Regions feel the pinch

In 2011, the amount of grants and subsidies to federated states, regions, provinces, and municipalities fell by 4.9 percent, according to the study, following a 0.6 percent drop in 2010.

Other sources of income include local taxes and user charges - the fees people pay to make use of services like parking and public transport.

As a result, subnational governments, too, are cutting down on spending.

In 2011, the study says, local direct investment fell by 6.6 percent, following a 7 percent drop in 2010. Today's level is back at where it was in 2006.

Public direct investment is money that goes into things like schools, hospitals or waste management, two thirds of which comes from subnational governments, according to the study, commissioned by the Council of European Municipalities and Regions.

"The subnational public sector [is] an engine for public investment," it says. In bigger countries like France, Germany or Italy, it accounts for almost three quarters of public direct investment.

The two-year drop is a first after a decade of "robust" growth, the study says.

Subnational governments have only been able to balance the books by cutting down on staff costs - the first time in a decade - and because in some countries, the economy has begun to pick up. Local tax revenues rose by 5.5 percent, after a slump in recent years.

"It is a stability in disguise," said Isabelle Chatrie, author of the study.

Meanwhile, central governments are hoping to cut costs even further by reducing the number of municipalities and telling them to cooperate more. It is a trend of the past few decades but gained in speed over the last couple of years.

"Municipal mergers have picked up with the crisis and austerity plans," she says.

In Greece and Portugal, who both agreed to reforms in return of a bail-out, reducing the number of subnational governments is even part of the deal with the so-called troika of international lenders - the International Monetary Fund, the European Central Bank, and the European Commission.

Greece, who in 1997 had already gone from 5,825 to 1,034 municipalities, went to 325 in 2010. Portugal boasted 278 municipalities in 2011. In May of the same year it agreed to reduce "the number of municipal offices by at least 20% per year in 2012 and 2013."

Overall, the number of municipalities in the EU, according to Dexia, dropped from 92,735 in 2004 to 89,149 in 2011.

For their part, subnational governments themselves are not celebrating the relative decline of their own species.

"The troika thinks that budget control is better on the central level, but they are wrong," Frédéric Vallier, secretary general of the Council of European Municipalities and Regions, told EUobserver.

"For us, it is about responsibility. Everything that gives us more responsibility is good," he added.

This story was originally published in EUobserver's 2012 Regions & Cities Magazine.

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