18. New Ways of Limiting Local Government Debt: An Empirical Assessment of the German Case

Severe fiscal pressure experienced by some German municipalities has led to a shift in the way municipalities are controlled by the responsible state governments. Instead of purely relying on a system of approving budgets and borrowing, some states have established debt relief programmes which combine grants and sanctions, or even sent austerity commissioners who take over responsibilities of councils and mayors. Whether these are deemed proportionate and legitimate interventions into the constitutionally guaranteed administrative autonomy of the local level depends heavily on their success in limiting local government debt. Based on an innovative synthetic control approach, this paper undertakes an empirical assessment of a recent debt relief programme in North Rhine-Westphalia and the deployment of an austerity commissioner, revealing that both instruments to some degree positively impacted upon local government debt, as compared to non-intervention. Nevertheless, it finds the effect is limited in substantial terms.