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.

Horst Seehofer, the Bavarian minister-president, argues that Bavaria is not showing a lack of solidarity. “It’s the transfer system which lacks solidarity.” Along similar lines, the chancellor has been arguing that transfers are also not the answer to Europe’s problems. She argues that there is a need for a “fiscal compact” for the euro area that includes the adoption of a new rule, restricting deficits by member states in their constitutions. Seehofer wants to argue that his counterparts in Germany need a similar dose of stronger fiscal discipline.

Two weeks ago, German lawmakers in Berlin approved the new EU budget discipline pact as well as the euro zone’s permanent €500 billion ($623 billion) rescue fund.  Two-thirds of all lawmakers in the parliament’s lower house endorsed the two sets of legislation in a late night session. Merkel put herself on the line by arguing that the fiscal pact and rescue fund send “a signal of unity and determination, domestically and abroad; a signal toward overcoming the European government debt crisis sustainably, and a signal that for us Europe means our future.”  Merkel won that vote, but she still got political blow-back from Minister-President Seehofer, who has threatened to let the coalition in Berlin collapse if the chancellor were to ask for further compromises to help the troubled euro member states. This new attack on the domestic subsidies issue has left some speculating that the Bavarian leader is exploiting both these issues a year before both his state elections, as well as the federal elections in September of 2013.

Yet there can be no doubt that Germans, in Bavaria or throughout the rest of Germany, are agitated by the unpredictability of the economic situation and by the solutions proposed to solve it − whether it be within the national borders or within Europe as a whole. As the old German song goes − “wer soll das bezahlen?” − remains an unanswered question.

  • Dale Medearis

    I suspect this has been done, but I could not help but wonder after reading this whether there are any papers that compare the sharing of revenues between states in Germany and states in the US in specific policy (or even spatial) context, such as transportation infrastructure, water infrastructure, or military spending.

  • R.G. Livingston

    This article omits one minor and two major points that bear on the transfer union question. Minor: besides Bavaria, Baden-Wuerttemberg, and Hesse, Hamburg, a northern state but a rich one, also provides transfer funding. Major: the constitution, the Basic Law, provides (Article 72) that “The Federation shall have the right to legislate…to the extent that establishment of equivalent living conditions throughout the federal territory…renders federal regulation necessary in the national interest.” Article 107 (2) provides that [Federal law] shall ensure that the disparate financial capacity of the Laender shall be appropriately equalized.” So intra-Land transfers are constitutionally anchored. Also, since 1990 there has been a truly massive transfer of resources, almost two trillion (yes, trillion) euros so far, from the western to the eastern states to carry out the constitutional requirement of “establishment of equivalent living conditions throughout the federal territory.” This massive transfer is being mainly financed by a “solidarity surtax” on personal incomes, which is to remain in effect until 2019 at least. So both the principle and practice of a transfer union are firmly established in the Federal Republic. Bavaria’s appeal to the constitutional court is motivated by the CSU’s effort to project itself to Bavarian voters as Bavaria’s chief protector in the hope of regaining in the next Land elections the absolute majority in the Bavarian Landtag that the CSU had for many years but lost a few years ago.