Theory, Evidence and Institutions
* INTRODUCTION During the 1990s, the degree of ﬁscal decentralization in EU member states increased: a process to enlarge the responsibilities of local governments in the management of public expenditure and taxation was set in motion in countries not organized on a federal basis.195 During the same years, budget rules aimed at guaranteeing the soundness of the public ﬁnances of EU member states and ensuring margins for counter-cyclical policies were deﬁned and introduced at the European level. These rules are based on the consolidated budgets of general governments. The existence of diﬀerent levels of government is not taken into account. The interaction between these two developments has not yet been adequately examined. This chapter proposes a ﬁrst analysis of the compatibility between the degree of decentralization decided at national level and the budget rules introduced at European level. In highlighting the allocative advantages of local autonomy, traditional theories of ﬁscal federalism stress the need to guarantee both control of national public ﬁnances and the possibility of carrying out counter-cyclical policies at the national level. To that end, the introduction of limits on transfers from the central government and on recourse to market ﬁnancing by local governments is necessary. These constraints must be ﬂexible, in relation to cyclical events and to the need to spread the burden of publicsector investment over several generations. These theoretical indications have been conﬁrmed by the legislation adopted in many countries. When regulating the activities of local governments, it is unusual to rely solely...
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