Abstract
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The current global crisis is affecting local governments particularly strongly, and especially so within the CEE countries. The threat of insolvency looms large for many local governments, and therefore, it is unfortunately very timely to look at this issue. Can genuine bankruptcy happen at all, should it be allowed to happen, can it be prevented, and if it cannot be, how can it be managed well?
In order to do so, the current essay sets out to investigate, on an empirical basis, how Germany has so far, i.e. before the crash, dealt with the issue of municipal insolvency. This pre-crisis approach also underlines the importance of the topic because it shows that even in more or less financial solid times municipalities were already exposed high financial pressure. Now, the crisis increases the number of municipalities facing a budget crisis. The results of the present investigation can help to deal with consequences of the crisis. Because of its high and indeed paradigm-setting level of municipal autonomy, not least for some of the CEE countries, the possibility to draw lessons from Germany should be particularly interesting.
In order to avoid a budgetary crisis and thus a highly critical condition of municipal life, in Germany the federal states have several different courses of action at their disposal. Taking any action may lead to an intrusion into municipal self-government; however, and therefore a careful balancing of aims and effects is necessary.
Altogether there are three foci of this essay: a discussion of the term “budget crisis”, its applicability at the municipal level as well as the federal states’ share in the responsibility for municipal budget crises, an empirical survey of the use of state commissioners in the context of processes of budget consolidation as well as a discussion of the use of external advisors for these processes, and a discussion of the approach of municipal bankruptcy as well as a review and evaluation of current preventive approaches of the federal states.
Lessons from Germany for the insolvent municipality can tentatively be summed up as follows, always for the German context:
While preventing municipal insolvency is important, it may not serve as an excuse to abrogate local independence, and care must be taken to steer a middle course.
This is especially the issue with state-appointed commissioners: If they are sent too early in the process, they violate local independence; if too late, they cannot be effective anymore.
Thus, it is more sensible to focus on prevention, which is best done by the development of (mandatory) indicators that reflect imminent problems of the municipal budget. In cases where the reason for a coming insolvency is less ill will than lack of knowledge, this is indeed the most promising approach.
In a final section, the paper will then link those results to the CEE countries and to the current times of crisis.
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