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134 8 German Federalism at the Crossroads Germany’s fiscal situation in the aftermath of the recent financial crisis and the subsequent “Great Recession” is a paradox. While the debt of the federal government (henceforth the Bund) has remained relatively stable in comparison with that of many other industrialized countries and the national outlook is clearly positive, the subnational units in Germany, the Länder, face a much more difficult situation. Debt and deficit levels increased rapidly during the crisis and its immediate aftermath. While the majority of the Länder have reduced their structural deficits since then,1 as of 2012 budgetary crises were pending for the Länder of Bremen, Saarland, and Schleswig-Holstein.2 Moreover, as of 2012 an additional number of Länder violated thresholds established by the German Stability Council (which represents both the Bund and the Länder) to measure the fiscal health of public finances in Germany, such as the ratio of interest paid on debt to tax revenues (Berlin), debt per capita (Berlin, Saxony-Anhalt), structural financial deficit per capita (Hamburg), and the loan finance quotient, which measures the percentage of expenditures financed on credit (Hesse, RhinelandPalatine ).3 Because different Länder face varying post-crisis challenges, the financial outlook for the Länder is far more mixed than for the Bund. To understand why that is the case, it is important to highlight the differences between the very special type of fiscal federalism that was built into the German Federal Republic after World War II and the other types of fiscally federal regimes discussed in this book. This chapter argues that the German setup has major peculiarities, which add up to what can be labeled the“German problem” in fiscal federalism. The chapter describes that problem and explains the impact of the crisis on the debate surrounding German fiscal federalism in general and the conduct of fiscal policies in the Länder in particular. It is important to single out three key core features of German federalism . First, there is a major asymmetry in the allocation of powers between the henrik enderlein and camillo von müller 08-0487-4 chap8.indd 134 10/7/13 8:36 PM German Federalism at the Crossroads 135 German federation and the Länder. While taxes raised at the Bund and at the Länder level account for equal shares of total German tax revenues (between 40 and 45 percent), the expenditure autonomy of the Länder is more limited than that of the Bund.4 Länder governments are thus often viewed as“spending” authorities with effectively limited power.5 Second, the Länder enjoy a de facto bailout guarantee from the Bund. This guarantee indirectly derives from a clause in the German constitution (Basic Law) requiring the German federal system to ensure and preserve uniform and equal living conditions throughout the federal territory. If a Land faces serious financial difficulties, it can file a complaint with the German Constitutional Court and request funds from the federal government. Two Länder (Saarland and Bremen) won their cases in 1992 and 2005 and are still receiving federal money,6 whereas Berlin lost its case in 2006. However, many market participants still believe that there is a clear bailout guarantee. This chapter discusses this issue in detail. Third, the Länder are very different in terms of their demographics, economics , and fiscal policies. For example, population density is lowest in the state of Mecklenburg–Pomerania, which has 71 people per square kilometer, while the state of North Rhine–Westphalia has 523 people and the state of Berlin has 3,899 people per square kilometer.7 Differences also apply with respect to economic productivity, which is highest in the state of Hamburg, where GDP per capita as of 2011 was Є52,731; in contrast, GDP per capita in the state of Thuringia was Є21,608. In terms of fiscal policies, structural differences become apparent in comparing per capita government expenditures, which as of 2011 were highest in the state of Bremen (Є8,103) and lowest in the states of Schleswig-Holstein (Є3,404), Lower Saxony (Є3,435), and Bavaria (Є3,469).8 The Länder vary also in terms of their administration. For example, while most states are administered as political units that comprise both urban and rural areas, there are three “city states”—Berlin, Hamburg, and Bremen— which enjoy Länder status for historic reasons. Differences exist also in terms of infrastructure. For example, the...

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