Fiscal austerity, governance and the crisis in European countries. Is local financial management the missing link?

Most EU member states have introduced domestic budget rules to meet the annual deficit targets of the EU’s Stability and Growth Pact. We examine budget rules in EU member states before and after the financial crisis and... [ view full abstract ]

Most EU member states have introduced domestic budget rules to meet the annual deficit targets of the EU’s Stability and Growth Pact. We examine budget rules in EU member states before and after the financial crisis and argue that fiscal consolidation measures need to be evaluated taking into account the domestic budget rules and the constraints on local financial management that the rules introduce. Drawing from the case of Italy, we show how perverse cutback strategies at the local level have been influenced by domestic budget rules which contributed to exacerbate the economic downturn.

Fiscal governance systems at the national and supranational level should pay more attention to local financial management. In this perspective, a challenge for the future is how to develop budget rules to control the general government deficit while preserving the financial viability of each public entity.