Signs of disharmony in Germany as states look to reform ‘equalisation’ system


Bavarian Minister-President Horst Seehofer (CSU) has finally taken off the gloves in the dispute over the contentious system of State Financial Equalisation (LFA) in Germany and announced that his cabinet is to lodge an official complaint with the Federal Constitutional Court.
The main argument for reform is the ever increasing financial burden on the four richest or so-called ‘donor’, states, whose apportioned revenue serves to prop up the twelve poorer, or ‘recipient’, states.

LFA is part of a complicated system of financial relationships between the Federation and the Federal States in Germany.  It fufils a specific stipulation of the Constitution of the Federal Republic of Germany, which was approved by the occupying powers and ratified by all of the West German states, with the exception of Bavaria, in 1949.  Following reunification in 1990, the former East German states were also incorporated into the Constitution of the Federal Republic of Germany.

As per Article 107 paragraph 2 of the Federal Constitution, it must be ensured by law that the different financial strengths of the Federal States are ‘appropriately’ adjusted.  Aligning the revenue of the Federal States, along with Supplementary Federal Grants, is intended to create and maintain equal standards of living throughout the Federal Republic despite variation in the financial strengths of the Federal States.

Under the system of LFA, or revenue sharing, the entitlement to receive payments and the obligation to make them is calculated based on the extent by which the financial capacity of the respective State falls short of or exceeds the ‘equalisation index’ –  the national average financial capacity of the Federal States.  The goal of LFA is to bring the financial capacity of the poorer States closer to the national average.

Bavaria is by far the greatest contributor to the LFA.  In 2011 Bavaria’s input of €3.7 bn accounted for more than half of the €7.3 bn total contribution of all sixteen Federal States. This trend shows no sign of abating – Bavaria’s liability is predicted to increase to €4.2 billion in 2014.  The greatest recipient state in 2011 was Berlin, receiving LFA support of over €3 billion.  For Minister-President Seehofer, the system in its current form has ‘spiralled out of control’.

Failed negotiation attempts with the other states have left Seehofer with no choice but to take Bavaria’s case to the Federal Constitutional Court in Karlsruhe. 

Another of the major donor states, Hessen, is set to join Bavaria in seeking reform which would relieve the financial burden on the donor states and encourage the recipient states to take on responsibilty for strengthening their own economies and practising better fiscal discipline.

The aggrieved parties are eager to stress that their complaint should be read not as a threat to state solidarity, but as an attempt to create a fairer system of revenue sharing from the perspective of the donor states.

‘Bavaria is for solidarity. The LFA is not’, were the words of Minister-President Seehorf.  He went on to draw attention to the fact that Bavaria itself was an LFA recipient state until 1988: “The financial assistance recieved by Bavaria served our state well. It was the initial spark to our economy and the basis for much of what can be proud of today. There is nobody in a better position to understand that the financially weaker states require support. However the LFA must be founded upon the principle of helping states to help themselves, and not reliance on long term subsidy”.

The Bavarian Minster for Finance Markus Söder (CSU) also expressed the need for the ‘reestablishment of a balance between solidarity and self responsibilty’, highlighting that the next two years will see Bavaria forced to reserve €8.2 bn for equalisation payments and concluding that a fairer system of LFA is needed to provide the recipient states with greater incentive for debt reduction and prudent budget management.

The same sentiments were echoed by the Bavarian Minister for Economic Affairs Martin Zeil (FDP), who cited Bavaria’s accounting for over half of the funds of the LFA as a clear demonstration of how the system has “nothing to do with fair burden sharing” and “punishes effective government whilst rewarding political inaction”.

With no political solution in sight, Zeil also defended the decision of the state government to take up their complaint with the Federal Constitutional Court as “the only remaining course of action to provide justice to the state of Bavaria and its tax payers”.

The Bavarian State Government intends to construct their formal written complaint over the coming months and submit it to the Federal Constitutional Court in late autumn.  An adjudication from Karlsruhe is not expected until after the state and federal elections in 2013.  The current system of LFA is already due to be reassessed in 2019.

This has left Minister-President Seehofer open to criticism of political posturing in the run up to next year’s elections.  A crusade to bring billions of euros worth of revenue back to Bavaria is sure to fare well with the tax payers of the southern state, even if the outcome of the endeavour is not to be announced until after the elections.

Seehofer has furthermore been charged with aiming to secure Bavaria a stronger position ahead of the imminent negotiations on the reform scheduled to take place in 2019.

Saxony Anhalt’s Minister for Finance Jens Bullerjahn (SPD) dismissed the Bavarian announcement as nothing more than an early start to the CSU re-election campaign and condemned their electoral tactics : “I have nothing against a fierce election campaign’, said Bullerjahn, “however when that comes at the cost of German solidarity, as in this case, then it’s gone too far”.

The Bavarian announcement was likewise attacked by the Minister-President of Mecklenburg-Vorpommern Erwin Sellering (SPD), who accused Seehofer of using the LFA as an “electoral campaign tool” and of “fostering division instead of solidarity in Germany”.

He also dwelled on Bavaria’s previous status as a recipient state: “I find it hard to believe that the Bavarians of all people are threatening state solidarity in Germany and attempting to revoke regulations which are firmly agreed to run until 2019”.

This will be the second time that Bavaria has taken a complaint against the LFA to the Federal Constitutional Court in Karlsruhe. In 1999 a successful campaign conducted by then Bavarian Minister-President Edmund Stoiber (CSU) and his counterparts in Baden-Württemberg and Hessen resulted in Karlsruhe demanding that adjustments to the system be negotiated by the Federation and the Federal States.

The current system was agreed between the Federation and the Federal States as a result of these negotiations in 2001 and has been in force since 2005.  It is not due to be reassessed until 2019.

By Ashley Husband-Powton