Municipal bankruptcy is a highly visible and politically consequential fiscal event. This paper examines whether such bankruptcies generate fiscal spillovers to nearby governments. Using Italian municipalities from 2000 to 2015, I combine a border-based exposure design with staggered difference-in-differences and event-study methods to compare municipalities bordering a bankrupt neighbor to those farther away. Exposure induces significant fiscal tightening: direct neighbors increase debt repayment by about 20–25 percent relative to pre-exposure levels and improve net fiscal surplus within one to two years. Effects decline sharply with distance and are not accompanied by higher off-balance-sheet liabilities. Adjustment occurs through expenditure restraint and stronger own-source revenues. Spillovers are stronger among municipalities with higher pre-existing debt and interest burdens, consistent with a disciplinary signal mechanism in which nearby bankruptcy raises perceived enforcement risk and prompts precautionary consolidation.

This paper examines whether Germany’s federal debt brake disciplined municipal public finances. Fiscal rules at higher tiers are often assumed to transmit “vertically,” constraining lower-level governments through tighter intergovernmental budgets, increased task (re-)assignments or stronger expectations of fiscal effort. I combine synthetic control estimates with a regression kink design exploiting the discontinuity in Bavaria’s fiscal equalization formula to test for consolidation responses among municipalities. Using a synthetic control for Germany’s municipal debt-to-GDP ratio from 1995–2023, I find no evidence that the federal debt brake altered the trajectory of local debt. To investigate municipal behavior more directly, I estimate heterogeneous spending responses separately from 2003-2010 and 2011-2019 around the fiscal gap threshold that governs non-earmarked transfers. No major expenditure category exhibits a statistically or economically meaningful change after 2011. Taken together, the results indicate that the federal debt brake did not induce vertical fiscal discipline at the municipal level.

Spillovers across regions provide strong incentives to coordinate policy or even to centralize it in a federation. I study the feasibility of federalization of policy when the decision of regions over the introduction of a federal standard is endogenized and the choice of the specific standard is separated in time from the decision over having a federal standard. The latter severely limits policy coordination. Moreover, I consider the case in which at a cost a region may choose to not comply with the federal standard (weak enforcement). While weak enforcement may hamper policy coordination in some situations, it may also enable it when rules cannot be fully enforced. I then interpret the introduction, the various reforms and the massive violations of the EU's Stability and Growth Pact (SGP) in light of the theory.

In the context of the financing difficulties of municipalities, this presentation analyses how federal states organise fiscal equalisation mechanisms aimed at supporting municipalities with lower fiscal capacity or higher expenditure needs. It adopts a comparative perspective, examining the Belgian, German, and Australian models of municipal equalisation.

While all three systems grant autonomy to federated entities in redistributing resources among municipalities, they differ markedly in the way equalisation is financed at the federal level. In Belgium, a federal grant to the regions is allocated based on their contribution to personal income tax, an indicator at odds with redistribution. Germany relies on a Länder equalisation scheme that partially incorporates municipal fiscal capacity, whereas Australia operates a specific federal grant allocated according to detailed criteria reflecting fiscal capacity and needs.

This comparison raises the broader question of how responsibility for municipal equalisation should be allocated across levels of government in federal systems.