Consensus Democracy and Interjurisdictional Fiscal Solidarity in Germany

The paper discusses recent developments of German fiscal federalism—especially the Länderfinanzausgleich, i.e. Germany’s unique system of horizontal equalization. A ruling by the Constitutional Court has cracked the status quo, and the parties involved (federation and states) have begun a process of bargaining on a new equalization system. This process is assessed against the background of recent historic developments in particular with regard to interjurisdictional solidarity in Germany, which has come under scrutiny after ten years of significant financial transfers to the formerly communist states in the East. The paper argues that there is a conflict between solidarity and subsidiarity in today’s Germany, whereby the former has won over the latter. Subsidiarity must now be emphasized more strongly than before. Taking Germany’s federal structure as given, contractual forms of governance are shown to be a possible solution for some of the problems that are so far treated within horizontal equalization. JEL Classification Numbers: D6, D78, E61, H4, H 50, H7, R50