Causes and Effects
Studies in Fiscal Federalism and State-local Finance series
Edited by Ehtisham Ahmad, Massimo Bordignon and Giorgio Brosio
Chapter 11: The impact of the global crisis on Macedonian local governments
Although Macedonia is only an EU candidate country, and the relative lack of financial integration has shielded it from many (but not all) of the adverse effects of the economic crisis, fissures in intergovernmental fiscal relations, and lack of clarity as to who spends what, create disincentives that resemble, e.g., those in Greece. Consequently, the chapter focuses on the key elements that need to be addressed as a prelude to EU entry, in order for Macedonia to be better prepared for an environment in which the disincentives are not so easily addressed. In Macedonia the central government still finances a large share of local expenditure through earmarked grants to the main sectors of expenditure. These grants are also disaggregated by economic categories, dictating how much has to be spent, e.g., for salaries and for acquisition of goods and services. Consequently, many functions carried out at the local level appear on the central budget, contributing to an obfuscation of responsibilities for spending. The 2008 and 2011 crises impacted severely on the Macedonian real economy that is relatively open to trade. The impact on the financial sector has been much more moderated, given the insulation of the Macedonian financial institutions. The recovery has been quick, especially after 2008. Macedonia, engaged in the accession process to the EU, which has many obligations to reform its legal and economic institutions, had no specific constraints on balancing its public sector budget apart from the general obligation to put it in order.
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