Structural Reforms During the Greek Economic Adjustment Program: The Amalgamation of Municipalities

Amalgamation reforms have been extensively implemented in several countries as policy instruments to improve local government service provision and reduce costs, based on scale economies. However, their effectiveness remains ambiguous in practice and varies depending on the context. We investigate the impact of a large-scale amalgamation that took place in Greek municipalities in 2011, on current costs and investments. Using data for the 2005-2018 period and a Difference-in-Differences methodology, we find a negative but insignificant impact of the reform on current costs. At the same time, we observe a significant decline in investment of approximately 25%-30%, though this is likely attributed to post treatment violations of the parallel trend assumption. The failure of the amalgamation to deliver clear cost savings may be due to inefficiencies stemming from the failure to achieve economies of scale, fiscal constraints, poorly aligned incentives among the merging entities, and a lack of political and cultural compatibility among the merged municipalities.