Since the outbreak of the crisis it has become increasingly clear: Without financial transfers from the “rich North” to the “poor South”, the Euro zone, and eventually the European Union, cannot cling together for long. Equally obvious, this prospect does not make everyone exult, and not only in Europe’s economic powerhouse Germany the fear of a “transfer union” keeps simmering.
Interestingly enough, but largely unnoticed by outsiders, the Federal Republic has its own controversy over financial transfers from richer to poorer regions. In fact, the German fiscal equalization scheme is somewhat considered a failure by many observers. What can we learn for the construction of a Europe of solidarity?
When it comes to taxation, German federalism is at its best. Competencies are shared between the federal and the state (Länder) level, and a considerable number of taxes are collected by the treasuries of the sixteen Länder. Aware of existing and arising inter-regional discrepancies, the fathers of the 1949 constitution sought to facilitate similar living standards all across the Republic. The resulting fiscal equalization mechanism was set up to guarantee that the diverging financial powers of the Länder be equalized to an “adequate degree”.
The precise redistributive formula is complex – simply put, those Länder with a higher than average revenue transfer funds to those with a smaller revenue until revenues (per capita) are near to equal. The scope of the scheme climbed from a modest 150 million in 1950 to quite a volume of €7.9 billion in 2012. Only three Länder, Bavaria, Hesse and Baden-Württemberg, paid this amount to the thirteen recipient states, among which, for example, Berlin was the happy beneficiary of €2.9 billion .
As the bill gets higher, so does the lamenting. In July 2012, conservative-led Bavaria, later joined by (also conservative-led) Hesse, announced to take the fiscal equalization mechanism to the German constitutional court. The opponents of the system claim that it punishes those managing their revenues carefully and rewards those promising milk and honey to their citizens. Whenever the revenues of a state decrease, there is no incentive to revert the process; the compensation will make up for it. Why, the critics ask, should a state treasury try to increase its revenues if these make no difference to the budget at the end of the day?
The discussion has become especially heated when the opponents of the scheme pointed out that some Länder like Berlin indulge citizens with benefits like free university education and crèche places that contributor Länder often do not afford. Many media have all too willingly been exploiting the picture of the lazy Berlin Bohemian, financially subsidized by respectably working Bavarians. Proudly describing his city-state as “poor but sexy”, Berlin mayor Klaus Wowereit has not missed the opportunity to fuel such animosities.
The parallel to the European case will have become perspicuous, despite all the technical differences: Financial redistribution on this level works through the EU budget, primarily funded through about one percent of each national budget. As agricultural subsidies and cohesion funds are, of course, not spent according to contribution, some member states end up as net contributors, some as net recipients.
Also, the various rescue mechanisms created since the outbreak of the crisis could have severe redistributive effects, were credits not to be paid back and guarantees to become due. Just to name the most recent scheme, the European Stability Mechanism has a volume of €700 billion, and its largest contributors to are those that most likely will not make use of it in the near future, Germany and France.
Surely, some kind of solidarity is unavoidable if Europe is to persist and living standards are to converge further. However, while European leaders are advancing the political and fiscal integration of Europe, the example of Germany teaches several lessons they should pay attention to.
Firstly, the mere transfer of funds from one treasury to another does not automatically make diverse economies converge. Of all the German Länder that originally were recipients, only one has turned to a contributor (ironically enough, the ever-nagging Bavaria), while some initially contributing ended up receiving. The system provided hardly any incentives for recipients to change the status quo, with the contributors having no influence on their budgetary policies. In this respect, Europe is on the right path establishing budgetary restrictions for those states claiming funds from the ESM or violating the fiscal compact.
Secondly, the issues with financial solidarity within Europe will not disappear once a European identity has further developed, as often suggested. Bavarians and Berliners cannot be denied to share a German identity. Yet, the former are agitated when they feel that their tax money flows off to some distinct administration believed to be sloppy. In general, citizens will always claim that a reasonable amount of their taxes be spent in the place they inhabit. The reference to a “community of fate” will hardly change this reluctance.
Thirdly, the story of Germany should make us think more creatively about European solidarity. Why not support less well-off European individuals through a European social security scheme, as the Europäischer Federalist blog has suggested? In Germany, social security financed through progressive income taxation is better accepted than the fiscal compensation system. Obviously, the level of social security is permanent subject to debate between left and right; but it is not a debate between Bavaria and Berlin, it is not “us” against “them”. Rather, it is a discussion among Germans.
Similarly, wouldn’t rich Europeans be more open to the idea to support the less fortunate, wherever they may be, than to the prospect that their money goes “from Germany to Greece”? The exact implementation and extent of such a system would be highly contested, perhaps in the European Parliament, perhaps between the national governments. But, again, it would be more of a debate among Europeans, not “them” against “us”.
Bernhard Clemm is a masters student in the European Politics and Society programme at Oxford.
This post originally appeared on EUspeak.eu.