Seizing an Unparalleled Opportunity to Meet EU Strategic Objectives - The Case for Cities' Increased Direct Access to EU Funding

Political Capital’s novel research addresses European cities’ access to financial resources under direct-management from the European Union (EU) budget and emphasizes cities’ role as key actors in achieving the EU's common climate, digital, social or health objectives. The research tackles the issues of whether the EU subsidies in their current distribution system, form and amount can effectively serve the crisis management that cities face and their ability to meet the European strategic goals—notably in the context of the crises that have hit the EU in the past couple of years. The current study concludes that such is the case only to a limited extent, hence why cities deserve the EU's special attention and protection against restrictive measures by national governments in the spirit of EU principles such as subsidiarity, partnership or political non-discrimination. We argue that meeting cities’ special financing needs is politically justified, legally possible, and even additional funds could be made available.

Findings

• Cities need more support. Cities are the strongholds of European democracy and the principle of subsidiarity. According to a recent Eurocities survey, over half of EU mayors surveyed think that EU institutions and policies do not or not sufficiently take into account cities' specific needs and potential. Also, mayors feel that the EU support is insufficient compared to the challenges they face. Moreover, many mayors think that EU funding schemes were more helpful in the form of direct support or if local needs were taken more into account. Cities were in the forefront to cope with recent challenges in the EU such as COVID and the inflow if Ukrainian refugees.
• The resources available for cities are quite fragmented. Applying for them is a serious administrative challenge for local authorities and, with a few exceptions, they can provide cities with access to smaller amounts of support. Available funding programs for cities (listed in more detail in the Annex) are largely managed under shared (four fifths) rather than direct management (one fifth).
• EU Cohesion Policy in need of reform. The coronavirus pandemic and the war in Ukraine have demonstrated the limits of the EU’s rapid and effective response to immediate crises. While greater centralization has occurred under the EU’s Recovery and Resilience Facility (RRF), a short-term crisis management tool, its shortcomings have also appeared as inequalities within the EU have amplified. To prove its viability and avoid competition with other alternatives and budget cuts, the Cohesion Policy must undergo structural changes after 2027.
• More direct funding is desirable – not only for cities but for civil society organizations as well. It represents a contribution to achieving the EU’s ambitious strategic goals in terms of climate, digital, social policies, to the costs of integrating refugees and legal migrants, and to strategic autonomy. Furthermore, direct funding represents an instrument to enforce the rule of law against political discrimination, especially in the context of a union-wide need for a decentralized Cohesion Policy.
• Increasing national centralization: According to the Eurocities survey mentioned above, mayors see a worrying centralisation trend in EU funds, and Eastern European mayors report that national governments use EU funds as a political weapon against opposition mayors. Budapest, Hungary, is a good case and point for the present failings of EU funding for cities.
• Hand in hand with the recent crises has come a stronger desire for Member States (MSs) to centralize resources. In the political conflict between the Hungarian government and the capital, Budapest’s unique position reflects the way in which European funds can be utilized as a means of political punishment to divert funds away from cities that are not politically aligned with the incumbent government. Cities subject to restrictive government measures, left out of the consulting process and recipients of minimal shares of the shared management funds run the risk of undermining common EU goals as they are financially obstructed.
• Legal, political and technical hurdles hamper EU direct management funding expansion. The legal hurdle concerns the challenges pertaining to changing the legislation in favor of increasing direct-management funding from its current one fifth of the EU budget. The political hurdle encompasses the conflicts of interests that exist between MSs, between MSs and EU institutions, and between national, municipal and regional actors. Lastly, the technical hurdle regards the present lack of human and administrative resources at the EU level to commit to greater direct-management.
• While the existing resources are quite fragmented, more sources of funding are potentially available. Possible new avenues include: an increase in the European Regional and Development Fund (ERDF) budget for sustainable urban development from the current 8 percent to around 10 percent; an increase in the European Urban Initiative (EUI) budget from the present EUR 500 million available now; a restructuring of the Cohesion Policy to include more direct funding; making use of the MFF as a guarantee to provide loans to cities where necessary; and returning money stuck in non-approved Recovery and Resilience Plans (RRPs) or not booked or used by MSs to an EU pool that would redistribute it on a direct management basis to final beneficiaries.
• Flexibility as the core of the EU’s resilience. The review of the Multiannual Financial Framework (MFF) will center around the EU’s ability to support Ukraine and to ensure and enhance its strategic autonomy. While no major budget increases or substantial modifications of the current financing model can be expected, greater flexibility should be given to MSs to respond more quickly and effectively to new emerging challenges difficult to predict. Moreover, placing the earmarked amount under direct or semi-direct management would prevent discrimination based on political grounds, ensure recipients are directly accountable to the Commission, involve the Commission in a way that does not cause an administrative burden, and safeguard the MSs’ commitment to the EU strategic goals.
• The mid-term MFF review remains an unmissable opportunity. While no major revisions can be expected to ensue following the review and given the limited timeframe of the whole process, cities should emphasize the cost of receiving Ukrainian refugees and their role in industrial development as a rationalization for increased direct funding. The mid-term review further represents a key moment for cities to prepare the ground for the future Cohesion Policy after 2027.

