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Chapter 3: Federal Republic of Germany

• Background
  • Population
  • History
• Political structure
  • The Federal government
  • The Bundesrat
  • The Federal Constitutional Court
  • The Land governments
  • The federal division of responsibilities
• Taxation system
  • Distribution of tax-raising powers and revenue
  • Taxation rates
  • Tax administration
  • Fiscal equalisation
• Interstate commerce
• Intergovernmental relations
• The Gesamtstaat
  • Conference of the Heads of Government of the Bund and Länder
  • Conferences of Party Leaders
  • Permanent Treaty Commission
• The Bundesstaat
  • Joint Tasks
  • Missions of the Länder to the Bund
• Third level
  • Conference of Minister-Presidents
  • Other Third Level institutions
• Developments in the 1990s
  • The Unification Treaty
  • Further constitutional reform
  • Fiscal equalisation
  • The role of the Länder in European Union matters
  • Globalisation and financial federalism
• Summary of observations
• Endnotes

3.0 The Federal Republic of Germany is the largest federal state in the European Union. Germany has a large degree of cultural homogeneity but a history of decentralised government.

Background

3.2 In 1990, the German Democratic Republic (East Germany) dissolved itself and, reconstituted as five new Länder, joined the Federal Republic. The new Länder accepted the Basic Law and other laws without significant qualification.

3.3 The ten original Länder are:

• Baden-Württemberg;
  

• Bavaria;
  

• Bremen;
  

• Hamburg;
  

• Hesse;
  

• Lower Saxony;
  

• North Rhine-Westphalia;
  

• Rhineland-Palatinate;
  

• The Saarland;
  

• Schleswig-Holstein.

The five Länder of the former German Democratic Republic are:

• Brandenberg;
  

• Mecklenburg-West Pomerania;
  

• Saxony;
  

• Saxony-Anhalt;
  

• Thuringia.

In 1990 East and West Berlin were unified, and the city of Berlin became a Land in its own right (two other Länder, Bremen and Hamburg, are also city-states rather than regions).

Population

Baden-Württemberg (1997)

10,397,000

Mecklenburg-West Pomerania (31 Dec 1997)

1,807,799

Bavaria (1996)

12,044,000

North Rhine-Westphalia (31 Dec 1997)

17,976,000

Berlin (Aug 1998)

3,409,885

Rhineland-Palatinate (Dec 1995)

3,977,919

Brandenberg (30 Jul 1998)

2,580,966

The Saarland (1998)

1,080,790

Bremen (1 Dec 1997)

674,180

Saxony (Aug 1998)

4,500,300

Hamburg (1997)

1,704,731

Saxony-Anhalt (31 Jul 1998)

2,688,086

Hesse (1997)

6,032,000

Schleswig-Holstein (31 Dec 1997)

2,756,473

Lower Saxony (31 Dec 1997)

7,845,398

Thuringia (1997)

2,478,148

History

3.6 In 962 the German King Otto I was crowned Holy Roman Emperor, and until its end in 1806 the Holy Roman Empire remained the overarching political entity in Germany. Although the whole of Germany was nominally subject to the Emperor’s authority, a number of factors contributed to an increasing degree of decentralisation.

3.7 Feudal government became predominant in Germany as a result of social, economic and military pressures similar to those in other parts of Europe. However, the decentralisation inherent in feudalism was compounded by political circumstances unique to Germany. Disputes with the papacy and involvement in Italian politics reduced the Emperor’s power over the nobles of Germany, and in 1356 the Emperor acknowledged the principal nobles as sovereigns in their own right.³ The Peace of Westphalia of 1648, which settled the religious wars that followed the Reformation, established the sovereignty of the more than 300 constituent states within the Empire.

3.8 The French Revolutionary Wars saw the beginning of a series of developments that led to the creation of modern Germany. Reorganisations of the Empire in 1801 and 1803 greatly reduced the number of constituent states. In 1806 the Holy Roman Empire was formally dissolved, and Napoleon established the Confederation of the Rhine. This league of German states collapsed following Napoleon’s retreat from Russia, but in 1815 the Congress of Vienna, as part of the settlement of the Napoleonic Wars, created the German Confederation. This union of 35 monarchies and 4 free cities was essentially a diplomatic arrangement providing for mutual defence, and it came to an end following the Austro-Prussian war of 1866.

3.9 The German Confederation was succeeded by the North German Confederation, which was established by Prussia and excluded Austria and the southern German states. The constitution of the Confederation provided for a Bundestag of directly elected members and a Bundesrat consisting of delegates of the member states. In 1871 the monarchs of all the German states except Austria recognised the Prussian king as Emperor of Germany and the constitution of the North German Confederation became, with some changes, the constitution of the federal German Empire.

3.10 Following the collapse of the government of the German Empire in 1918, a republican constitution, providing for a more centralised federation, was adopted at Weimar in 1919. However the National Socialist government, which came to power in 1933, abolished German federalism by decree in 1934. German federalism was re-established in West Germany following the defeat of Hitler, with the creation of the Federal Republic of Germany in 1949. The new Basic Law integrated parliamentary democracy with the tradition of German federalism:

With British history at its roots Australia, or rather its constituent parts, began with a tradition of parliamentary democracy, while federalism was an addition to it derived from a foreign and a semi-foreign (the American and the Canadian) source. In Germany history has taken exactly the opposite course: with only two exceptions the country has always been living in a tradition of federalism, while parliamentary democracy came to it on top of this at a later stage from foreign (mainly British but also French) sources.

Even the two exceptions referred to were not really genuine ones: during the first of them, the period between the dissolution of the Holy Roman Empire of the German Nation under the pressure of Napoleon in 1806 and the promulgation of the Imperial Constitution of 1871, the numerous sovereign monarchies and republics on German territory were linked together by structures of a confederal, quasi-federal or (partially and finally) even federal character. The second period, Hitler’s centralist dictatorship, represented an interruption rather than an exception to constitutional history since not just federalism but also any form of constitution as such had ceased to exist.

