Journal of Financial Economics

REF 132 Financing Territories

Since the 1960s, in France, decentralization has emerged as one of the main way to achieve a better government. By transferring powers from the state to local authorities, nothing less was expected than deepening democracy, increasing prosperity and renewing "minority" cultures. Since, the reform of the territorial public action aims, by ongoing alterations, to achieve at last the initial promises. Is it worth pursuing this way or is it time to look for different ways for emancipation ?

This article reviews the successive reforms of the European Union Cohesion Policy. We study the economic and political context, the nature and logic of EU cohesion policy reforms and reflect on the concept of cohesion and its involvement in terms of European public policies. The paper highlights a paradigmatic change that has gradually moved towards more territorialization. Particular emphasis is placed on the concept of smart specialization and its use to facilitate the implementation of a policy that takes more into account local peculiarities. The article also opens a reflection on the future budget of the Cohesion Policy for 2021-2027 and its stakes in a Brexit context.

Whether in the context of regional policy, or through programs managed by the Commission, European funding plays an important role in financing the local economy and territories.

However, at the European level, as shown by the ongoing exchanges on the future multiannual financial framework, the fiscal equation is increasingly complex to solve - with, on the one hand, resources in attrition (consequence of Brexit) and on the other, increasing needs (climate, migration, strategic issues, etc.).

This is the reason why European funding for the territories will experience a "new deal" in the coming years : in terms of priorities, modes of intervention and actors. This new deal should strengthen the Europe of the territories, making it possible to distribute European funding closer to local needs.

After having sketched an overview of European funding for the territories,, we highlight the main elements of the "new deal" linked to the future multiannual financial framework before highlighting the growing role of public investors in national long-term services for a Europe of territories.

The structure of subnational governments as well as their level of fiscal and financial autonomy vary a lot among the four countries reviewed (Germany, Spain, United States, United Kingdom) both in terms of local powers and own resources of local governments. While local governments account for a large share of public investment and employment, these indicators vary by a factor of three across the four countries, depending on the nature of the public policies they are in charge of, particularly in the social area. The way of covering external financing needs for subnational governments is also very diverse, some countries being characterized by a higher recourse to capital markets by bond-issuance (United States, Germany) whereas public financial institutions predominate in local financing in other (in United Kingdom and more recently in Spain). Despite these differences, the States under review have implemented similar frameworks to control local public expenditures and are facing comparable challenges in reducing subnational government's debt and deficit, especially in Europe, in a context of fiscal adjustment.

Within the local public finances, the budgets of the municipalities and their associations occupy the first place. In fact the role and the competencies of the public inter-municipality cooperation establishments (EPCI) have been reinforced with successive reforms. The financial resources for these EPCI (dynamic taxes, a specific funding allocation) have allowed the growth of their expenditures, their interventions for the provision of local public services according to the needs of citizens and territories.

When the financial model of these local authorities is rather strong, it seems to be weakening. Due to (national/supranational) constraints that are far from local concern, local governments are involved in the restoration of public accounts. The decrease of State grants, the limits for their expenditures evolution constrained their operational capacity. Local taxes become less and less local ; local fiscal autonomy decreases. That trend (based on a vertical logic) raises challenges about coherence in public policies, and also about finances of decentralized governments, according to territorial issues.

Fiscal equalization between local governments is now a constitutional requirement since 2003 and there is some consensus on its principle. However, it is frequently criticized. First, its efficiency might be too low in reducing inequalities in tax capacities and fiscal needs. Second, it might be complex in its operating methods. Third, it might even be counter-productive in terms of a better control of local expenditures. Yet, the French legislator seeks to decrease the rise in local governments' spending, first in 2014-2017 by reducing its grants, and then (2018-2022) in enforcing a cap in the increase in current spending. This paper gives an econometric evaluation of the elasticity of municipal spending to equalization grants. Results show that this elasticity is low, and lower than the elasticity of spending to non-equalization grants, suggesting that equalization might be reinforced without calling into question the control over local spending.

The Region Sud-Provence Alpes Côte d’Azur is one of the main French regions. It generates 7.1% of French GDP. In this interview, the regional president explains the main financing principles he has followed since 2014. In a context in which the government has been steeply reducing subsidies and changing what regions are responsible for, Région Sud chose to straighten out its finances by reducing borrowing and having the balanced budget prioritize the climate, vocational training of youth, culture, public transportation, and business. Investment decisions are made according to these regional priorities and spreading funds around too thinly, which is inherently ineffective, is avoided. For the sake of consistency and in keeping with these priorities, relations with other local governments are now codified through regional contracts of local parity. The creation of a Regional Fund for Area Planning makes it possible to help small villages. In order to fund its operations, the region has turned mainly to the bond market and its partner banks, the European Investment Bank and the Caisse des Dépôts. Région Sud also makes full use of European funding, especially to carry out various collaborative cross-border projects that have been developed with Italian regions.

This article describes the use of public-private partnerships by local governments since their creation in France in 2004. We argue that the municipalities' objectives and constraints explain the development of such contracts. We also study the reason of their current neglect. We conclude that the recent lack of interest for public-private partnerships is also due to the diversification of the contractual tools made available to municipalities.

French banks have a strong local anchoring. The networks of bank branches and business centers, located throughout France, are a major asset for the French banking industry. They allow advisers to be close to their customers, households, companies or local authorities, on a daily basis and for the realization of their projects. Dynamic actors in the job market and training, French banks have a key role and commitment in society. They contribute to the integration of everyone and to the financial education of all in the territories.

