HANDELSBLATT EXCLUSIVE Bailing Out the Neighbors

Germany’s system of moving public funds between states is looking increasingly shaky as new figures show that the wealthiest three subsidize the other 13 to the tune of billions, Handelsblatt has learned.
Quelle: dpa
Hamburg, which recently spent €750 million of taxpayers money on its new Elbphilharmonie concert hall, turned from donor to recipient in 2016.
(Source: dpa)

If you want to reduce a crowd of Bavarians to a quivering mass of rage, just say this one German word: Länderfinanzausgleich. It means “financial equalization of the states,” the system by which richer federal states pay large amounts of tax revenues to poorer ones in order to balance out regional differences.

The arrangement is a cornerstone of the post-war federal German constitution, but is widely resented among wealthy states, who loathe seeing their cash sluiced off to poorer cousins.

The affluent southern state of Bavaria pays the most. Anger at the perceived injustice has been simmering there for decades. “Bavaria is the biggest charitable institution in Germany,” Markus Söder, the state’s finance minister, complained sourly last year.

Since then, Mr. Söder’s resentment has only increased. As the years go by, the entire system of financial equalization among the 16 federal states has grown more and more lopsided, as a small number of rich donor states pay out to a large majority of below-average neighbors. The trend got worse in 2016, as revealed by the system’s latest figures, exclusively revealed to Handelsblatt by sources in a state government. Last year the number of donor states dwindled further: from four down to three.

Bavaria is the biggest charitable institution in Germany. Markus Söder, Finance minister, Bavaria

Hamburg, previously a donor, last year became a net recipient of federal transfer payments. In 2015, the northern city-state paid €112 million, around $119 million, into the system. But last year it received €65 from collective funds.

The city has oscillated for many years from donor to recipient, but its latest switch will be doubly bad news for its mayor Olaf Scholz, of the center-left Social Democrats, or SPD. This is because the news comes just as the city’s new Elbphilharmonie concert hall opens. The new building is an astonishing architectural achievement, but came at an eye-watering price to taxpayers, years late and costing them upward of €750 million.

Mr. Scholz has built a political reputation on getting the building finished and stopping its hemorrhage of public money. This week also sees the announcement of the SPD’s candidate for federal chancellor. Mr. Scholz harbors some national political ambitions, and does not want his city portrayed, yet again, as a slacker spendthrift.

“Now Bavaria is subsidizing the Elbphilharmonie too,” grumbled Mr. Söder in response to the news. In 2016, Bavarian payments reached record levels, climbing almost 7 percent to €5.82 billion. That means the southern state is now paying 55 percent of all inter-state transfer payments.

17 p8 Hamburg on the Receiving End-01

On several occasions in the past, Bavaria has taken cases to the federal constitutional court to try to get its burden reduced. Critics from elsewhere in Germany like to point out that Bavaria was a poor agricultural state not long ago, receiving large transfer payments in the decades after the Second World War.

In fact, the biggest increase in payments in 2016 fell to the state of Hesse, home to Frankfurt, Germany’s financial capital. Hesse’s mandatory contributions climbed last year by 31.4 percent to €2.26 billion. “It’s normally nice to be top of the table, but this time we aren’t enjoying it quite so much,” was the ironic comment from Hesse’s finance minister, Thomas Schäfer.

Hesse's payments now almost total those of the third net contributor, the southwestern state of Baden-Württemburg. Like its neighbor Bavaria, Baden-Württemburg was once predominantly agricultural, but in recent decades has undergone an economic miracle, making it one of the wealthiest states in the country.

The biggest recipients of federal largesse are northern states with a declining industrial base, and the still underdeveloped former communist states in the east. And the largest beneficiary of all is the federal capital Berlin, which received almost €4 billion in payments last year.Berlin may have a fashionable reputation but it is not a wealthy city by European standards: “We are poor, but sexy,” went the famous boast of former mayor, Klaus Wowereit.

Next in the transfer payment line was North Rhine-Westphalia, receiving around €1.1 billion. It is Germany's most populous state, but is home to a swathe of former industrial cities, a kind of German rustbelt.

The payment transfer system is dependent on a complicated calculation, based largely on states’ tax revenues and populations. This can lead to fluctuations: Lower Saxony received 63 percent more than last year, while the northernmost state of Schleswig-Holstein saw inter-state revenue fall by 8.9 percent. But the trends remain clear: even during a boom time for the country as a whole, wealthy southern Germany is gradually pulling away from the north, west and east.

“The figures for financial transfer payments in 2016 just show how urgently we need reform,” said Mr. Söder.

The entire financial system between Germany’s federal and state government is due to be overhauled in four years’ time after politicians agreed on a deal in fall. In 2020, the current system will be replaced with one which will see more payments from central government to the states, and less inter-state payments.

But while the reforms have been agreed, they have not yet been passed into law. “I hope the agreement is made law without further ado,” said Mr. Schäfer, Hesse’s finance minister. Hesse was a strong state and happy to show solidarity with others, he added: “But at this stage, we have passed our limit, in terms of assuming others’ burdens.”


Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the author: [email protected]