Investments through the 2014-2020 European structural funds pursue goals of smart, inclusive and sustainable growth, while many towns and cities in Europe are shrinking rather than growing. Policy makers and practitioners therefore face challenges in ensuring that places with very limited growth potential will not fall further behind. While scholars argue that cities in long-term decline would benefit from enhancing their capacity to develop collaborative initiatives that draw on local resources and assets, in practice local decision makers seem to struggle to engage their communities in the fight against the causes and consequences of decline. This paper advances the argument that the concept of co-production is well suited to explore and explain how collaborative actions unlock new strategic choices that are based on capabilities and resources over which local actors have control. A case study from a small manufacturing town in Germany is used to illustrate how co-production at different levels can lead to tangible, long-term improvements in a context of ongoing shrinkage.