As shrinking populations become the new normal for many OECD and EU regions, local governments face mounting challenges in delivering essential services. By 2050, two-thirds of EU regions will see a decline in population, with the median age set to increase by 4 years. Faced with a dwindling workforce, reduced revenue and growing demands, regions and cities must make big changes if they are to continue to deliver core services.
What lessons can be learnt from Europe’s Nordic regions, which have been grappling with the challenge for decades?
Europe’s shrinking populations demand new solutions
In recent years, outmigration has left many regions across Bulgaria, Croatia, Hungary and Romania struggling with several challenges. Shrinking populations affect municipal public services, infrastructure and revenue. As populations decline, the share of elderly residents increases, raising demand for health and social care. Meanwhile, oversized municipal infrastructure often becomes underused and poorly maintained – including housing and public transport systems. Reduced economic activity results in lower tax revenue and user fees which, combined with spending pressures, creates a “scissor effect” that strains municipal governments.
Pulling together through municipal co-operation
The population decline in shrinking areas of the Nordic countries has persisted for decades, making them among the first to grapple with this trend. Now, other EU countries are beginning to follow suit.
In the Nordic countries, a common and successful response to the long-standing challenges of population decline in shrinking areas has been inter-municipal co-operation (IMC). This approach allows them to share costs and resources, and retain economies of scale, helping them to keep their per capita expenditure under control. These collaborations can range from simple agreements to more formal structures with joint governance.
In Finland, there are various forms of inter-municipal co-operation. While most collaborations are voluntary, for some services inter-municipal co-operation is mandatory, such as in healthcare and in education. Less formal models, such as host municipality arrangements and shared civil servant positions, are also common, as are joint municipal companies.
Although the framework for municipal collaboration is set by a Municipal Act, much room is left for municipalities themselves on decisions regarding governance, cost-sharing models, and types of agreements. Inter-municipal cooperation has allowed small and shrinking municipalities to sustain quality service delivery in education, health, and social services, in a policy framework where municipal mergers are challenging and no regional government level exists.
Setting up for success
Our recent OECD report highlights the need for inter-municipal co-operation to be guided by clear rules and regulations that set out the types and boundaries of inter-municipal
co-operation arrangements, governance, minimum requirements, dispute resolution mechanisms and means of experimenting and piloting co-operation and clear governance structure (e.g. joint committees, councils, or boards).
Inter-municipal co-operation also needs to be backed by funding to support joint initiatives. Cost-sharing models must be fair (e.g., based on population, service use, municipal wealth), and there must be the right incentives provided by central government for joint services provision, as well as transparent budgeting, regular financial reporting and audits to ensure that funds are used efficiently and that all parties are accountable for their financial contributions.
But at the heart of successful inter-municipal co-operation is trust. When municipalities trust each other, they’re more willing to share and pool resources. Piloting joint projects and gradually building partnerships is often the best way to start – especially when they generate data that clearly demonstrates their value.
Lessons for the future
So what can other regions learn from Nordic Europe’s experiences? First, co-operation is key to keeping public services afloat as populations shrink. Second, co-operation needs to be underpinned by national governments – who must provide the right legal and financial frameworks, alongside strong incentives to pool resources.
They should also start small and demonstrate their value through experiments and pilots that can be scaled up. As other OECD regions face up to the demographic challenges that lie ahead, they would be wise to embrace these lessons.
Antti Moisio is Economist and Senior Policy Analyst in CFE/RDG. Before coming to the OECD, he worked in Finnish Prime Minister’s office as Senior Advisor. His duties in the ministry were primarily related to better regulation and legislative impact assessments. Prior to that, Antti Moisio worked for more than two years at CFE/ESG as a Policy Analyst, mainly in projects related to decentralisation and multi-level governance. Antti has also worked several years as Research Director and Principal Economist in VATT Institute for Economic Research in Helsinki. Antti has publications on local public finance, efficiency of public services, municipal mergers and political economy. Antti has taught courses on applied econometrics and local public finance in several universities, including University of Jyväskylä, Université de Rennes 1 and Université de Fribourg. Antti holds a PhD in Economics from University of Jyväskylä, Finland.
Margaux Vincent is a Policy Analyst in the OECD Centre for Entrepreneurship, SMEs, Regions and Cities Regional Development division. Her specialisation is in Regional Development and Multi-level governance. Margaux holds master's degrees in International Economics and Development from Université Paris Dauphine, European affairs from Sciences Po, Political Economy from LSE and Neuroscience from Columbia University.