Federalism, therefore, had just as deep roots in Germany in 1949 as parliamentary democracy had in Australia in 1901 when it came not to be ‘invented’, but to be re-established by the Basic Law after World War II. Compared to democracy, it was the older value of the constitution which had to be combined with the younger one, while in Australia it had been an innovation to be coupled with the inherited parliamentary tradition.⁴

3.11 The German Democratic Republic, also established in 1949, at first had five states. In 1952 these were split into fourteen administrative districts (Bezirke), but the states were reconstituted in July 1990. In August 1990 East and West Berlin were unified to create the Land of Berlin, and in October the five Länder of the German Democratic Republic and the Land of Berlin became unified with the Federal Republic of Germany.

Observation 10:

Role of the States in the federation

Germany has a long history of powerful Länder. The Länder’s cultural and political identity is strong. They have a tradition of extensive participation in the government of Germany.

Political structure

3.12 Germany is a constitutional parliamentary democracy, with a bicameral federal legislature.

The Federal government

3.14 The Bundestag (Federal Diet) is the legislative chamber which performs the roles associated with a Westminster parliament. After each election the Bundestag must elect the Federal Chancellor,¹⁰ who is typically the leader of the party or coalition of parties with a majority in the Bundestag. If a majority of the Bundestag cannot agree on a Chancellor, the President has discretion to either appoint a Chancellor, or to dissolve the Bundestag and call new elections.¹¹ Otherwise, once appointed, the Chancellor may be removed only by a constructive vote of no confidence, in which the Bundestag votes to appoint a new Chancellor;¹² a Chancellor who moves and loses a vote of confidence may dissolve the Bundestag.¹³ The Chancellor appoints the rest of the Federal Ministry, and they hold office only so long as the Chancellor does.¹⁴ Each Minister is responsible for running his or her department independently, within general policy guidelines set by the Chancellor.¹⁵ Gerhard Schröder was elected seventh chancellor of the Federal Republic of Germany, with the votes of the Social Democratic Party and Alliance 90/The Greens, on October 27^th 1998.

3.15 The Bundestag must be elected every four years, or if dissolved, within sixty days of dissolution.¹⁶ Its members are directly elected by the people. When electing the Bundestag, voters cast a vote both for a local candidate and for a preferred party. The main political parties are the Christian Democratic Union (which is allied with its Bavarian sister party, the Christian Social Union) on the centre right, the Social Democratic Party on the centre left, the Free Democratic Party, a classical liberal party, Alliance 90/The Greens, which is a merger of the East German civil rights movement of 1989-90 with the West German radical ecology party, and the Party of Democratic Socialism, which is the former Socialist Unity Party (ie. Communist Party) of East Germany. The Basic Law specifies that the Federal Republic of Germany shall be a democratic and social federal state,¹⁷ and all German parties support the social market economy. This is a system of free enterprise combined with social welfare programmes, such as national health insurance, family allowances, pensions, and support for unemployed and handicapped workers. These programmes account for almost half the Federal Government’s budget.

3.16 Three hundred and twenty-eight seats in the Bundestag are filled by constituency representatives elected on a first-past-the-post basis, subject to the rule that no party may receive Bundestag representation if it wins fewer than three seats and receives less than 5 per cent of the vote. The remaining seats are distributed among the parties, on the basis of party lists in each Land, so as to bring the representation of each party in the chamber into accord with the total proportion of votes cast for each party, on a Land-by-Land basis. The proportionalities are calculated on the basis of a 656 seat chamber. Each party is entitled at least to the constituencies it wins, even if it wins a greater proportion of constituencies in a Land than its proportion of the total vote in that Land. Therefore, the actual number of seats in the chamber varies from election to election. There are currently 669 members of the Bundestag (298 Social Democratic Party, 245 Christian Democratic Union/Christian Social Union, 47 Alliance 90/The Greens, 43 Free Democratic Party, 36 Party of Democratic Socialism).

The Bundesrat

through which the Länder shall participate…in the legislative process and administration of the Federation and in matters concerning the European Union.¹⁸

Tax

Bund

Länder

Local Government

Total

Wages and salaries tax

120 148^*

120 148^*

42 405

282 701

Assessed income tax

5 949^*

5 949^*

2 100

13 997

Interest and dividend withholding tax

11 157^*

11 157^*

4 845

27 159

Business tax on individuals

2 780^*

2 780^*

16 681

22 241

Income tax surcharges

23 689

..

..

23 689

Total individual

163 723

140 034

66 030

369 787

Corporation tax

9 068

9 068

..

18 136

Business tax on profits*

1 778

1 778

10 665

14 220

Interest withholding tax*

224

224

2 115

2 562

Corporate tax surcharges

2 578

..

..

2 578

Total corporate

13 647

11 069

12 780

37 496

Value added tax*

131 388

103 234

..

234 622

Customs duties

7 314

..

..

7 314

Excise on mineral oil

64 888

..

..

64 888

Excise on tobacco

20 595

..

..

20 595

Excise on beer

..

1 779

..

1 779

Other excises

8 183

..

..

8 183

Gambling tax

..

2 785

..

2 785

Taxes on motor vehicles

..

13 806

..

13 806

Insurance tax

14 104

..

..

14 104

Other taxes on consumption

6 779

762

848

8 389

Total tax on goods and services

253 251

122 366

848

376 465

Taxes on net wealth

288

8 143

5 115

13 546

Taxes on real property

..

..

13 744

13 744

Inheritance and gift tax

..

3 549

..

3 549

Financial and capital transactions

54

6 067

296

6 417

Total taxes on property

342

17 759

19 155

37 256

Other taxes, fees and fines

..

..

254

254

TOTAL TAXATION

430 963

291 228

99 067

821 258

Observation 13

Federal financial arrangements

The Basic Law ensures that each government receives sufficient tax revenue to fulfil its responsibilities.

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Taxation rates

3.49 Income tax rates vary depending on whether the taxpayer is filing singly or jointly, with a married partner. When married couples file together, income splitting applies. Married partners may file separately, but should they do so they are subject to singles’ tax rates. The following table provides the income tax rates applicable for the 1996 financial year:⁹²

Taxable Income (Deutsche Marks) Single or Married couple	Effective Tax Rate (%)		Marginal Tax Rate (%)
	Single	Married	Single	Married
60,000	24	16.4	35	29
80,000	27.5	19.7	41	31
100,000	30.7	22.2	47	33
120,000	34.0	24.0	53	35
140,000	36.7	25.8	53	38
160,000	38.7	27.5	53	42
200,000	41.6	30.7	53	48
240,000	43.5	34.0	53	53

3.50 If an individual is a member of a state recognised church, an additional 8 per cent or 9 per cent church tax is assessed on the income tax liability. The Solidarity Surcharge of 7.5 per cent of the assessed income tax liability is charged on every individual.

