Volume 11, Issue 3

This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We consider two scenarios: a proportional income shock and a shock on employment which increases the rate of unemployment.We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 48 per cent of the shock is absorbed in the EU, compared to 34 per cent in the US. Under the assumption that only credit constrained households adjust current spending on consumption goods to current disposable income, the cushioning of disposable income leads to a demand stabilization of 26 to 35 per cent in the EU and 19 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. With respect to income stabilization, Germany is above the European average for both scenarios. Demand stabilization in Germany is weaker because the number of liquidity constrained households is below the EU average.

In 2009, German federal fiscal relationships were reorganized in order to introduce binding rules for a reduction of public deficits. One element of this reform are so called “consolidation transfers” for heavily indebted states as an measure to reduce debt. In turn, receiving states have to run a strict consolidation strategy in the years to come, that is a reduction of public expenditure. It is shown that these bail-out rules will only help if the accompanying regulations will be enforced in a restrictive matter; however. There are risks that this will not be pursued in a proper way.

This article sheds light on the relationship between politicians and scientific advisors in the second stage of reform of Germany’s fiscal federalism. Based on the principal agent theory and a specific model presented by Bueno de Mesquita we derive two hypotheses. Concretely, we expect that policy change depends on both the homogeneity of the experts’ signals (H1) and the strength of the experts’ signals independently of their preferred policies (H2). For an empirical investigation, we exploit a dataset that includes information about the status quo, the experts’ positions and the degree of policy change relating to 416 conflict issues. According to two separate questionnaires in the policy advisory process we differentiate between the fiscal reform in narrower sense and the administrative reform. Our findings show that H1 and H2 have explanatory power for the partly far-reaching fiscal reform, whereas only H1 explains the “fig leaf” of administrative reform.

The system of intergovernmental fiscal relations in the Federal Republic of Germany has been always extremely difficult to regulate. The Parliamentary Council of 1948/49 left this task unfinished, and the first fiscal reform of 1955 was only partly successful. The 1969 reform seemed to be more successful, but it became clear quite soon that intensified interlocking politics created new problems for the decision-making process. Also, it created incentives to finance public policies by debts. The financing of German unity was based on the 1969 regulations. In recent years the overburdening of the existing rules became obvious. Growing problems caused a shift of paradigm in the direction of less interlocking politics and financing.

The paper discusses the recently reformed articles 109 and 115 as well as the respective temporary arrangement of article 143d of the German Basic Law. The aim of these norms is to limit public sector borrowing for both the federal state and the lands of the Federal Republic of Germany. The author critically assesses the capacity of the new regulations to achieve this aim. The different solutions for public debt will only be capable of alleviating the problem of excessive new public debts if there is a corresponding political will. The new regulations, partly following EU law, ignore the fact that the self-binding constraint of the democratic legislator in the sensitive area of public finance tends to exceed the jurisdiction of constitutional law. Thus it is argued that the new regulations are for the most part an act of merely symbolic legislation. They do not truly deserve to be called a “debt brake”.

Since 2009 Germany has a new debt regime that requires the federal government to reduce its structural deficits to 0.35 percent of GDP until 2016 and the Länder to balance their budgets structurally until 2020. In this paper the rationale for a debt brake is discussed, the provisions of the new regime are summarized and its effectiveness is assessed. Although the new debt brake basically provides for a reasonable framework to achieve sustainable public finances, several loopholes remain that enable finance ministers to avoid fiscal consolidation. Particularly problematic are the provisions for the Länder which have incentives to appear excessively indebted until 2019 in order to negotiate better financial conditions in the fiscal equalization system that must be revised until 2019. These incentives may be stronger than the constitutional provision to reduce deficits.