Are Central Government Rules Okay? Assessing the Hidden Costs of Centralised Discipline for Municipal Borrowing

Davide Eltrudis and Patrizio Monfardini
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Davide Eltrudis: Department of Economics and Business Sciences, University of Cagliari, 09123 Cagliari, Italy
Patrizio Monfardini: Department of Economics and Business Sciences, University of Cagliari, 09123 Cagliari, Italy

Sustainability, 2020, vol. 12, issue 23, 1-14

Abstract: In the EU, the specialty municipal banks have been the traditional funding source besides tax sharing and governmental transfers for Local Governments (LGs). With the decentralization process, LGs experienced different market-based options so that banks were no longer the only source of funding. However, with the onset of the Eurozone crisis, public sector debt is no more risk-free, and the cost of borrowing became unstable over time. To minimise such risks, Central Governments forced LGs to adopt general principles of control of local borrowing. Previous studies evidenced that centralised controls affect unitary countries more than federations. This paper investigates the Centralised Discipline and Control Model to understand whether it generates hidden costs. For such a purpose, the paper compares municipal bonds against borrowing from banks in Italy, a European unitary country. This paper highlights the existence of hidden costs for Italian LGs because the Central Government set up an expensive system for controlling the entire public sector debt. Policy makers should pay particular attention to which model of control to adopt by considering their country’s specific characteristics and the potential impacts of the different models on them, according to the present economic circumstances.

Keywords: Central and Local Governments; governance of municipal borrowing; municipal bonds; borrowing from banks; cost of debt (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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