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Most of the literature on managing local public debt in Central and Eastern Europe is concerned either with the existing institutional restrictions on borrowing, or with sanctions against excessive debt. One common feature of these approaches is that they place the role and responsibility of the central state in the forefront while considering local government performance as a dependent variable. The present study drops the traditional analytical perspective of budget discipline and focuses instead on the budget responsibility (or self-control) of local governments. It argues that compliance with the legal norms and a favourable rating at the bank are necessary but not sufficient conditions for a municipality to incur debt. Success in the overall financial management requires a more proactive attitude in which local policymakers adjust their investment policy to the actual debt capacity of the local government, assessing the short, medium and long-term costs and benefits of each investment project.

ISBN 978 0 85793 228 0 (cased) ISBN 978 0 85793 229 7 (eBook)

This study shows that the origins of the sovereign debt crisis within the euro area are to be found within the private sector and in economic policy mistakes rather than only in the profligacy of some national governments in the Southern periphery of Euroland. Sovereign debtors and their private creditors should therefore meet in order for them to arrange a financial package including debt restructuring, rescheduling and cancellation. In this study we argue in favour of a European political union in the form of a federation of states, with its own taxation powers and some financial equalisation transfer mechanisms, to be coupled with a proactive investment policy carried out by the European Investment Bank (EIB) and the issue of euro-bonds to channel global savings into an investment-led European Economic Recovery Plan.