3.51 Capital gains are assessed at personal income tax rates if such gains are from a speculative transaction or the sale of non-business property if the individual owned more than 25 per cent of that property in the five years prior to sale.⁹³

3.52 The corporation tax rate is 45 per cent, with profits distributed as dividends taxed at the lower rate of 30 per cent. The Solidarity Surcharge of 7.5 per cent applies to the assessed income tax liability of every corporation.

3.53 The standard rate of Value Added Tax is 16 per cent, with a reduced rate of 7 per cent applying to certain goods and services (including basic groceries). Exports outside the European Union, as well as some services (including banking, insurance and medical services), are zero rated.

3.54 The local government trade taxes apply to income and capital, and are determined by municipalities according to local factors. These trade taxes are deductible for corporate and personal income tax purposes.

Tax administration

3.55 Each level of government has tax administration powers commensurate with its tax raising authority.

Fiscal equalisation

3.56 Germany has a low degree of vertical fiscal imbalance. There is a modest scheme of fiscal equalisation through a pool of revenues provided by rich Länder for direct distribution to poorer Länder; the Bund also contributes through a portion of the value added tax.⁹⁴ The addition of five eastern Länder in 1990 has required a special program.

Interstate commerce

3.57 Strong interstate commerce provisions prevent most internal trade barriers. Moreover, both Land and federal laws are subject to European Union directives for a single European market.

Intergovernmental relations

3.58 The system of intergovernmental relations in Germany is based on a shared appreciation of consensual decision making. Professor Ursula Männle, the Bavarian Minister for Federal Affairs, observed that:

Our society has more or less the impression that we need compromises, it is not that each State has to compete with each other.⁹⁵

3.59 The need to co-ordinate voting and responses to Bund legislation, and the fact that the Länder administer the majority of federal law,⁹⁶ means that Bund-Land and inter-Land co-operation is extensive.

3.60 The Bundesrat makes the Länder governments participants in the federal legislative process, and thus gives them direct influence over the Bund. In addition to this intergovernmental institution at the core of the German constitutional structure, Germany has also a number of non-constitutional intergovernmental arrangements. Although non-constitutional, the working of these other intergovernmental bodies is co-ordinated with, and facilitated by, the working of the Bundesrat:

Mr JOHN - The individual conferences, how long would they go?

Mr LEONARDY - They would not last more than one morning or afternoon and they would normally be in the vicinity of the Bundesrat plenary session because on that occasion the Minister-Presidents would be in Bonn anyway. So you would have that conference either on the preceding Thursday with the plenaries always being on the Friday or you would have the conference following the Bundesrat meeting or even starting during the Bundesrat meeting because then the Minister-Presidents would leave the chamber, the Bundesrat would leave their business to their own ministers representing them.

Mr JOHN - How often would the individual Ministers’ conferences be?

Mr LEONARDY - That depends on the field. There are some who meet almost monthly. There are also ad hoc conferences, particularly for instance we have had many cases recently in the Interior Ministers’ field when we had to co-ordinate the repatriation of Boznian refugees and so on which is a matter for the Ministers of Interior Affairs. But basically on an average I think one can say that the sequence of such conferences would be between one and two months. In many fields they would be organisationally interlinked with the respective departmental committee in the Bundesrat as for instance the business of the Ministers’ Conference of Interior Affairs is organised and managed by the Secretariat of the Committee for Interior Affairs in the Bundesrat. The same applies to the Finance Ministers. So the Finance Ministers would also quite often meet parallel to meetings of the Committee of Finance at the Bundesrat here.⁹⁷

3.61 There are three levels of German intergovernmental relations: Gesamtstaat (‘whole state’), Bundesstaat (‘federal state’), and Third Level.

The Gesamtstaat

3.62 The Gesamtstaat is the ‘whole state’ and comprises institutions in which both the Bund and the Länder are represented with equal status. In these institutions, all decisions must be made by consensus or there must be ‘agreement to disagree’. Decisions which are taken at the level of the ‘whole state’ may need to be approved by Bund or Land legislatures.

3.63 Uwe Leonardy described the Gesamtstaat as consisting of

[I]nstitutions which comprise both levels - federation and Länder on equal footing - chaired by representation of the federation as in this case by the Chancellor.⁹⁸

Conference of the Heads of Government of the Bund and Länder

3.64 The Conference of the Heads of Government of the Bund and Länder is the most senior ‘whole state’ institution and meetings take place on a bi-annual basis.⁹⁹ These meetings have their legal basis in No 31 of the Standing Orders of the Federal Government. They are prepared and preceded by meetings of the Chief of the Chancellor’s Office with the Chiefs of the Land Cabinet Offices.¹⁰⁰

Conferences of Party Leaders

3.65 The second type of ‘whole state’ meeting occurs between Bund-Land party leaders and executives. The Conference of Party Leaders in the Bundestag and Land Legislatures meet to consider parliamentary issues at these levels and to co-ordinate responses to particular party issues.

