ABSTRACT
In federally organized states like in Germany grants from the national (federal) level to local governments are often seen as suitable instruments to stabilize the economy in cases of economic crisis. The reasoning behind this is first the ‘Keynesian’ idea of ‘deficit spending’, i.e. stabilizing the demand side of the economy – preferably by increasing debt-financed public infrastructure investments. Second, in federations such an increase in public spending is only possible as a cooperative action between the different layers of government because the regional (the states, or in Germany the Länder) and the local level of government (counties, towns or municipalities) are responsible for the core infrastructure.