Created in 1818, French Savings Banks are just 200 years old and  have always sticked to their initial mission, being anchored in their territories to support their inhabitants and the local ecosystem. The regional cooperative bank business model relies on a specific governance, a territorial-based activity and the use of regional savings to finance regional projects.  Being able to supply the very needs of all regional actors – households, companies, local governments, social and private real estate developers, associations… - it therefore provides a real economic added value. This business model enhances innovation abilities and backs the different players by providing new financial products and support during the different stages of their development. The case of  Languedoc Roussillon Caisse d'Epargne is an example of this specific business model.

The creation of Bpifrance in 2013 addressed a need of rationalizing the different French public financing tools dedicated to companies. Bpifrance is able to fund firms throughout their lifecycle - from the very beginning to mergers and acquisitions operations - with all the range of financial tools : loans, equity and guarantees. Committed to collective interest Bpifrance systematically proceeds by co-financing firms projects with private banks or private investors.  In doing so, it plays a major role for funding regional companies. Moreover, partnerships stricken with the European institutions' and local governments' financial tools channel funds towards local activities fitting the strategic framework of the different French régions.

This article presents the new strategy of the Banque des Territoires, created in May 2018. Its core strategy is the reinforcement of territorial cohesion. This initiative is focused on clients, who are the actors of the territories, especially local governments, social housing organizations and notaries. The aim is a better answer to their financial needs thanks to a “sans couture” financial offer, from engineering to investment and loans. This new structure takes into account digital and environmental issues, social inclusion and economic attractiveness. The strategy of Banque des Territoires is implemented by regional delegations, close to clients. At last, the projects are analyzed with extra-financial criteria, for a better environmental performance.

In France, over the past thirty years, the question of the relationship between health care institutions and their territories has become essential in most of the health reforms initiated. Moreover, the financing terms of these institutions hold such a central place in the health organization that it seems important to question their effects on the territorialization of these institutions. This is the main questioning of this work based on a cross-reading of the contents of the reforms of the financing of these institutions with a longitudinal study of the main national statistics on their financial situation and care provision in the territories.

France is the country of the European Union that spends the most public money for infrastructure and transport services (2% of GDP). Local and central administrations encourage a continuous growth of motorized mobility, which is more than 80% road, for both travellers and goods. The new mobility services (carpooling, two-wheel self-service, long distance coaches ...) only marginally change this reality. Innovations in the field of transport are therefore more often tax and tariff than technical. Thus, more and more cities are practicing or considering free public transport which means finding the corresponding financing. Since it is also necessary to finance major projects such as the Grand Paris Express and the maintenance of road and rail networks, it is now time more than ever to search for new public resources, despite the recurring upsurges of fiscal protests.

Since 2015 and the beginning of the Quantitative Easing policy by the European Central Bank, the residential loans stock increased by 17 % in France, while the residential wealth just increased by 2,4 %. French departments where the residential wealth decreases and in the same time the total amount of credit increases by more than 17 % are not scarce. This article documents a variety of regional situations : appropriate financing, under-financing, over-financing or absence of voluntarist policy. Whether it be in terms of financial stability or territorial planning, identifying the territories of the wealth-credit divergence is a crucial issue. 

Citizens' Finance (solidarity-based and crowdfunding) are localized finance concerned with the local development model. They are in a cooperative dynamic with the local government (Région), but not an alternative to the public financing system. They are working with the local units of cooperative banks but try to promote new issues of local financing in order to sustain social-based utility territorial projects or projects promoting the territory building. We wish to develop, through this research paper, a critical analysis about those financial products and actors of the Citizen's Finance, both solidarity-based and crowd-based, a thought about their capability to get a return on their « autochtonous capital ». Therefore, we enlist some back and forth « theory/fieldwork » in order to have a better understanding of this citizen financial economy for financing the local development, expanding since 1980's not only in France, but in the EU and all over the world, in the Social Economy Model.

Understanding finance and currency as common does not reduce this issue to their potential contribution to sustainable development from an environmental point of view (in the consumption of the physical resources or the financing of equipment, means of transportation and housing). Their “common” dimension appears through the production and the circulation of liquidity which are essential for the functioning of the economic and financial systems and through types of management which involve all their “stakeholders”. Unlike “natural” resources that “common” management tries to protect and thus to limit the consumption of, in order to assure their reproduction or their preservation, currency must be spent because its injection and its circulation lead to real multiplier effects of income.

Here, we mainly analyse certain current limits of the capacity for development of commons and the necessary conditions for their appropriation and for their reproduction. We present the case of the best known complementary currency in a developing or emergent country, in Conjunto Palmeiras and its replications in Brazil, as well as the recent monetary project in Kenya (Bangla Pesa). These complementary currencies place these commons especially in small territories. The global level raises numerous issues ; on the one hand, the implication of what are supposed to be the "stakeholders" and their representatives, and on the other hand, the conditions of the production of the monetary and financial resources.

The EU is experiencing a paradox : ten years since the eruption of the financial crisis, growth has finally returned but long-term investment (LTI), is yet to reach pre-crisis levels. However, the challenges facing the EU require an unprecedented long-term investment effort. The financial stability, priority of the post-crisis reforms, and a prerequisite to an upturn in long-term financing, is not sufficient alone – as demonstrated by the persistent weakness of LTI in Europe. The reforms adopted in the name of stability also tended to penalize LTI. The « quick fixes » introduced to rectify the undesirable effects of the reforms were ultimately of limited impact and sometimes even inappropriate. We are therefore proposing a simple yet comprehensive definition of what LTI essentially means. "Long-term investment is the financial investment strategy deployed by any operator holding stable resources which at the same time allows for and requires asset allocation able to generate an economic return over time."

On this basis a favorable regulatory environment could be created according to four main principles : a) reposition LTI at the heart of public policy, b) enable effective quantification of long-term risks and returns, c) promote long-term asset & liabilities management and d) promote the alignment of interests among the various operators around long-term objectives.