. However, such co-operation should be encouraged on a voluntary basis and not imposed from a higher level.

      As a co-rapporteur on the subject, I intend to put forward for debate in the Congress these and some other, more specific recommendations, also dealing with reviving local businesses, regenerating public space, providing vocational training and skill development, and dealing with the demographic change. There is a host of measures that can be taken or are being taken already at local and regional level to reverse the consequences of the crisis. Organising proper channels for sharing information and good practices is yet another challenge which probably can be best met by European organisations and institutions such as the Assembly of European Regions and the Congress.

      I would like to conclude by stressing that local autonomy, the clout of local and regional government, cannot be measured solely by revenue growth or legal competence. From national government to the general public, there is an expectation that local and regional government will “do something about” economic recovery, youth unemployment, social distress and the care of a rapidly increasing elderly population. It is this expectation that gives local and regional authorities the opportunity for leadership, influence and innovation. It can only be taken, however, by sustaining two legacies of the last four years:

      • a culture of efficiency, of care how money is spent,

      • and a culture of partnership with neighbouring authorities and agencies, business and social enterprise, the voluntary sector, universities and research institutions, in which power comes not from the law but from political legitimacy and a comprehensive concern for the local economy and society.

      Thank you.