The city is not being "blackmailed." There was an overtly religious symbol on city property. The city was asked to removed it. Instead, the city declared that area a "free speech zone" in which anyone could put up any monument that honors veterans. The city chose to do this instead of taking the cross down.

If the city (that's the government) allows symbols from one religion to be placed and maintained on government property, but does not allow symbols from other religions, the city is then promoting or favoring one religion over another. That is a violation of the US constitution.

This isn't complicated. The city can say no religious symbols are allowed or the city can say any religious symbols are allowed. The city cannot say only symbols from religions we approve of are allowed.