Four Decades of Municipal Bailouts in Germany

Abstract

Despite the existence of strict budgetary frameworks and fiscal equalisation systems, municipal budget crisis has been a phenomenon in Germany for decades. As an institutional response, most German states implemented bailouts to restore local public finances. This chapter gives a brief description of the history of municipal bailouts in Germany. We begin with the first small bailout programme in North Rhine-Westphalia during the 1980s. In the aftermath of the global financial crisis of 2008/2009, bailouts reached their peak with a broad diffusion of programmes reacting to persistent budget deficits and escalating local debt. States designed those programmes as conditional bailouts, as they were aware of the moral hazard risks. In a second step, we explain the different institutional designs, timing and impacts of these bailouts. Regarding design, we categorise bailouts by two basic goals, different instruments and scopes. We find different explanations for designs and timing regarding the political attitudes, financial market pressure and state fiscal capacities. Finally, we assess the impacts of bailouts on municipal fiscal performance, state-local relationships and local democracy.