The political economy of fiscal crises has attracted scholarly attention to the role of balanced public finances, global contagion amidst market liberalization and, more recently, micro perspectives on issues such as the subprime mortgage markets. Much less attention has been given to the intergovernmental dimension of the fiscal squeezing following episodes of crisis. Insofar as federalism has been long associated with fiscal reforms blockage due to entrenched territorial veto players uninterested in fiscal austerity, it is important to ponder about the resulting budgetary and organizational fragmentation and concomitant political effects. Especially is this the case for federations whose institutional arrangements stem from original constitutional bargains where the states were signatories and must be consulted for any amendment, hindering restrictions to the access of said states to deficit finance. To address this theoretical lacuna, this paper advances an institutionalist perspective to address a subset of issues that led to the relative success of Brazil and Mexico, on the one hand, and the absolute failure of Argentine, on the other hand, in confronting the financial crisis of the 2000s. It focuses on the politics of fiscal responsibility laws, which one aspect of fiscal institutional design aimed at tackling the soft-budget constraints lurking underneath said financial crisis. In view of episodes of fiscal squeeze in the Germany of the late 1990s and ongoing debates on sovereign debt crises in the European Union, the lessons from these contrasting Latin American federal experiences are worth considering.
