On the Financial Autonomy of European Local Governments: The Case of Municipal Bonds in Italy
Purpose: There is broad consensus across different studies in considering decentralisation as a critical factor for increasing the responsiveness of Local Governments (LGs). For this decentralisation process to be operational, financial autonomy is essential. Since LGs may access financial markets to secure their self-sufficiency, this study focuses on the financial autonomy of LGs based on municipal bonds. However, the centralised control of borrowing is supposed to decrease financial autonomy, especially in unitary countries. Focusing on the time when the municipal bonds were wide spreading in Italy, that is unitary indeed, the paper investigates the capacity of municipal bonds to increase the financial autonomy of local governments. Reference is also made to the European fiscal rules, that were getting stricter in the same years, because these constitute an excellent example of this control model. Approach/Methodology/Design: Addressing this goal, this paper relies upon Generalized Least Squares (GLS) regression of longitudinal (panel) data. Findings: Findings show that financial autonomy strictly depends on tax-raising powers, but municipal bonds may help. There is indeed statistical evidence of the relationship between financial autonomy and bond issuing, reinstating the idea that municipal bonds could qualify as an instrument of financial autonomy for LGs. Practical Implications: However, to benefit from this positive relationship between municipal bonds and financial autonomy, the constraints of the centralised model need to be reduced or the model of control to be changed. Originality/Value: The issue is not just whether the use of municipal bonds granted financial autonomy to local governments, but rather that their usage may generate growth and maintenance of financial autonomy within the centralised discipline and control model.