3.66 The executive committees (or ‘presidiums’) of political parties, assisted by party headquarters, work to ensure the smooth conduct of Bund-Länder business. This is particularly necessary in the case of the partnership between the Christian Democratic Party and its sister party in Bavaria, the Christian Social Union. The position of the Christian Social Union is so strong that it has a veto right of its own in any political project adopted by the Christian Democratic Party which concern constitutional matters relating to the federal system.¹⁰¹

Permanent Treaty Commission

3.67 Another meeting which occurs at the level of the ‘whole state’ is the Permanent Treaty Commission. This is comprised of representatives of the Länder and receives information from, and reaches agreement with, the Foreign Ministry (and other ministries, where appropriate) if and when international treaties impinge upon Land competencies. Uwe Leonardy explained its history and method of operation to the Committee:

Mr LEONARDY - We have a certain mechanism by which the Länder are involved in the negotiation of treaties with foreign powers conducted by any federal ministry which touch upon any of the exclusive powers of the Länder as they do very frequently on educational matters and so on in order to prevent a dispute on the question of whose power is it to implement such foreign treaties and to transform them into domestic or municipal law. They way in which this was solved is typical of the working of the German political system because it was done by what is called a gentleman’s agreement. This question cropped up very early in the history of the Federal Republic. In 1957 the Länder and the federation agreed at what is called the Lindau Agreement because it was concluded at Lindau at Lake Constance. The main part of this agreement is an institution which is called the Permanent Treaty Commission which meets monthly in Bonn in which every Land is represented by one representative - I sit on it for Lower Saxony - and this Commission has to be consulted by the federation in all cases in which agreements are under negotiation with a foreign power. We then convey to the federal ministry in charge of that agreement or negotiation what our demands on that matter will be and the powerful situation of the Länder is that the Federal Government cannot ratify this agreement or treaty under international law which means that it cannot deposit the document of ratification unless all Länder governments have said yes.

Mr PULLEN - All, not just a majority?

Mr LEONARDY - Yes all, because it is about exclusive powers [of the Länder] and you can’t majoritise on exclusive powers.¹⁰²

The Bundesstaat

3.68 The next level of intergovernmental relations occurs at the Bundesstaat or ‘federal state’ level. These are constitutionally based Bund-Land institutions in which decisions are taken by majority vote. The only decisions made at this level are those concerning areas of federal competence or subject to federal procedures, such as Joint Tasks.

3.69 The Bundesrat is the pre-eminent institution at the level of the ‘federal state’. The operation of the Bundesrat and its role in the federal legislature was examined in detail above. An important role in Bund-Land relations, including the functioning of the Bundesrat, is played by the Missions of the Länder to the Bund.

Joint Tasks

3.70 The term Joint Task refers to an agreement between the Bund and all the Länder, or a single Land. Joint Tasks occur in areas where the Länder have primary or sole responsibility (education, university construction, housing, urban infrastructure, industrial policy and agricultural structural policy), and where the Länder’s ability to provide effective solutions is seen to be limited. The reasons for this limited ability may be a preference for national uniformity, resource constraints on small Länder, or where the broader, cross-Länder implications of infrastructure projects might be ignored by the Land concerned.

3.71 Joint Tasks have a constitutional basis and take three forms:

• tasks requiring joint planning and finance (Article 91a);
  

• federal subsidies to Länder investment programmes (Article 104a (4)); and
  

• Bund-Länder agreements to collaborate in policy planning (Article 91b).

3.72 Although agreements on Joint Tasks need only a majority of Bundesrat votes, the practice is that all such agreements are reached unanimously in order to preserve the common interests of the Länder and to prevent the Bund from playing off one Land against another.

Missions of the Länder to the Bund

3.73 The Missions of the Länder play a key role in linking Bund and Länder institutions. Based in the federal capital, they are headed by the Plenipotentiaries (the same who work in the Permanent Advisory Council of the Bundesrat) and are staffed by the same Länder staff who service the Bundesrat committees. The Plenipotentiaries, usually being Ministers in their Land Cabinet, are in attendance at the Missions for at least a third of their time. The staff of the Missions are permanently resident and commute for one or two days per week back to their Land capital.¹⁰³

3.74 As well as providing support to their Land in the Bundesrat, the Missions are the liaison between Land and Bund ministries. It is a requirement of the Standing Orders of both Bund and Land Cabinets that the Missions be informed of any business between the Bund and their Land executive. The Missions provide an important communication link between the Bundestag and their Land Missions have constitutionally guaranteed access to all Bundestag plenary sessions and committee meetings. They have the ‘right to be heard at any time’ in Bundestag committees,¹⁰⁴ and Länder ministers or Heads of Government may address plenary sessions of the Bundestag.

3.75 The Missions are able to track developments in federal ministries, in parliamentary parties and act as ‘lobbyists’ for their Land in financial and economic matters. This information function is also extended to public relations. They actively promote their Land through a number of means (exhibitions, public lectures, press conferences, receptions etc) and host ‘parliamentary evenings’ which allow individual firms, regional or interest groups the opportunity to discuss issues of interest with Members of the Bundestag or representatives of the Bund. Visitors from Bundestag constituencies are also common. It has been estimated that the Lower Saxony Mission receives 25,000 guests per annum, with a total number of 1 million guests since it was opened in 1949.¹⁰⁵

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Observation 14:

Intergovernmental institutions

The Länder maintain permanent Missions to the Bund (currently located in Bonn; to move to Berlin in 1999 or 2000). The location of these Missions at the site of federal government ensures that they are able to:

• provide support for their Land in the Bundesrat;
  

• deal with, and receive information from, federal ministries; and
  

• represent their Land in the national capital.

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Third level

3.76 This level refers to inter-Land co-operation and co-ordination. Uwe Leonardy described the Third Level to the Committee, as including

a wide-ranging structure of horizontal co-ordination between the Länder as such in each departmental field with regular meetings of the Ministers of the Interior, Finance, Education and so on. These institutions on the Third Level are not chaired by a representative of the federation but by a Minister of one particular Land, usually on a system of rotation which does not mean that the federal Minister of that particular field could not participate. He or she would regularly participate but in an advisory and discussion function.¹⁰⁶

Conference of Minister-Presidents

3.77 The most important meeting which occurs at the Third Level is the Conference of Minister-Presidents which meets formally once a year. However, it is usual for meetings to occur four times a year,¹⁰⁷ and there is always one held immediately prior to a Conference of the Heads of Government of the Bund and Länder.¹⁰⁸ It has a rotating presidency and is served by the Länder Heads of Cabinet Offices.

