16 Against One

Shaking Down Berlin in Financing Shake-Up

schaeuble angry looking_ap
Will Schäuble play ball?
  • Why it matters

    Why it matters

    The German complex federal-state financial model is based on a redistribution of tax revenues from richer to poorer states, which has led to resentment in the past.

  • Facts


    • Germany’s 16 states have agreed on their proposal for reforming the federal-state financial model.
    • They want Berlin to come up with €9.7 billion to finance the new system, instead of the €8.5 billion on offer.
    • Richer states, such as Bavaria, want to reduce their contributions to poorer states via the current scheme.
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Just in time for Christmas, the 16 states that make up Germany’s federal system have come up with their list of what they would like from Berlin: €9.7 billion.

Whether finance minister, Wolfgang Schäuble, turns out to be Santa Claus or Scrooge remains to be seen.

The demands come as Germany’s 16 states finally stopped squabbling between themselves and reached an agreement on how they want to be financed going forward.

The rub for Berlin is that the only way they could reach a deal on the redistribution of tax revenues involves the federal government coming up with more funding from its coffers so that no state comes away empty-handed.

For years richer states, such as Bavaria, have complained that the complicated system of transferring funds from wealthier to poorer states is unfair to them. Bavaria and Hesse have even filed a legal challenge against the system with the country’s highest court.

On Thursday, however, the states reached a deal. One whereby the central government in Berlin would contribute €9.7 billion instead of the €8.5 billion, or $9 billion, Mr. Schäuble has offered so far.

According to representatives of the states, the discrepancy is due to different accounting methods. Sources in the finance ministry said they were skeptical and would need to look closely at the figures first.

Chancellor Angela Merkel’s initial response was cautious and non-committal. “The federal government has taken note of it. We have not had the opportunity to deal with the proposals,” she said.

A comprehensive reform of the so-called Länderfinanzausgleich, or state fiscal equalization, has been in the works for years.

The fraught negotiations between the states had taken a year longer than originally envisaged.

Late on Thursday afternoon, after the states finally saw eye-to-eye, agreeing to scrap the system in its current form, they went to the chancellery to present their proposals to Ms. Merkel and Mr. Schäuble.

By asking Berlin for more money, the richer states feel less burdened while the poorer ones don’t have to fear a hole in their budgets.

The states’ plan envisages getting rid of the current system of transfers and instead regulating redistribution via sales taxes.

“We have agreed. The result pleases everyone,” Stanislaw Tillich, premier of Saxony, said referring to the 16 state premiers.

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