Länderfinanzausgleich and the future of Europe
As a new center-right party in Germany threatens Merkel's government, it's a good time to review the angst-riddled politics of fiscal transfers within Germany
Yesterday the German federal states Hesse and Bavaria filed a lawsuit
against the existing mechanism of fiscal transfer between the federal
states of Germany, the so-called “Länderfinanzausgleich”. The German
constitution states that the objective of this fiscal transfer mechanism
is the convergence of the financial power across its federal states.
The current system consists of vertical payments between the German
state (“Bund”) and the federal states (“Länder”) as well as horizontal
payments from federal state to federal state. The eligibility for
transfer payment receipts is determined by an index
(“Finanzkraftmesszahl”) which indicates the relative financial power of
the federal states. Bavaria, Baden-Württemberg and Hesse are currently
the only net contributors, while Berlin is the biggest net recipient of
these fiscal transfers.
Bavaria and Hesse argue that the current mechanism does not create any
incentives for the net recipients to improve their financial position.
It is said that sanctions for fiscal mismanagement are missing, while
the net contributors are discouraged to consolidate their finances
further as long as they have to redistribute their wealth. Basically,
one rich German state is arguing why it should transfer its fiscal
revenues to a poor (and arguably irresponsible) German federal state. If
you already see significant opposition against a redistribution
mechanism of wealth within a country, how is it possible to picture
Germany, the Netherlands or Finland agreeing on major fiscal transfer
payments to Southern Europe?
