Intergovernmental Fiscal Relations After German Unification: Problems and Solutions

Abstract

During the negotiations on the Unification Act in 1990 a serious problem occurred: The system of intergovernmental fiscal relations would have been overstrained in a non manageable degree, if the new East German Lander were included. This system was constructed for a quite homogenous federal state and not for managing the extreme differences between the West German and the new East German Lander. It was therefore not possible to immediately integrate the new Lander into the current system. Since restructuring the system within a short period of time was also out of the question, flexible and provisional interim regulations had to be worked out. After about three years, when sufficient data for the new Lander was available, the system of intergovernmental fiscal relations was restructured; this common effort considered the problems of unified Germany up to the year 2000 and beyond. Thus the German system of intergovernmental fiscal relations has changed from an obstacle for unification to the major element in the completion of economic and social unification.