Government Spending

To Europe's Thrifty, Austerity Is Just Unfair


An Italian street vendor (left) talks about his plight during a clampdown by authorities against illegal street trading in central Naples

Photograph by Christopher Furlong/Getty Images

An Italian street vendor (left) talks about his plight during a clampdown by authorities against illegal street trading in central Naples

South Tyrol in the Italian Alps, like many regions in Europe, is being asked by the central government to absorb big tax increases and spending cuts. Some local leaders instead propose buying their fiscal independence from Rome. “We are willing to contribute, ” says Thomas Widmann, economics minister for Italy’s wealthiest province. He suggests that South Tyrol pay €15 billion ($19.9 billion), its share of Italy’s €1.9 trillion debt based on the province’s population, in exchange for total control over local taxing and spending.

South Tyrol’s proposal would “undermine the unity of Italy,” says James Walston, a political scientist at the American University in Rome: the national government would never accept it. Still, the episode shows how the crisis is creating friction within countries. As Widmann puts it: “Why do we have to cut spending if our public finances are in order?”

There’s similar grumbling in Portugal about big-spending localities such as the island of Madeira, which got a €1.5 billion bailout from the central government last year after running up €6.3 billion in debt on projects such as a yacht marina. Now, Lisbon is cutting aid to all municipalities by 4.7 percent, spurring complaints from some that managed their finances conservatively. “High debt levels are a problem of some town halls, not all,” says Antonio Amaral, a spokesman for the city of Maia, in northern Portugal, which has paid down almost half its debt.

Resentment is brewing in Surrey, an area of posh homes and corporate headquarters southwest of London. The community has whittled its budget 9 percent over the past two years as the British government cut funds to municipalities. David Hodge, leader of the Surrey County Council, says that Surrey turns over more than half its business-tax revenues to the central government, while poorer regions get more of the aid available. “Now’s the time we should be investing,” Hodge says. Defying a request by the central government to freeze local taxes, the county plans to boost its council tax 3 percent.

In Germany, some mayors want to end a pact requiring the federal government and regions in former West Germany to pay €156 billion in subsidies to eastern Germany through 2019. The deal “has forced highly indebted and some impoverished cities and communities in western Germany to borrow money” to pay their share, says Ullrich Sierau, mayor of Dortmund. The city ran up a €1.3 billion debt as it borrowed to make €520 million in subsidy payments. It still owes €230 million in subsidies. The debt crisis and stricter capital rules for banks have pushed credit costs so high that more borrowing would drive cities like Dortmund “faster than ever before towards bankruptcy,” he says. Germany also is trying to control debt by restricting the borrowing power of local governments. As austerity bites deeper, tensions between regions are likely to grow.

The bottom line: National governments in much of Europe are imposing cuts on localities—and some are pushing back.

With Niklas Magnusson, Chiara Vasarri, Henrique Almeida, and Rodney Jefferson
Matlack is a Paris correspondent for Bloomberg Businessweek.

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