Subnational Government Organisation and Public Debt Crises

Multilevel governments can be organised according to two basic principles: the principle of autonomy and the principle of vertical public administration. In between, there are a number of mixed systems which are questionable from the point of view of distribution of responsibilities. Subnational public debt crises typically occur in mixed federal systems. Preferable to such systems are pure systems with clear responsibilities. Nevertheless, courts can establish clear liability rules and hence contribute to a stabilisation of federal systems. However, court decisions do not supersede a political choice between either of the two pure systems. Two case studies on local governments illustrate under what circumstances a system of autonomy is preferable and how this result can be applied to the European Union.