Local governments across Europe are leading the charge for a climate-neutral, competitive, and resilient future, mobilising 69% of climate-relevant public spending (OECD) to turn national and EU policies into real projects, from retrofitting homes to revitalising social infrastructure. Their investment and ambition already outpace those of many central governments. Yet the financial rules meant to support them often hold back their progress. Rigid frameworks hinder local ambitions and, with them, Europe’s green transformation.

Europe’s key implementers face significant systemic barriers

The EIB Municipalities Survey 2024 – 2025, shows that nearly two-thirds of municipalities struggle to secure investment financing, while almost half are held back by slow, complex regulations. A shortage of experts in climate assessment, engineering, and technical planning further limits the capacity to turn plans into action.

Despite these constraints, the majority of local governments and city leaders plan to increase investment in the next three years according to the EIB to reduce emissions, improve local environments, and expand critical infrastructure like schools, hospitals, and affordable housing. They do so as the devastating effects of climate change, the worsening housing crisis and the crucial delivery of essential services are demanding rapid local action.

The next EU budget – will cities remain sidelined?

In July, the European Commission unveiled its proposal for the next EU Multiannual Financial Framework (MFF) for 2028–2034. With around €2 trillion at stake, the upcoming negotiations in Brussels are a major opportunity to strengthen local governments’ capacity to build a more sustainable, resilient Europe. But local and regional leaders fear that the final budget structure will sideline them again.

The Local Alliance – a coalition of Europe’s major city and region networks, including ICLEI -  warns that the National and Regional Partnership Plans proposed by the European Commission could overly centralise decision-making and weaken Cohesion Policy - the very policies and funds designed to strengthen the economic, social and territorial cohesion of the EU across its regions. Without clear earmarking for Cohesion Policy and strong safeguards guaranteeing local access to EU funds based on partnership principles, local and regional governments may be left without the tools needed to deliver Europe’s green, just, and competitive transition. This is especially problematic when national governments delay or restrict fund disbursement to local levels.

Can the system be changed?

Yes, it can be, and the solutions lie in decentralisation, rather than centralisation. The TurnaroundMoney II project explored alternatives in Germany, Czechia, and the Baltic States and through workshops with public authorities, financial institutions, and utilities, the project identified practical, decentralised models with potential for EU-wide application:

• In Germany, the decision of the new federal government to create a special asset (Sondervermögen), taking on debt, opened the space to allocate additional public funds to the level of the states and municipalities. Whilst discussions around the regulations of implementation are ongoing, it looks like the ultimate decision will be left to the states, following Germany’s principle of subsidiarity. This provided a chance to use the approaches of state level funds (more here) as well as the so-called budget approach (see here) to make the allocation of funds more effective and more efficient. The budget approach would allow for simplicity in the administration of the funds, whereas the state level funds would allow to de-risk private co-investment into public infrastructure projects.
  
  
• In Czechia, a blueprint for Public-Private Partnerships (PPPs) was explored to attract private co-investment while addressing low administrative capacity in local government. A central PPP platform was proposed to streamline applications, provide risk assessments, guide agreements through a standard format, and base public payments on real-time progress toward defined KPIs.
  
  
• In the Baltic States, the regional experience with One-Stop-Shops (OSS) was explored. The existing OSS model was examined for scale-up from local to regional levels. The proposal is to empower regional energy agencies as intermediaries, providing technical support to municipalities and coordinating market activities, backed by a nationally supported financial mechanism.

These examples – and their conclusions, which will soon also be available– suggest that while national consent is required to increase financial support to local government, it must go hand-in-hand with trust in regional and local capabilities and giving local decision makers the freedom to decide how best to use it. At the same time, robust monitoring frameworks are needed to ensure resources are used effectively within a multi-level governance system.

What are the next steps?

Europe will not meet its climate or competitiveness targets without systematically improving its financial structures and facilitating financial flows to local and regional governments. The solutions exist but they need political will, coordination, and cooperation between all levels of governance. Sidelining municipalities as the level of government closest to citizens has repeatedly hindered and hampered the potential progress. As MFF negotiations proceed, EU and national governments must recognise local and regional authorities as full partners in delivering the green transition and the budget.

To make this happen, they must:

• Embed multilevel governance as a core principle in the next budget.
• Establish legal frameworks for special municipal funds and flexible budget approaches.
• Support experimentation with innovative financing models like OSS and PPP platforms for replication across Member States.

Europe’s green, just, and competitive transition will be built from the ground up. It is time to give cities the financial tools they need to make it happen.