AS THEY do about once a decade, the Germans are again fighting over their domestic “transfer union,” in which tax revenues are redistributed among the 16 federal Länder (states). But this time the euro crisis provides a new twist, for the currency zone’s southern countries are of late demanding “solidarity” from Germany in a form that sounds suspiciously like an even bigger transfer union. Hence the parallel in German minds: some states are makers, others are takers. The dynamic and fiscally responsible Bavaria, in this analogy, plays the role of Germany, backed by other good budgeters such as Hesse and Baden-Württemberg (Finland and the Netherlands, say). The city state of Berlin (“poor but sexy”, as its mayor has described it) becomes a “German Greece”, alongside other weaklings such as Thuringia or Bremen (Portugal or Spain).
Germany’s system of financial equalisation is “socialism among states”, says Christian Kelders of the economics ministry of Bavaria, which pays half of the total transfers of €7.3 billion ($9.5 billion) a year. It leads to “perverse incentives” by punishing Länder that raise more tax revenues and rewarding those that collect less, agrees Luise Hölscher of the finance ministry of Hesse, which gives the most per person. On October 23rd the centre-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), agreed to push for reform. Separately, Bavaria will take its complaint to Germany’s constitutional court, where Hesse will probably join as plaintiff.
The EU is already a small transfer union of sorts, with a budget worth about 1% of the union’s GDP (see Charlemagne). It could become a much bigger one, if the embryonic "banking union" is extended to include joint bank-deposit guarantees, or if the union starts issuing joint Eurobonds. European leaders may also create a separate euro-zone budget.
By contrast, Germany’s system redistributes states’ revenues, irrespective of their indebtedness or spending, thus reducing differences in funding per person. The city states of Berlin, Bremen and Hamburg are even allowed to inflate their populations by 35% in this calculation, on the theory that they also serve commuters from surrounding states. Thus a state whose funding per person is 70% of the average, say, ends up at 91% after redistribution. One that starts at 120% ends at about 106%. Beyond this “horizontal” redistribution, the federal government also “vertically” tops up the transfers. Separately, all Germans still pay a “solidarity surcharge” to the Länder in the former East Germany.
The recipients love this system. Berlin, which gets 41% of the transfers, rebuts southern whining as a populist “Bavarian reflex”. Berlin’s finance ministry points out that the city is reducing its deficits very responsibly. To call Berlin a German Greece is nonsense, says its finance minister. Besides, Bavaria was for decades itself a taker.
And yet there are lessons in Germany’s federal experience for Europe, says Hesse’s Ms Hölscher. When economic differences become big, redistribution can lead to conflict, especially if the givers have no influence over what the takers do with their money. Bavarians, for instance, are irate that their students pay to attend university, whereas Berlin makes education free, even as Bavaria subsidises Berlin’s budget.
Sooner or later, regions may rebel. Thus Wilfried Scharnagl, a veteran Bavarian politician of the centre-right and the author of “Bavaria Can Also Go It Alone”, says that Germany’s system “lames the weak and weakens the strong.” If Bavaria is at risk of ending up in a double transfer union under the oppression of both Brussels and Berlin, it should, he thinks, secede.