Recommendations

In our study, we have identified several possible solutions to increase the financial resources available for cities. They are the following:

Short-term opportunities

• Use the MFF mid-term review as an opportunity for cities to argue for more direct funding and prepare the ground for the future Cohesion Policy after 2027.
• Increase cities’ role in the RFF and its REPowerEU-related programs and require MSs to improve cities’ inclusion in the RRF programming and implementation process, and widen cities’ access to these sources.
• Regroup Cohesion Policy funds irrecoverably lost for the MSs’ governments due to the rule of law conditionality mechanism to projects serving sustainable urban development in a direct funding scheme.
• Top up the Horizon Europe ‘100 Climate-neutral and Smart Cities by 2030’ program by an additional €3-500 million to finance climate neutrality efforts of cities within the framework of the yearly EU budget debates.
• Return money stuck in non-approved Recovery and Resilience Plans (RRPs), not booked or used by MSs to an EU pool and make it available for final beneficiaries of the respective country on a direct management basis to boost economic and social recovery at the local level. However, this would require an amendment to the RRF rules, which is quite unlikely to happen by 2026.

Long-term opportunities

• Increase in the European Regional and Development Fund (ERDF) budget the proportion that must be devoted to sustainable urban development from the current 8 percent to around 10 percent. Place the earmarked amount under direct or semi-direct management to prevent discrimination on political grounds. The purpose would be for the recipients of funds to be directly accountable to the European Commission.
• Increase the budget of the already directly managed European Urban Initiative (EUI) from EUR 500 million available now. An enhanced EUI could become the core of a special fund to support cities in reaching their climate and other objectives related to sustainability.
• Create multi-country projects dedicated to energy transition and decarbonization within the future Strategic Technologies for Europe Platform (STEP), considering cities’ critical role in industrial development.
• Include in the country-specific recommendations (CSRs), within the European Semester, a golden rule for cities' long-term investment needs. Doing so would allow cities to borrow from capital markets. Moreover, the MFF could be utilized as a guarantee to provide loans to cities where necessary.
• Let NGOs distribute part of the funds along the lines of the European Economic Area (EEA) and Norway Grants, in which part of the resources are managed not by the beneficiary state but by civil society organizations.
• Redefine the principle of excellence in research and innovation-related programs and adapt it to local needs.
• Reconsider the support system affecting cities according to the principle of efficiency. The extension of existing direct management financing can play a useful role in this, through the completion of existing funds or the creation of new ones focused on special needs. This can be especially useful in countries where political discrimination afflicts large cities led by the opposition thus imperiling the achievement of favorable changes at the local and EU level.

Our full study is available here.