German federalism at the crossroads: renegotiating the allocation of competencies in a new financial environment

Germany has been only mildly affected by the shock of the 2008–9 financial crisis and this chapter argues that Germany’s economic circumstances were quite different from many other federal countries included within the volume. The fiscal crisis has, however, occurred in a period where intergovernmental relations within Germany have already been very much in flux and, as this chapter argues, has altered the likely trajectory of federal reform in Germany. This analysis highlights how the interaction of actors, existing institutions and changing economic conditions influence change in federal systems. While negotiations relating to intergovernmental reform in Germany are ongoing ahead of the expiration of the existing regime for federal funding in 2019, the analysis presented in this chapter provides insights into both points of contention in this debate and the likely future direction of federalism reform. Reform of the German federation was on the political agenda on the eve of the financial crisis. The so-called Federalism Reform I that had come into effect in 2006 featured a cautious decentralization agenda. More significantly, however, negotiations had started for the so-called Federalism Reform II, which focused on federal fiscal relations. The most significant element of the second reform package, which was influenced by the prevailing financial crisis and passed in August 2009, was the introduction of constitutional debt limits for central and subcentral governments. The original goal of engineering a thorough reorganization of fiscal relations has, however, not been achieved. This issue has been lingering ever since, but has gained increasing attention more recently. The current system of fiscal transfers will expire at the end of 2019, and the negotiations for a new system have drawn some attention to more fundamental questions of Germany’s federal fiscal constitution.