Achieving Accountable Governance and Structural Reforms: Lessons from the Crisis in Europe

The global financial crisis of 2008 has severely impacted the functions and operations of different levels of government in Europe—requiring costly bailouts from national or supranational levels in some cases. A typical adjustment has been reductions in wages and benefits at different levels together with harmonization of fiscal policies across the EU and control of general government deficits (involving all levels of government). This highlights the incentive and governance problems associated with fragmentation of government. Overlapping responsibilities and absence of full information prevent effective governance and yardstick competition. The paper offers a review of the recent processes of structural reform of subnational government in a number of EU countries, such as France, Spain, Denmark and Italy. The purely economic side of reform, i.e., achievable scale economies, and the political economy of reform, and more precisely the institutional constraints, are highlighted. With the exception of Denmark, the restructuring of levels and numbers of government has proved difficult. Meaningful reforms must address assignments and own-revenue responsibilities and transfers, together with the political economy of institutional reforms. This has lessons for large multi-level countries, such as Brazil, China, Indonesia and in South Asia.