February 5, 2013 6:47 pm

States challenge Germany’s subsidies

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The two richest federal states in Germany have launched a constitutional challenge to the country’s system of tax transfers in order to stop subsidising spending in the city of Berlin, the national capital, and all the poorer states.

Bavaria and Hesse joined forces on Tuesday to set in train a lawsuit that is likely to open up deep divisions between wealthy southern Germany and the poorer north and east, and call into question the entire adjustment system that helps stop Berlin from going bankrupt.

But they failed to persuade Baden-Württemberg, the third wealthy net contributor to the redistribution scheme, to join in their complaint, which is unlikely to be decided by the German constitutional court until at least 2014.

Bavaria boasts that its capital Munich is the country’s most prosperous city, the headquarters of BMW, the motor manufacturer, and Siemens, the engineering and electronics conglomerate. Hesse is home to Frankfurt, Germany’s banking and financial centre.

Volker Bouffier, state premier of Hesse, said the constitutional challenge agreed at a joint cabinet meeting in Wiesbaden, state capital, was “an act of political self-defence” to end a system that was both inefficient and unfair.

Horst Seehofer, prime minister of Bavaria, said his state had reached its “pain threshold” in transferring €3.9bn in 2012 to the poorer states. Baden-Württemberg, with a transfer of almost €2.7bn, is second largest net contributor, followed by Hesse with €1.3bn.

The city of Berlin, which is host to the German government but boasts very little business and industry to help finance its running costs, is by far the largest net recipient, getting €3.3bn out of the €7.9bn pot, followed by the five other eastern states which used to be part of communist East Germany.

Both Bavaria and Hesse are ruled by centre-right coalition governments facing elections in September. Their leaders were accused by Norbert Walter-Borjans, Social Democrat finance minister of North Rhine-Westphalia, of “blatant electioneering”. His state received €400m from the transfer system last year.

Baden-Württemberg, home to Daimler, manufacturer of Mercedes cars and trucks in Stuttgart, and Robert Bosch, the largest power tool and accessory manufacturer in the world, is now ruled by a coalition of environmentalist Greens and centre-left Social Democrats. They held back from joining the challenge, although the Greens in Hesse supported the move.

The present system of transfers was negotiated between the 16 federal states after German reunification in 1990, and expires in 2019. It has seen a steady increase in the burden on the three net contributors, not just to finance the eastern states and Berlin, but also the port cities of Bremen and Hamburg, and all Germany’s northern states, although they are mostly relatively prosperous.

Southern critics of the system, especially in Bavaria, see it as a German version of a “transfer union”, and fear that a similar financial adjustment process could be created in the 17-nation eurozone to provide permanent subsidies from northern Europe to the poorer south.

They point out that subsidising indebted cities such as Berlin and Bremen has done nothing to improve their fiscal discipline, but rather turned them into a constant drain on taxpayers in other parts of the country.

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