Contemporary challenges to German federalism: From the European union to the global economy

Law and Policy in International Business, Fall 2001 by Deeg, Richard

I. INTRODUCTION

Three major challenges confront German federalism today. The first is the strong and growing dispute among German Lander over their present fiscal federalism arrangements. In essence, the wealthier Lander are pushing hard for less horizontal redistribution of tax revenue from the wealthy to poor Lander, as well as more fiscal decentralization. Disputes over fiscal federalism have been an enduring feature of postwar German federalism and thus, in one sense, are nothing new. Yet the current dispute appears to be more serious than past ones because never before has there been such a vast disparity in fiscal strength among Lander as in post-reunification Germany. The intensity of the current struggle also reflects the desire by wealthier Lander to have more autonomy in meeting the challenges of the global economy. More broadly, the wealthy Lander are pushing for a shift from the traditional "cooperative federalism" of the postwar era to a more "competitive federalism" similar to that of the United States.1 While this is an unlikely outcome, it would represent a fundamental paradigmatic shift in the nature of German federalism.

The second challenge is the loss of legislative and policy autonomy to the European Union. The transfer of policy-making authority to the supranational institutions of the European Union has been more or less strong and steady since the implementation of the Single European Act of 1986.2 Subsequently, many of the German policy competencies accorded to the Lander have been passed upward to, or are now shared with, the European Union. The Lander have not been successful in regaining these competencies. They have, however, positioned themselves to have a stronger collective voice in determining Germany's policies toward the European Union. Indeed, in many instances the Lander are direct participants in the international negotiations undertaken among member states, and any revision of EU Treaties requires, albeit indirectly, the collective assent of the German Lander. The expansion of EU legislation and policy scope is further counterbalanced by the European Union's subsidiarity principle and the commitment to fostering subnational autonomy. Thus, the impact of European political integration on German federalism has been, and will continue to be, profound. But rather than eroding German federalism through centralization tendencies, European integration has largely reinforced the defining structural and normative elements of German federalism.

The third challenge is European and global market integration, that is, the process of opening national markets to foreign economic actors and the subsequent cross-border activities of these actors. Market integration, like the other two challenges, generates incentives for both centralization and decentralization within the German federal system. Economically less competitive, and therefore fiscally weaker, Lander press for greater federal support to maintain living standards and subsidize economic development. In so doing, they foster greater political centralization. On the other side, the competitive Lander press for decentralization so that they can capture-through increased tax revenue, jobs, and the like-the benefits of their global economic competitiveness.

Together these challenges create what this paper calls the "German conundrum." Germany's cooperative federalism, indeed its constitution, imposes a high level of vertical and horizontal intergovernmental coordination and resource transfer, yet integration and globalization exacerbate the wealth disparities and policy preference divergences among Lander. This, in turn, undermines the solidarity needed to sustain the system of cooperative federalism. But the strong preference of weaker Lander, the federal constitution, and the Federal Constitutional Court inhibit a movement away from cooperative federalism. Thus, the "marriage" among the Lander has turned sour, but they can neither divorce nor separate. The future evolution of German federalism will depend very heavily on whether and how this problem is resolved. Because globalization,3 like the other challenges, generates incentives for both centralization and decentralization, this paper will argue that the German case supports the thesis that federalism is viable in a global economy, as it ultimately remains a matter of political choice.

Part II of this paper reviews some theoretical arguments regarding the impact of economic globalization on political centralization within nation-states integrated into the global economy.4 Parts III, IV, and V then move to a more detailed discussion of the three major challenges confronting German federalism. Part IV discusses the impediments to reform of German federalism and its likely evolution in the near future.

II. THEORETICAL PERSPECTIVES

The prevailing popular orthodoxy holds that globalization erodes the political autonomy of nation-states and, by extension, subnational governments. The growing mobility of goods, capital, and labor make effective government market intervention and regulation-where it is still considered desirable-possible only on the international level, whether through treaties or international coordination. In this view, the imperative outcome of globalization is either more political centralization or simply less political control over markets.5 While there is no doubt considerable truth in this, there is ample evidence to support the counterview that globalization can foster decentralization as well. Moreover, there are theoretical grounds for expecting globalization to promote, or at least enable, political decentralization within nationstates, especially within federal systems.