Other Third Level institutions

3.78 The Conferences of Länder Ministers meet on a regular basis. There are about fifteen different Conferences of Länder Ministers, corresponding to areas of Ministerial responsibility. Most meet once or twice a year, with extraordinary meetings where necessary to deal with some urgent matter. The Conference of Länder Ministers for European Affairs normally has three meeting a year, while the Conference of Länder Finance Ministers meets about once a month.¹⁰⁹

3.79 Each Land is able to make suggestions for agenda items at these meetings; matters dealt with include items where the Länder must reach a common position, or at least co-ordinate their positions. Matters being dealt with by the Bundestag or Bundesrat are not normally discussed, but preliminary discussions on matters not yet before the Federal legislature may take place at both Ministerial Conferences, and at the Conference of Minister-Presidents.¹¹⁰ The Conference of Länder Ministers for European Affairs will often treat matters prior to their coming before the European Union processes of the Bundesrat (discussed below).¹¹¹ The Conference of Länder Finance Ministers co-ordinates the positions of the Länder prior to negotiations with the Bund over revenue-sharing, and prior to the introduction of tax legislation into the Bundestag or Bundesrat.¹¹²

3.80 Conferences of Länder Ministers are partly served by the Bundesrat committee service, and partly by organisation units of their own.

3.81 The Conference of the Presidents of the Land Legislatures meets twice a year, in spring and in autumn. This is a forum for the exchange of experience in practical and political work, on matters of common interest.¹¹³

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Observation 15:

Intergovernmental institutions

The conduct of intergovernmental relations in Germany is a reflection of a highly co-operative system of federation. However, the incorporation of intergovernmental mechanisms into the federal parliamentary structure, and the sharing of taxation revenue, reflects the strength of the Länder within the federation and the German emphasis on consensual decision making.

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Developments in the 1990s

The Unification Treaty

3.82 Many of the challenges confronting the German federal system during the 1990s emanate from the unification of West and East Germany in 1990. The integration of the five East German Länder into the federal system placed strains on the complex web of Bund-Land relationships and exacerbated existing tensions about the system of fiscal transfers. Constitutional reform sought to maintain the balance of the federal system and reaffirm the commitment to a consensus model of Bund-Land relations. At the close of the 1990s Germany has completed the institutional transformation from a divided to a united country, but the politics of unification continue to be important.

3.83 The Länder of the former East German state were added to the eleven Länder of the Federal Republic of Germany after the signing of the Unification Treaty on August 31^st 1990. The Unification Treaty amended parts of the Basic Law, establishing the fact of unification and ordering temporary financial arrangements while the Bund and Länder negotiated new terms for vertical and horizontal fiscal transfers. The Treaty also provided for amendments to Länder boundaries.

3.84 Article 4 of the Unification Treaty addressed the issue of the weighting of votes accorded to each Land in the Bundesrat. Prior to unification the voting had been so balanced as to protect the four largest Länder from legislative and constitutional amendments forced by a coalition of smaller Länder. This was threatened after unification since maintenance of the vote weighting system would have given the five eastern Länder, together with small western Länder, the majority required to push their own legislative proposals and constitutional amendments through the Bundesrat. The voting system was rebalanced by increasing by one the number of votes allocated to the four largest Länder.

3.85 Article 5 of the Unification Treaty suggested further constitutional amendments be considered. It specifically noted the contributions of Minister-Presidents of the Länder in their statement The Cornerstones of Federalism on July 5^th 1990, the possibility of a merger between Berlin and Brandenburg, negotiation of permanent fiscal arrangements and reconsideration of Article 146 of the Basic Law, which states that

This Basic Law, which is valid for the entire German nation following the achievement of the unity and freedom of Germany, shall cease to have effect on the day on which a constitution adopted by a free decision of the German people enters into force.

3.86 Article 7 of the Unification Treaty provided temporary arrangements for the period 1991-1994 on the understanding that final arrangements for the post-1995 period would be negotiated by 1993. The projected East German deficit was divided on an equal basis between the Bund, the western Länder and the eastern Länder. The transfer payments of the western Länder would be paid through a newly created German Unity Fund. The Fund was compensation for excluding the East German Länder from the usual vertical and horizontal transfer system until the beginning of 1995. The Treaty also set the proportion of value added taxes the eastern Länder would receive, relative to those received by the western Länder.¹¹⁴

Further constitutional reform

3.87 The constitutional reform process which began with the Unification Treaty continued with the Joint Constitutional Commission of the Bundestag and Bundesrat, which opened in March 1991. The Constitutional Amendment Act 1994 incorporated the recommendations of the Joint Commission, at least so far as they affected Bund-Länder relations.

3.88 Four major recommendations aimed at strengthening the Länder were made by the Joint Commission and subsequently incorporated into the Basic Law. Article 24 was amended to grant Länder the right to transfer (with Bund approval) certain sovereign powers to transnational border authorities for the purpose of dealing with common problems. This would have the effect of facilitating the type of police and customs transnational border co-operation envisaged in the Treaty on European Union. Articles 72 and 75 were amended to raise the threshold test for the validity of framework legislation, and legislation in areas of concurrent jurisdiction, to that noted above: such legislation must be necessary in the national interest for the creation of equivalent living conditions throughout the country or the maintenance of legal and economic unity. Article 76 was amended to enable the Bundesrat more time to deliberate on bills submitted by the government “for important reasons” with similar provisions granted to the government with regard to bills submitted by the Bundestag.

3.89 Article 29 (1) of the Basic Law states that

[Land] boundaries may be modified to ensure that the Länder, by virtue of their size and capacity, can effectively perform their functions.

Territorial reform has therefore been a recurring theme for Germany, and was dealt with by the Joint Commission.

3.90 The accession of the East German Länder to the West German federation demanded a consideration of territorial reform for two reasons: firstly, in order to ensure the effectiveness and viability of the new Länder and, secondly, in order to maintain the efficiency and balance of Bund-Land relationships. The two recommendations which were made and subsequently incorporated into the Basic Law were the addition of Article 118a, which allowed the merger of Berlin and Brandenburg according to their own terms and procedures, and an amendment to Article 29 allowing for regional territorial reform by consent. Subsequent to these amendments, a Treaty of Merger was signed between Berlin and Brandenburg, ratified by both Land legislatures but defeated in popular referenda.¹¹⁵ With the failure of the Berlin-Brandenburg merger there appears to be no further moves towards territorial reform in the near future.

Fiscal equalisation

3.91 Vertical transfers between Bund and Länder are determined on an approximately biennial basis. Horizontal transfers between Länder are arranged so that each Land will receive at least 95 per cent of the per capita income of the Länder community as a whole. The constitutional requirement to

ensure a reasonable equalisation of the financial disparity of the Länder¹¹⁶

has placed the fiscal equalisation system at the heart of the federal system, and it has come to epitomise the consensus style of decision-making between Bund and Länder.

