Debt Rule Federalism: The Case of Germany

In 2009, Germany has introduced a new debt brake which aims at constraining the buildup of new public debt for both the federal and the state level. While the new rule is enshrined in the federal constitution, the Grundgesetz, the sixteen states have leeway on how to mirror these national rules in their state constitutions and budgetary state laws.

It is the objective of this contribution to shed light on this issue and to ask to which extent German states’ debt rules differ. Germany is without doubt an important example of debt rule federalism since the German debt brake has had a strong impact on the design of the rules agreed upon in the European Fiscal Compact. In our analysis we go beyond a mere qualitative description of institutional differences and develop a quantitative indicator which expresses the strictness of the debt rules. The indicator’s construction follows approaches developed in the current literature to compare the strictness of fiscal rules across countries.

Our results point towards a considerable heterogeneity of budgetary rules across German states in spite of the existence of the overall federal constitutional rule. For example, states differ with respect to the legal basis of their debt rules, the rule’s precision, the chosen flexibility provisions and its comprehensiveness. Furthermore, only in the poorest states the rules’ credibility gains from effective sanction provisions as these states risk the loss of transfers if they do not adhere to the rules. This partially explains that, according to our indicator, the strongest rules are currently to be found in financially weak states (Schleswig-Holstein, Saxony-Anhalt and Saarland). However, this advantage will partially expire in the year 2020 when the financial consolidation support and with it the specific threat of sanctions end.

From 2020 on, according to the current state of legislation Rhineland-Palatinate (index value of 0.78) has the strongest rule, followed by Saxony (0.67), Schleswig- Holstein (0.67) and Hesse (0.66). Rhineland-Palatinate, Schleswig-Holstein and Hesse implemented the rule in their state constitutions. What makes Rhineland-Palatinate outstanding is that its rule also covers special funds and public enterprises. This raises the index scores significantly.

Some of the highly indebted states miss the chance of using their own legislation to make their fiscal regime more credible. This observation is in line with well-known disincentives of German federalism. Germany’s federal jurisdictions form a full bail-outcommunity. In this sense, the German experience with in several cases poor ambitions for state fiscal rules is another example of bad incentives in federal systems based on mutual bailout promises.

Ciaglia, Sarah and Friedrich Heinemann (2012), Debt Rule Federalism: The Case of Germany, ZEW Discussion Paper No. 12-067, Mannheim.