Subnational Debt Crises, International Conditionality, and the Rise and Demise of Local Democracy in Weimar Germany and Post-Socialist Hungary

Accounts of international conditionality and austerity mostly focus on national aspects. Much less attention has so far been paid to the question of how they have affected subnational governments. This is surprising, as in a number of European countries, municipalities and regional governments have taken out large loans during the economic boom years and have been threatened by bankruptcy in the crisis years. This paper seeks to start filling the gap by exploring the political economy of local government debt crises in Weimar Germany and contemporary Hungary. The paper shows that  these cases exhibit striking similarities. In both countries local governments had to assume a number of new tasks closely related to democratization and the expansion/consolidation of the welfare state, and they had to do so under conditions of “permanent austerity” (Paul Pierson). Indebtedness – in foreign currencies - occurred against the background of both countries’ deep financial integration – via returning to the gold standard in Weimar Germany’s case and the EU accession in Hungary’s case. Two respective financial crises – the Great Depression and the Great Recession - unleashed sustained distributional struggles. The cases however differ in how (local) governments adjusted to the debt crises. While Weimar Germany internalized the international constraints resulting from over-indebtedness and its adherence to the gold standard even in hard times, Hungary, in contrast, rejected the medicine administered by the IMF and EU, and implemented “unorthodox” economic policies.