The Effects of Local Fiscal Politics on Uniformity of Living Conditions: German Federalism and Regional Disparity

Masaki Bessho, Yokohama National University

Unlike most federal systems, the German federal system was designed and implemented to maintain "uniformity of living conditions" across Germany. The federal government and the states established common standards for public policy and services through federal-state cooperation and inter-state solidarity. After unification, however, some states began to focus primarily on their territorial self-interests. And a series of federalism reforms weakened cooperation and solidarity. This study addresses why the changes in German federalism occurred by analyzing local fiscal politics, particularly focusing on the eastern states. As is well known, German unification resulted in significant economic and social disparities between the eastern and western states. These disparities highlighted territory-specific interests, leading the states to gradually shift from policy coordination to autonomous, differentiated policy-making. Furthermore, the disparities exacerbated the challenges of fiscal equalization. The issue centered on the horizontal fiscal equalization system, which transfers a portion of revenues from revenue-strong states to revenue-weak states. The sum of the money flowing through this system increased significantly after unification. Inevitably, it fostered resentment among the wealthier states. Thus, economic and social disparities transformed German federalism. Consequently, German federalism has undergone three reforms in the last two decades, involving the disentanglement of joint decision-making, the transfer of limited legislative responsibilities to the states, and the abolition of the traditional horizontal fiscal equalization system. This means that the disparities remain so large. Why have the disparities not been reduced enough over three decades since unification? This study aims to clarify the efforts made by the revenue-weak eastern states to strengthen their territorial economic and tax powers, and the influences of these efforts on the ongoing disparity.

No extended abstract or paper available

 Presented in Session 18. Fiscal Politics from Below: Local Responses to Central Governance