What can be done

Potential solutions and interventions

Addressing Europe's construction crisis effectively will likely require interventions & measures on both the EU and country level to mitigate the underlying reasons.

Facilitate loan access

  • Subsidized loans: Partner with development banks and financial institutions to provide lower-rate mortgages for sustainable & affordable housing, as demonstrated by Germany's KfW, which effectively promotes energy-efficient construction.
  • Mitigate lending risks: Offer government-backed loan insurance to allow lenders to provide mortgages with low down payments, reduced closing costs, and easier credit qualification, a strategy used by the U.S. Federal Housing Administration [16].
  • Direct lending programs: Provide loans directly to small & medium-sized developers or investors (for residential construction) who might face challenges in accessing traditional finance. An example of this is the UK's Home Building Fund [17].

Decrease construction costs

  • Tax reduction for construction: Apply targeted tax measures, such as lowering VAT on construction materials and services. Ireland, for instance, applies a reduced VAT rate of 13.5% for construction services, compared to the standard rate of 23% [18].
  • Interest deductibility: Improve the financial appeal of construction investments by expanding interest deductibility on loans related to construction projects. In the U.S., for example, developers can in select cases fully deduct construction loan interest.
  • Degressive depreciation: Adopt degressive depreciation models for construction investments, allowing for higher initial depreciation rates, currently already effectively used e.g., in Germany for selected segments [19].
  • Subsidized land for housing: Reduce construction costs by providing land at below-market rates for residential development. This approach, as seen in Vienna, involves local governments developing and then selling land at affordable prices to developers committed to building affordable (social) housing [20].

Streamline regulations

  • Simplified documentation: Reduce excessive documentation requirements to improve processing times for construction permits, drawing inspiration from the digital environmental permit system in the Netherlands [21].
  • Strict deadline policies: Set strict timelines for permit reviews to expedite approval processes. This approach is effectively utilized in Denmark, where specific time frames are mandated for building permit application processing [22].
  • Standardized building codes: Move towards further harmonizing building codes across Europe & leverage the “Eurocodes” as a starting base. This approach mirrors the standardization seen with the International Building Code in the U.S.

Direct government involvement

  • State-Led affordable housing: Support direct financing & building of affordable housing by governments. This model can be seen successfully in Singapore where the Housing Development Board directly builds & manages affordable housing and where a large portion of citizens live in state constructed flats.
  • Public-Private Partnerships: Promote Public-Private Partnerships for constructing affordable housing. This mirrors the UK's Private Finance Initiative, where private firms finance & build housing, in return for long-term government agreements [23].
  • Urban renewal: Create funds for the redevelopment of underutilized urban areas, similar to the U.S.'s Opportunity Zones. Such incentives have successfully attracted substantial investments into previously overlooked areas [24].
  • Emergency financial support: Provide emergency aid to construction companies & developers, e.g. loan guarantees, tax reliefs or bailouts to prevent bankruptcies and ensure sector stability, similar to bank bailouts post-2008.

Addressing the construction crisis in Europe is crucial for the region's economic stability. While implementing these measures will require substantial funding, the investment is justified given the risks previously outlined. Options for financing these initiatives could include

  1. Stablishing a special construction budget outside standard EU deficit guidelines
  2. Issuing EU-specific bonds dedicated to construction sector revitalization.
  3. Reallocating remaining parts of existing European funds, such as the substantial €800+ billion form NextGenerationEU earmarked for post-COVID-19 recovery [25].

In conclusion, resolving the crisis in Europe's construction industry must be a top priority for policymakers. A coordinated strategy is essential, involving the revision of financing mechanisms, reducing construction costs, streamlining of regulations, and direct investments in sustainable housing. This comprehensive approach will not only aid in the recovery of the construction sector but also align it with the broader objectives of the European Union.

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