3.92 The inter-Land transfer system came under strain in the 1980s when sharp economic disparities began to emerge between the Länder. As a consequence, higher income Länder were forced to increase the amount of transfers to the lower income Länder, with neither group satisfied with the result. Such were the divisions that in 1986 and 1992 the Federal Constitutional Court was called upon to judge the alleged inequalities in the system. Unification exacerbated these tensions by sharpening the disparities between the Länder.

3.93 A growing realisation of the actual costs of unification, both for the Bund and for the western Länder, and an appreciation of the inadequacies of the existing transfer system, meant that all parties understood the need for amendments to the transfer system by 1995 when the new Länder joined the system. The reformed fiscal equalisation package was the result of eighteen months of extensive negotiations held between September 1991 and early 1993.

3.94 Reform proposals discussed in the Conference of Länder Finance Ministers suggested the abolition of Joint Tasks and mixed financing arrangements, in order to free up resources and possibly to return legislative competences to the Länder. The opposition of low-income western Länder and all of the eastern Länder to these propositions was founded on their reliance on federal aid for major expenditure.

3.95 The final result of negotiations was a Bund-Land, multi-partisan “Solidarity Pact” which was designed to facilitate eastern reconstruction through a variety of financial measures and not simply through the fiscal equalisation process. Under this plan the fiscal equalisation system would be largely unchanged. The commitment to the aim of each Land enjoying at least 95 per cent of the average financial capacity would remain intact and the western Länder would increase their transfer payments to the eastern Länder. Two-thirds of the cost of the Solidarity Pact would be borne by the Bund. This would be achieved through the redistribution of large amounts of the Bund’s value added tax revenues to the Länder.¹¹⁷ This redistribution would ease the financial burden of inter-Land transfers. The Solidarity Pact came into effect on January 1^st 1995, and is to be renegotiated for the year 2004.¹¹⁸

3.96 The Solidarity Pact has not ended the debate on fiscal equalisation entirely. There are still concerns regarding features of the system which inhibit efficiency, whilst the commitment to European Economic and Monetary Union will require adjustments to Bund and Land budgetary positions.¹¹⁹

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Observation 16:

Role of the States in the federation

The constitutional reform process re-emphasised the importance of inter-Land co-operation to the stability of the German federal system. The unification process necessitated the commitment of large amounts of federal funds. This process was not controlled by the Bund and was managed in an intergovernmental manner.

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The role of the Länder in European Union matters

3.97 Concern over the effect of membership of the European Union on Länder competences arises from Article 235 of the European Economic Community Treaty (1957) which grants the European Union implied powers. Over time these powers have included education, broadcasting and other Land competences. Länder participation in European Union matters was, until the mid-1980s, a matter for inter-Land co-ordination and informal representations to both the European Union and the Bund government. This process was formalised in 1986, when the Statute of Ratification of the Single European Act granted the Bundesrat increased involvement in government decisions regarding the European Union. The Bundesrat gained:

• the right to be properly informed;
  

• the rights of Länder to send their own representative to European Union negotiations affecting their competences; and
  

• the provision of sufficient time and resources to produce opinions on European matters affecting exclusive Land competences (from which the government may deviate only “for unavoidable reasons” of European Union policy, with reasons to be conveyed in writing to the Bundesrat).¹²⁰

3.98 In response to these changes, the Bundesrat changed its method of operation with regard to European Union matters. A European Chamber was established with the authority to act on behalf of the Bundesrat in urgent cases, and European Union matters became subject to the standard Bundesrat procedure of absolute majority voting, rather than the unanimity formerly required under the Permanent Treaty Commission process.

3.99 By the late 1980s a number of Länder had established offices in Brussels in order to facilitate direct contact with the European Union, but this was regarded by the Länder as an insufficient guard against marginalisation of Land powers.

3.100 Coinciding with the debate on unification was the debate on amendment of the founding treaties of the European Union which was to eventually produce the Treaty on European Union (1993). The Länder began to exert pressure on the Bund to amend the Basic Law in order to secure the Länder’s role in the formation of the Bund’s European Union policy. As a result, Article 23 was replaced in its entirety and served to deal with the European Union. It now provides that the transfer of sovereign rights can only occur with the explicit approval of the Bundesrat and constitutionalised the requirement for the Bund to take into account the views of the Bundesrat. Also constitutionalised was the demand that the Bund take all practical steps to follow the wishes of the Bundesrat where exclusive Land competences are involved. Article 23 also provided that

The Bund shall delegate the exercise of rights of the Federal Republic of Germany as a member of the European Union to a representative of the Länder nominated by the Bundesrat if exclusive legislative competencies of the Länder are centrally affected.

In practice, this means that a Land delegate can be the German representative in deliberations of the Council of Ministers.

3.101 The Länder have now secured for themselves a central place in the development of German policy with regard to the European Union. Their institutional involvement can be summarised as follows:

• Bundesrat Committee for Matters of the European Union;
  

• Länder Ministries for European Affairs which are horizontally co-ordinated through the Conference of European Affairs Ministers;
  

• the placement of European issues on the agendas of the Conference of Minister-Presidents and Conference of Financial Ministers;
  

• Länder representation in the Council of Ministers;
  

• Office of the Permanent Observer of the Länder in Brussels;
  

• individual Länder offices in Brussels; and
  

• direct representation of the Länder through the Committee of the Regions.

Globalisation and financial federalism

3.102 The internationalisation of the economy and financial markets has changed the shape of regulatory federalism in Germany over the past ten years. In seeking to broaden the scope of their financial activities and increase their competitiveness, the German banking and securities industries faced demands from international competitors and regulators to adopt internationally recognised standards of regulation. In response to these demands the German regulatory system changed its domestic system which favoured self-regulation and Länder oversight into one which emphasised independent regulatory bodies and stricter, centralised regulation.

