German states file lawsuit at constitutional court

With the ink barely dry on yesterday’s Cyprus rescue deal, Germany is braced for another bad-tempered bailout battle – this time at home.

Two of Germany’s wealthiest states, Bavaria and Hesse, have filed a lawsuit at the constitutional court saying they are being penalised by a decades-old obligation to subsidise poorer states.

Their Karlsruhe complaint is part of a long-simmering row among Germany’s 16 federal states that goes a long way to explaining wariness here of solving the euro zone crisis with jointly issued euro bonds.

Since 1952 Germany has operated an internal redistribution system for tax revenue, the “federal financial equalisation system”. It has redistributed more than €160 billion over the subsequent six decades, based on a constitutional obligation to use public money to even out structural and economic weaknesses in the regions.

But well-intended solidarity payments have created an unsustainable alimentary system, according to Bavaria, Hesse and Baden-Württemberg in the southwest. They want changes to the method by which they transfer €8 billion annually to poorer northern states, including Hamburg and Berlin.

The existing rules, according to their constitutional complaint, encourage financial dependency rather than fiscal prudence. Donor states Bavaria and Hesse say that, the greater their own budget surplus, the greater the contribution they are expected to make into the redistribution pot.

'Grotesque' system
"We're aiming for cohesive and equitable financial equalisation that rewards one's own efforts and punishes idleness and a recipient mentality," said Horst Seehofer, Bavarian state premier and leader of the Christian Social Union, describing the existing system as "grotesque".

Under current rules, the city state of Berlin receives more than 40 per cent of the fund’s annual total. Another city state, Hamburg, is a net recipient despite having the highest per-capita tax revenue in the country.

The state governments of Bavaria and Hesse, home to the financial capital of Frankfurt, want laws changed to limit transfers and introduce incentives for recipient states to reform their budgets.

Their interest in filing the constitutional challenge is as much political as financial: politicians in both states are facing twin state and general elections in September.

The row over fiscal equalisation is almost as old as the system itself. For decades it has generated ill-will among neighbouring federal states.

The southwestern state of Baden-Württemberg is the only continuous contributor to the system, paying out more than €50 billion since 1952. However, the Green Party-governed state has declined to join the Bavarian-Hesse court case.