Just as the EU struggles to navigate its own immediate financial challenges, there is another reminder from Germany this week that the battle over fiscal governance also represents a continuing one at the national level over institutions, rules, and procedures. The relationship between the Union on the one hand and the member states on the other remains at the core of the EU debate. Yet it is interesting to note that Germany’s fiscal federalism, often cited as an example of how to cope with the complications of federal and state relations, is now the subject of political battles in Berlin between the rich and the poor in Germany.
This week the government of Bavaria is considering a challenge over the constitutional command to “safeguard equivalency of living conditions throughout the Republic.” The sixty year old practice of revenue sharing among the states has become a problem for Bavaria, a state which used to be a recipient of such revenue but is now the lead supplier of same to the rest of the country. Today, the majority of the sixteen German states are recipients of financial aid due to their weak tax revenues, low incomes, and high unemployment. The city of Berlin is at the top of that list, receiving €3 billion ($4 billion) yearly in subsidies from the other fifteen states. Only four states are sources of subsidies, whereas the remaining twelve are recipients, receiving in excess of €7 billion per year. Bavaria claims the system of revenue sharing is unfair, and it is suggesting that the recipient states are wasting their subsidies. So, Bavaria wants to take its case to Karlsruhe where the Federal Constitutional Court is already weighed down with its deliberations over the euro crisis and the constitutionality of the fiscal policies proposed, in large part, by Germany. Just as there is a north-south divide in Europe when it comes to economic strength and weakness in Europe, Germany’s equation has a similar profile. The southern states of Bavaria, Baden Württemberg, and Hesse are stronger than those in the north and east, and they have increasingly complained about the imbalance of the subsidies
This domestic squabble does not help Chancellor Angela Merkel much, particularly after she has repeatedly warned other euro zone nations that Germany’s ability to help them is constrained by the Court’s decisions, apart from the blow-back she is getting from her own citizens. However, there is no denying that the dispute reminds everyone of the enmity between poor Greeks and rich Germans during the ongoing euro zone crisis.
For Merkel, the fact that Bavaria’s government is made up of the conservative Christian Social Union (CSU) and the pro-business Free Democratic Party (FDP) − her two partners in the coalition government in Berlin − adds to her dilemma. Bavaria wants the Federal Constitutional Court later this year to declare that the current agreement on sharing tax revenues is illegal. This would come after the Court decides on the constitutionality of the EU proposals.