ABSTRACT

Government structures vary broadly among countries. While some countries show a more unitary structure others are widely decentralised. In Germany, for historical reasons, the federal character of political and administrative relations is pronounced. Consequently a highly independent and powerful position of the federal states, the Länder, is intended by the Basic Law (Grundgesetz). However, the constitution also always aimed for establishing nationwide uniform living conditions. In the proper sense both objectives generate an inherent target conflict. On the one hand the diversity of regions is pronounced. On the other hand uniform standards are desired. The conflict manifests itself within a type of competitive federalism. While Basic Law assigns formal autonomy to the Länder, their scope to act is limited. An increasing number of federal laws predominate the expenditure side while the tax setting power of the Länder – which had always been limited – has been reduced during the last six decades. Unsurprisingly, the German federal arrangements have ever been a complex system. But the high number of realignments resulted in an even more complicated and sophisticated set of rules. This paper reviews the assignment of powers to governmental levels by Basic Law and lines out the major regulations of the fiscal equalisation schemes. In fact, the system exhibits a notable number of shortcomings. Besides, new challenges will become more and more pressing within the next years. The Solidarpakt, which constitutes special grants to the new Länder, will end in 2019 and the German debt brake will be completed in 2020. Finally, the Federal financial equalisation system itself has to be realigned until 2020 because the standard act is limited in time. Focusing on the German experience, at least, the question will be whether there are any lessons that can be drawn.