The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.So to bring suit against Nevada, I have to be a citizen of Nevada (tbd iaw NV st. law). Of course, SCOTUS later decided that the principle of sovereign immunity generally extends even to in situ residents.
Anyway, the legal particulars are less compelling than the euvoluntary fallout. You see, one of the reasons civil courts exist is to alleviate ex post regret. To the extent that this alleviation applies to transactions with the sovereign, terms of trade are more likely to be closer to what you'd find in the market. The Brits accidentally figured this out when, as part of the deal that put William and Mary on the throne, Parliament took control of the purse strings. Sovereign immunity means that the Crown can default on loans with impunity. Knowing this, how do you suppose lenders adjusted their behavior? That's right, smaller loans with worse terms. Once the House of Commons could be held to task for bad borrowing behavior, lo and behold, lenders were more willing to pony up the dough that ended up with England as the dominant naval power in the world. Sure, the Dutch took it in the shorts in the process, but hey, gotta break a few eggs, right?
Because sovereignties so enjoy borrowing, there's strong disincentive to default on obligations. Given some sense of temperance (and when political elites don't fall for their own kayfabe), there's a natural check on profligacy. Similarly, as long as the standard order of residual claimancy is observed, we have agents whose job it is to a) encourage risk-taking and b) demand prudence. When it's all working properly, we've got a system where the states can easily borrow as needed for public projects.
When it's not all working properly, I am not convinced that much blame ought be laid at the foot of the eleventh amendment. I'm not convinced that fear of lawsuit would keep elected officials austere. No, my friends, that sad duty is the onus of the median voter. And if that's truly the case, then the chance is quite fat indeed.
Curious question in there somewhere, too. Which transactions with governments are more euvoluntary than others? Is buying US Treasurys in the primary market euvoluntary? What about when the FOMC does it? Can the open market transactions be separated from the projects they fund when the euvoluntarity is being evaluated?
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Do you have suggestions on where we could find more examples of this phenomenon?