Reform Strife

Federal-State Family Feud

SchaubleScholz2_actionpress
Seeing things eye to eye, Wolfgang Schäuble (l) and Olaf Scholz.
  • Why it matters

    Why it matters

    Chancellor Angela Merkel has created a group to advise on reform of the workings between federal and state governments. But two senior politicians from rival parties in the ruling coalition have bypassed it and announced their own reform plans.

  • Facts

    Facts

    • Christian Democratic Union and Social Democratic Party rule Germany in grand coalition.
    • Relationship between coalition and state governments strained.
    • Reform of state powers would affect taxes, welfare and national debt.
  • Audio

    Audio

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If Wolfgang Schäuble and Olaf Scholz had planned to surprise everyone, they certainly succeeded. At a news conference back in May, these political rivals were expected to announce an agreement on a multi-billion euro spending plan for education and research. Instead they proposed a major federal shake-up, challenging the relationship between states and the federal government by pushing for a constitutional amendment that would relax a ban on education cooperation.

Mr. Schäuble, Germany’s finance minister, and Mr. Scholz, Hamburg’s mayor, are now working on their next idea for reforming the long-standing state-federal relationship in Germany.  The unlikely bedfellows, whose parties form Germany’s current coalition government, want to use ongoing negotiations on the country’s fiscal equalization scheme (a redistribution of money between its 16 states) and its solidarity surcharge (paid by Germans in the west to subsidize those in the former East Germany) to agree a major reform of the relationship between federal and state governments.

The unilateral move by two supposed rivals, albeit coalition partners, has put a few noses out of joint.

The overhaul would include new rules on the division of social functions, joint debt management and tax reform. The men have already drafted a policy document on the subject.

The unilateral move by two supposed rivals, albeit coalition partners, has put a few noses out of joint. Mr. Schäuble is a member of Chancellor Angela Merkel’s centre-right Christian Democratic Union (CDU), while Mr. Scholz is a member of the left-leaning Social Democratic Party (SPD). So while collaboration on a popular education spending plan is one thing, federal reforms are quite another. “Perhaps this time they are going a bit far,” said a member of the coalition.

State premiers and finance ministers rebuked the pair for “wheeling and dealing.” And Horst Seehofer, leader of the Christian Social Union, a powerful Bavarian sister party of the CSU, has not given the two reformers any support.

In fact, Mrs. Merkel and the state premiers had already told Mr. Schäuble and state finance ministers to work up proposals on the federal-state reforms by Christmas. Experts from several state finance ministries had been busy working on alternatives all summer, seemingly unaware of Mr. Schäuble and Mr. Scholz’s private discussions.

The two politicians have known each other for years. Mr. Schäuble was interior minister and Mr. Scholz was the minister of labor in a previous coalition. “They like each other,” said one person who knows them well.

As part of their private discussions, the pair agreed a few ground rules, including a ban on leaks. “I want to achieve something in negotiations, not in interviews,” said Mr. Scholz.

“I want to achieve something in negotiations, not in interviews.”

Olaf Scholz, Hamburg Mayor

In addition, they wanted to complete their discussions rapidly. The party bosses were supposed to help, but when the pair presented their draft reform to Ms. Merkel, Mr. Seehofer and SPD leader Sigmar Gabriel on August 31, no blessing was forthcoming.

Mr. Seehofer was annoyed that a policy paper on the relationship between federal and state governments was presented without any CSU involvement. “Mr. Seehofer stepped on the brake,” said an insider. The CSU chief intends to use the resolution of a dispute over road tolls – a key priority for Bavaria – as a bargaining chip to secure his support. There is now a concerted attempt in the finance ministry, which has been skeptical of the plan, to defuse the road toll dispute.

Many states with SPD governments are also annoyed because Mr. Schäuble and Mr. Scholz circumvented the official working group. “Not exactly respectful” was how one finance ministry official summed it up.

Mr. Scholz is also accused of failing to represent the interests of SPD-run states. The pair’s suggestion of integrating the solidarity surcharge into income tax was cited as an example, as affluent states such as Hamburg would profit from it. His proposals were “soaked in water from the Elbe,” said one finance minister, referring to the river that runs through Hamburg.

Jan Hildebrand and Donata Riedel are Handelsblatt finance policy correspondents in Berlin. Klaus Stratmann covers energy policy for Handelsblatt from Berlin. Contact: hildebrand@handelsblatt, riedel@handelsblatt, stratmann@handelsblatt

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