3.103 The regulation of these two industries was different, with the banking sector defined by a more centralised regulatory system. The banking sector was subject to a federal agency which itself was subject to oversight by the federal Ministry of Finance. The agency’s regulatory functions were shared with the Bundesbank and the peak associations of the banking groups.¹²¹

3.104 The securities industry was far more heavily federalised, being by long tradition self-regulating and regionalised. Article 74 of the Basic Law granted the Länder co-decision over stock exchange matters. Co-ordination of the Länder bodies was through a body in which Land Ministers of Economics and Finance and Bund officials were represented. Provision was made for Bund representation should matters touch upon Bund authority. Land regulation was restricted to legal supervision over the exchanges and granting licences for self-regulation to private operators.¹²²

3.105 Pressure to restructure the German system grew after domestic banks attempted to increase their business with international firms. For a number of reasons, foreign investment in Germany was unattractive, the chief among these being self-regulation of the securities market. German banking activity in the United States was blocked over concerns about lower regulatory standards.

3.106 The Bund Ministry of Finance was growing increasingly concerned about the consequences of Land predominance in securities regulation in an era of increasing multilateral co-operation. The European Union’s Single Internal Market project demanded at least some level of harmonisation of regulations, and moves in this direction were confirmed with directives on insider trading (November 1989) and investment services (May 1993). Both directives required national competent authorities to assist with multilateral co-operation.¹²³

3.107 The needs of the Germany banking system and the European Union legislative demands required the establishment of a national competent authority. By 1993 discussions between the banking industry, the Bund and Länder led to the creation of a new regulatory system. As part of this system a supervisory agency for securities trading was established under the jurisdiction of the Bund Ministry of Finance. The Länder had their rights of supervision over their exchanges increased particularly with respect to overseas transaction and internal investigations. A Securities Council was established to allow the Länder input, but no decision-making rights, into Bund decision making. The exchanges themselves were required to establish a new body for the supervision of trading which could collect data and co-operate closely with the Bund regulator.¹²⁴

3.108 Budgetary constraints may do much to determine the level of Land involvement in regulation while the preference of the banking and securities system to deal with a coherent, federal regulatory regime will also tend to diminish Land authority in the overall regulatory system. Financial internationalisation and its demands for regulatory harmonisation, in the case of Germany, have resulted in a considerable centralisation of regulatory authority in the hands of the Bund government.

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Observation 17:

Role of the States in the federation

The Länder have demonstrated their responsiveness to issues of multilateral co-operation, globalisation and development in European Union policy. The Länder are keen to maintain their role on all of these levels. The strength of the intergovernmental relations culture and the structure of the German system are able to support them in this endeavour.

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Summary of observations

The Bundesrat is at the heart of the German federal system. By giving the Länder governments a direct voice in the federal legislature, it ensures a central role for the Länder in German law-making despite the wide scope of Bund legislation. The importance of the Länder is reinforced by their pre-eminent position as the administrators of federal law.

The Bundesrat also provides a focus for a large number of non-constitutional intergovernmental institutions, including permanent missions of the Länder to the Bund.

The vitality of the Länder within the German federal system is shown by the role they have played in the development of post-unification financial arrangements, and by their ongoing role in relations between Germany and the European Union.

RETURN TO TOP

Endnotes

1Basic Law for the Federal Republic of Germany, arts 1, 20, 79 (3).

2Federal Statistical Office Germany, Internet site: http://www.statistik-bund.de/basis/e/bevoe/pop01.htm.

3The Golden Bull of Charles IV.

4Uwe Leonardy, “The German Model of Federalism”, Australian Federalism: Future Directions, Conference held at the Centre for Comparative Constitutional Studies, University of Melbourne, Melbourne, July 14^th-15^th 1994, p 2.

5Basic Law for the Federal Republic of Germany, art 59.

6Basic Law for the Federal Republic of Germany, arts 63, 67, 69.

7Basic Law for the Federal Republic of Germany, arts 60, 64.

8Basic Law for the Federal Republic of Germany, arts 39, 63, 68.

9Basic Law for the Federal Republic of Germany, arts 58, 63, 67.

10Basic Law for the Federal Republic of Germany, arts 63, 69.

11Basic Law for the Federal Republic of Germany, art 63 (4).

12Basic Law for the Federal Republic of Germany, art 67.

13Basic Law for the Federal Republic of Germany, art 68.

14Basic Law for the Federal Republic of Germany, arts 64, 69.

15Basic Law for the Federal Republic of Germany, art 65.

16Basic Law for the Federal Republic of Germany, art 39.

17Basic Law for the Federal Republic of Germany, art 20 (1). This article may not be amended: art 79 (3).

18Basic Law for the Federal Republic of Germany, art 50. Amendments to the Basic Law which would affect the participation of the Länder in the federal legislative process are prohibited: art 79 (3).

19Basic Law for the Federal Republic of Germany, art 51 (3).

20Basic Law for the Federal Republic of Germany, arts 52 (3), 121.

21Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

22Uwe Leonardy, “The working relationships between Bund and Länder in the Federal Republic of Germany”, in C Jeffrey and P Savigear (eds), German Federalism Today, Leicester University Press, Leicester, 1994, p 46.

23Ms Ute Müller, Head of the Bundesrat Presidial Office, advice to Committee staff, May 4^th 1999.

24Ibid, p 47.

25Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

26Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Dr C Daestner).

27Basic Law for the Federal Republic of Germany, art 79 (2).

28Leonardy, above n 4, p 12.

29Basic Law for the Federal Republic of Germany, art 77 (3).

30Basic Law for the Federal Republic of Germany, art 80; The German Federal Council (Bundesrat) (3^rd ed),The Bundesrat, p 16.

31Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Dr C Daestner).

32Basic Law for the Federal Republic of Germany, art 77 (2).

33Basic Law for the Federal Republic of Germany, art 77 (2).

34Basic Law for the Federal Republic of Germany, art 77 (2).

35Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

36Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Dr C Daestner).

37Basic Law for the Federal Republic of Germany, art 94 (1).

38Facts about Germany, Press and Information Office of the Federal Government, Germany, 1998, p 178.

39Basic Law for the Federal Republic of Germany, art 73 Nos 1,2, 3, 5, 10a, art 105 (1).

40Basic Law for the Federal Republic of Germany, art 73 Nos 4, 11.

41Basic Law for the Federal Republic of Germany, art 73 Nos 6, 6a, 7.

