Fighting depopulation in Europe by analyzing the financial risks of local governments

Throughout Europe, one of the main problems facing policymakers is that of falling rural populations. In many cases, this is aggravated by high levels of local government borrowing. Although researchers have sought to determine the causes of this debt, much remains to be known about the factors influencing the default risk of small- and medium-sized towns, information that would help them formulate policies to combat the loss of population. The aim of our study is to identify factors relevant to this default risk. We analyzed demographic, socioeconomic, and financial factors in a sample of 6456 Spanish local governments by their population size. Our findings show that financial policies applied to reduce this risk should vary according to the population size, as certain factors exert a specific influence on smaller municipalities. Nevertheless, socioeconomic and financial variables have more impact on default risk than demographic factors. Our findings are novel and useful for all concerned in combating the depopulation of rural areas in Europe, owing to the relevance of conclusions for the design of public policies based on the sustainability of public services in small municipalities. Points for practitioners The measurement of the default risk in local governments reveals very relevant information for the design of public policies against depopulation. Socioeconomic and financial variables have more impact on default risk than demographic factors. The evolution of the measurement of default risk reveals that policies against depopulation must be defined based on the size of the municipalities. The influencing factors on the default risk are interesting to decide if finance government investments through loans that allow the repopulation of small municipalities.