Impact of The Economic Slowdown on Local Government Investments, Debt and Productivity in The Eu Countries

The recent economic crisis had a significant influence on the activities of public sector entities at both central and local levels. This research paper shows an analysis of changes in investments, debt and productivity of local governments in European Union countries in the years 2003-2012. During the crisis period, local governments performed a visibly positive role from the perspective of the countercyclical policy of the public sector. In the years 2009-2010, the share of local government investments in total investments (GFCF) grew to 10%. The active investment policies of local governments resulted in their higher indebtedness. Average annual net borrowing amounted to 0.5% of GDP per country during the crisis period. Although the borrowing was for purely investment activities, it was not noticeably correlated with an increase of productivity. In addition, after productivity growth in the 2008-2009 period, the subsequent years experienced an overall decrease of local government sector productivity. Further analysis showed a relative deterioration of the financial position of local governments regardless of their productivity profile. Taking into consideration the lasting fiscal strains, further stimulation of the economy with debt instruments appears an unsustainable policy for local governments, both in the context of future debt repayments, as well as the failure to lead to increased productivity.