42Basic Law for the Federal Republic of Germany, art 73 No 9, art 105 (1).

43Basic Law for the Federal Republic of Germany, art 73 No 8.

44Basic Law for the Federal Republic of Germany, art 71.

45Basic Law for the Federal Republic of Germany, art 74 Nos 1, 3, 4a, 18.

46Basic Law for the Federal Republic of Germany, art 74 No 2.

47Basic Law for the Federal Republic of Germany, art 74 Nos 4, 6.

48Basic Law for the Federal Republic of Germany, art 74 Nos 7, 13, 19, 19a, 20, 26.

49Basic Law for the Federal Republic of Germany, art 74 Nos 9, 10, 10a.

50Basic Law for the Federal Republic of Germany, art 74 Nos 11, 11a, 16, 17, 24, art 105 (2).

51Basic Law for the Federal Republic of Germany, art 74 No 12.

52Basic Law for the Federal Republic of Germany, art 74 Nos 14, 15, 25.

53Basic Law for the Federal Republic of Germany, art 74 Nos 21, 22, 23.

54Basic Law for the Federal Republic of Germany, art 72 (1).

55Basic Law for the Federal Republic of Germany, art 72 (2).

56Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

57Basic Law for the Federal Republic of Germany, art 93 (1) No 2a.

58Basic Law for the Federal Republic of Germany, art 75 (1) No 1a.

59Basic Law for the Federal Republic of Germany, art 75 (1) No 2.

60Basic Law for the Federal Republic of Germany, art 75 (1) Nos 3, 4, 6.

61Basic Law for the Federal Republic of Germany, art 75 (1) No 5.

62Basic Law for the Federal Republic of Germany, art 75 (2).

63Basic Law for the Federal Republic of Germany, art 75 (3).

64Basic Law for the Federal Republic of Germany, art 105 (2a).

65Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Dr C Daestner).

66Basic Law for the Federal Republic of Germany, arts 87 (1), 87a, 87b.

67Basic Law for the Federal Republic of Germany, art 87 (1).

68Basic Law for the Federal Republic of Germany, arts 87 (1), 87d, 87e, 89.

69Basic Law for the Federal Republic of Germany, art 87f.

70Basic Law for the Federal Republic of Germany, art 87 (2).

71Basic Law for the Federal Republic of Germany, art 87 (3).

72Basic Law for the Federal Republic of Germany, arts 84 (1), 85 (1).

73Basic Law for the Federal Republic of Germany, art 87 (3).

74Basic Law for the Federal Republic of Germany, art 83.

75Basic Law for the Federal Republic of Germany, arts 84, 85, 104a (3).

76Basic Law for the Federal Republic of Germany, art 106 (1) (2) (6).

77Basic Law for the Federal Republic of Germany, art 106 (3), (4).

78Basic Law for the Federal Republic of Germany, art 106 (5), (7).

79Basic Law for the Federal Republic of Germany, art 105 (1).

80Basic Law for the Federal Republic of Germany, art 105 (2).

81Basic Law for the Federal Republic of Germany, art 105 (3).

82Basic Law for the Federal Republic of Germany, art 105 (2a).

83Basic Law for the Federal Republic of Germany, art 106 (3), (4).

84Basic Law for the Federal Republic of Germany, art 106 (3).

85Basic Law for the Federal Republic of Germany, art 106 (5).

86D James, Federal and State Taxation: a comparison of the Australian, German and Canadian Systems, Parliament of Australia, Parliamentary Library, Current Issues Brief 5 1997-1998, p 16.

87Basic Law for the Federal Republic of Germany, art 106 (3).

88Basic Law for the Federal Republic of Germany, art 106 (3a, b).

89Basic Law for the Federal Republic of Germany, art 106 (3d).

90Ms Ute Müller, Head of the Bundesrat Presidial Office, advice to Committee staff, May 4^th 1999.

91D James, above n 85, p 19-20.

92Table based on figures provided by Ernst & Young Internet site: http://www.doingbusinessin.com, Appendix 8.

93Ernst & Young Internet site: http://www.doingbusinessin.com.

94Basic Law for the Federal Republic of Germany, art 107.

95Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Professor U Männle).

96Leonardy, above n 4, p 12.

97Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

98Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

99 Ms Ute Müller, Head of the Presidial Office, advice to Committee Staff, May 4^th 1999.

100Ibid, p 7.

101Leonardy, above n 22, p 44.

102Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

103Ibid, p 48.

104Basic Law for the Federal Republic of Germany, art 43 (2).

105Leonardy, above n 22, p 60.

106Meeting Transcript, FSRC, July 1^st 1998, Bonn, (per Mr U Leonardy).

107Ms Ute Müller, Head of the Bundesrat Presidial Office, advice to Committee Staff, May 4^th 1999.

108Leonardy, above n 4, p 10.

109Ms Ute Müller, Head of the Bundesrat Presidial Office, advice to Committee staff, May 4^th 1999.

110Ibid.

111Ibid.

112Ibid.

113Ibid.

114Arthur B Gunlicks, “German federalism after unification: the legal/constitutional response”, Publius, vol 24 no 2, 1994, pp 83-4.

115The vote in favour in Berlin was 53.4%; the vote against in Brandenburg was 62.6%. These results fell short of the two-thirds majority required in both Länder.

116Basic Law for the Federal Republic of Germany, art 107 (2).

117Charlie Jeffrey, “The non-reform of the German federal system after unification”, West European Politics, vol 18 no 2, 1995, p 264.

118Ms Ute Müller, Head of the Bundesrat Presidial Office, advice to Committee staff, May 4^th 1999.

119Eckhard Wursel, “Germany: reforming federal fiscal relations”, OECD Observer, vol 214, Oct-Nov 1998, pp 33-4.

120Uwe Leonardy, “The Länder and the European Union”, Politik: the Newsletter of the Conference Group on German Politics, vol 7, Fall 1997, p 10.

121Richard Deeg and Suzanne Lütz, Internationalization and Financial Federalism - The United States and Germany at the Crossroads?, MPIfG Discussion Paper 98/7, September 1998, pp 8-9.

122Ibid, pp 9-10.

123Ibid, pp 14-16.

124Ibid, pp 19-20.