Financing German federalism: Problems of financial equalisation in the unification Process

Abstract

The keystone of any federal system is the system of allocation of financial resources between the national and subnational levels of government. The German system provides for the equalisation of resources both vertically between federation and Lander and horizontally between the Lander themselves. Prior to unification the financial equalisation system had already come under severe strain as a series of conflicts emerged between the Lander over the allocation of resources. Unification presented new strains which promoted disagreement between federation and old Lander over how the incorporation of the new Lander in the east should be financed. The eventual outcome was a series of transitional arrangements which have largely excluded the new Lander from both the vertical and horizontal financial equalisation systems until 1995.