Financing German Unity: Fiscal Conflict Resolution in a Complex Federation

Wolfgang Renzsch

Publius: The Journal of Federalism, vol. 28, issue 4, 127-146

Abstract: Unification posed a new challenge to the Federal Republic of Germany. Two economically different areas were united into one federal polity. Due to the constitutional command to safeguard equivalency of living conditions throughout the republic, the federal government as well as the “old” Länder were supposed to support the “new” Länder of East Germany. Until 1994, provisional regulations served to finance East Germany; in 1995, the new Länder were integrated on an equal footing into the “financial constitution” of the Basic Law. Unification was not used for constitutional reform as had been demanded by some Land leaders. Concerning intergovernmental fiscal relations, one can speak of “budgetary adaptation” only. It was not possible to resolve long-lasting constitutional issues together with the challenge of unification. German unification has been, and will be, very costly. Public debt rose from roughly 900 billion German marks in 1989 to more than two trillion in 1995. The argument about burden sharing between the federation and the “old” Länder continues, and the formulas of fiscal equalization have been challenges by Bavaria and Baden-Württemberg. Copyright , Oxford University Press.

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