Helping Hand

With Surpluses Here and Deficits There, Federal Germany Looks Financially Shaky

  • Why it matters

    Why it matters

    Throughout Europe’s debt crisis, Germany has remonstrated other E.U. nations to get their finances in order. But the country’s own system of fiscal solidarity is exposing its limits.

  • Facts

    Facts

    • In German many cities and municipalities, deficits are growing again.
    • Germany’s federal structure includes redistribution of tax revenues among the states.
    • The upcoming budget talks will create plenty of haggling between richer and poorer regions.
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    Audio

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Bavaria's Munich has plenty of money thanks to tourism and industry. Source: DPA
Bavaria's Munich has plenty of money thanks to tourism and industry. Source: DPA

 

It all seems so simple: The economy and the labor market surge ahead, driving up tax revenues and making deficits go away. Budgetary consolidation achieved like clockwork.

Yet, because all financial relationships between Germany’s federal, state and local governments have to be completely renegotiated by the time the debt cap for the country’s 16 states comes into force in 2020, some state leaders appear to be fed up with saving. Being overly thrifty wouldn’t exactly strengthen their negotiating position in forthcoming rounds of financial haggling.

So in many places across Germany, budget deficits have grown again for the first time since the end of the Great Recession. Eight of the 16 states made ends meet, but the other half spent a total of €5.6 billion ($4.2 billion) more than they earned. All that is needed for these states to face a fiscal disaster is a change in interest rates or a serious economic downturn.

Even within Germany's borders, clearly, friendship ends when money is involved.

At the other extreme, Bavaria continues to surge further ahead of the other states: A surplus of €1 billion in the first half year is a good sign that the southern powerhouse is in rude economic health. Against this background, it is almost comical that Horst Seehofer, Bavaria’s state premier, is going to Germany’s Constitutional Court to change the country’s fiscal redistribution from richer to poorer states, arguing it is supposedly too big a strain on his state. Mr. Seehofer, in all seriousness, wants to limit his payments into Germany’s fiscal solidarity system to a maximum of €1 billion. Bavaria’s last payment into the scheme was €4.3 billion.

Of course, at first sight it looks a little unfair that three rich states have to pay for 13 poor states. But if you take the respective populations, about 30 million German citizens live in the paying states, and 50 million are in the states receiving financial support.

Apart from that, the amounts of money involved are not particularly large: Last year, states and local authorities generated a total of €244 billion in taxes. Of that, only about 3 percent was redistributed by the fiscal solidarity scheme.  Even rich Bavaria has to pay only about 9 percent of its total revenues to other states — a rate that normal taxpayers and companies can only dream about.

But even the wording “its revenues” is misleading.  As the connection between economic success and fiscal revenues is limited, it is above all the formerly communist eastern part of Germany that suffers due to its lack of wealth and the absence of businesses. Where company headquarters are located is where most money flows to the inland revenue. That’s why in Bavaria, where eight companies listed on the blue-chip DAX index are headquartered, the gross domestic product has increased by about 19 percent since 2009 and tax revenues by a huge 27 percent.

The banking district ini Frankfurt am Main in the state of Hessen is a solid source of tax revenue. Source: Reuters
The banking district ini Frankfurt am Main in the state of Hessen is a solid source of tax revenue. Source: Reuters

 

Contrary to statements from the paying states, Germany’s fiscal solidarity scheme is by no means spiraling out of control. The volume of revenues redistributed in 2013 was hardly any greater than in 2008. Indeed, much less money is being redistributed today than had been estimated back in 2005 – which Bavaria agreed to at the time.

The local authorities play a special role in Germany’s federal financial network. Not least due to the successful work of their central lobbying organizations, “municipal financial crisis” is now a familiar term in the public domain and in federal politics, too.

Chancellor Angela Merkel’s grand coalition now plans further relief for towns and municipalities, although they, in total, have been producing surpluses for years. From 2015, the municipalities will receive financial relief of €1 billion initially and from 2018, €5 billion in assistance for disabled people. The federal cabinet will pass the draft bill to relieve the municipalities in the coming week.

But even that is not as easy as it sounds. Because, according to the constitution, the federal government cannot directly finance municipalities. And so the money has to make a detour: Firstly, it will go to the states who are supposed to pass it on, and whether they do so or not is, of course, another matter.  Saarland and Saxony-Anhalt have already announced that they will not pass on these relief funds, because they, and not their municipalities, finance disabled assistance.

Asking for financial solidarity during the euro zone crisis has caused tensions between richer and poorer countries. But even within Germany’s borders, clearly, friendship ends when money is involved. And that does not auger well for Germany or Europe.

The author is a Handelsblatt editor and can be reached at: schrinner@handelsblatt.com

 

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