German Questions


(Local Government News)


Des McConaghy, May 1990



Des McConaghy reports from Berlin (and North Rhine Westphalia) during East Germany’s first free election following the collapse of the Berlin Wall. He assesses the opportunities for German federalism as political union is consolidated. He finds a well managed process - but not one that will easily accommodate poor neighbours.



On 2 May 1989, at a small Hungarian town of Hegyeshalom, some Hungarian border guards began cutting through the "iron curtain" that divided Europe for over forty years.  With this gesture the centre of Europe moved eastward - - to Berlin!


At first there were wry smiles in Warsaw; "We Poles fought for democracy for ten years, the Hungarians for a few years, the Czechs a few weeks - and East Germans a few hours"!  But the East German (GDR) citizens had a remarkable advantage: a pan-German "passport". So once the wall was breached they immediately began to vote with their feet - and their regime imploded!  Hungary, Czechoslovakia and Romania began to topple too - the "domino effect". Europe awoke to a "new order".


It was something of a seismic shock. Firstly the wall divided more than people; it had frozen the administrations on either side into eclectic images of their over-mighty allies.  Nowhere was this more evident than in the GDR (German Democratic Republic) and German Federal Republic (FRG). Secondly, "Deutsche Frage"…the German Question! Unification heralded a new superpower of 80 million trained and disciplined people at the very centre of Europe - and already a powerhouse of international capital. Inevitably policy - including any later European Monetary Union - will be dominated by the almighty D-Mark. ‘The Germans’, commentated one senior Eurocrat, "will have it all their own way".


But what are the implications for democratic traditions, for local government and civil society? The "single market" was already posing similar questions for ourselves in the UK. But now the European goal posts are being moved again, the rules are once more up for revision and the "playing field" massively extended. So is German democratic federalism still flourishing? What does it really offer the GDR? Can its main features survive German unification? To what extent could it be - as some would suggest- a working preview of Euro-federalism? And then perhaps another even more urgent question; who now beats the distant drum?




These all seemed good questions as I arrived in East Berlin on Sunday 18 March; the day of the GDR’s first free elections for over sixty years; and a truly historic event! I stood in the "Palace of the Republic" to watch the results come in. The world media was also there, speculating about "negotiated constitutions" - and perhaps even a "Third Way"!  But the exit polls already had showed the conservative Christian Democrats (CDU) romping home - with Social Democrats (SDU) in second place. The West German CDU had bankrolled a lavish campaign, whipping up expectations of immediate unification and (it was hinted, and therefore also believed) a one to one exchange rate. That was conclusive; "Anschluss" cried the press!


Certainly the CDU spokesmen were bullish. They brushed aside questions of cost; about the funding of the GDR Länder (States) and communities (local authorities). Once the currency issue was settled - they said - a massive response to company flotations would follow. Public action was hardly an issue; private funds would pour in and "Unification" would trigger a new economic miracle: "Wirtschaftswunder"!


So I asked a disconsolate Jens Reich, a founder member of the East German "New Forum", how it felt to have handed his revolution to Chancellor Kohl. He said, "We just have to live with it - and hope we are not steamrolled".  And to my question as to their constitutional reform proposals, he replied, "I think this is no longer realistic; but the West must now press for amendments to defend social rights".


We shook hands - it isn’t every day that one meets someone who started a revolution!  And then, like a ghost from the sixties, there stood Cohn-Bendit, "Danny le Rouge", gesticulating in French about how the people have chosen. And so I threw in my penny’s worth; "So that’s what you meant by "Daddy’s Revolution"?!  But their East German New Forum (and SPD) could have known that there are very few votes in constitutional issues: and the plain truth is that nobody had much time to think. Meanwhile the continuing haemorrhage of GDR citizens to the West (at 3,000 a day) was fast destabilizing both sides. In a very un-Germanic manner the Federal Government decided to go for early unification …and tidy up later. They had to!




Came the dawn - and the Bundesbank lost no time rejecting a one to one exchange rate. So as new MPs arrived for work the first protestors marched into the nearby Marx Engels Platz. 30,000 people wanted to know just why they had brought down a dictatorship "only to come under the control of the Bundesbank". Trade Unionist Helga Mausch asked the crowd; "Are these the< democratic rules we are to live under"?


It was an ironic question from those who had just chosen capitalism! Was not the conservation of money more important than industrial production, systems of equity - or indeed anything else?!  With the exception of Britain most Western countries think that an independent central bank is a condition of prosperity.  But no sane West German questioned the Bundesbank’s role. It supervises monetary policy while keeping inflation down by providing the financial markets with clear and transparent rules. These rules underpin their social market economy, and they underpin the investment and social welfare packages on which consensus depends.


And this consensus has been a key to West German success. It exists between federal, state and local governments, between private and public sectors - and also between management and labour. It has depended on rules, on clear and common objectives, on regulation and now on joint resource planning between each governmental level. It is corporatist, certainly, and it is also bureaucratic. But it makes for a shared view of "reality" - and a "jobbist" approach to tasks. As such it is light years from polarized Britain and our laissez-faire voluntarism. And it makes Germany relatively rich!


But as one German writer said, it now looked as though a snake had swallowed a hedgehog! So I went to see Frank Bögisch, finance negotiator for the GDR’s SPD. I could now "cross over" effortlessly from West to East Berlin - though still with a shudder at Friedrichstrasse station, where I once spent several anxious hours in an East German cell for carrying a tape recorder …and my "Local Government News"!!


Bögisch then held their line on exchange rates; "One to one is the best thing for the East German (GDR) economy - and essential to halt the exodus. We may go for coalition with the CDU. And Kohl will not want to be forced by the SPD. But we must be given a chance to explain. If our coalition is not successful we can say we tried. The next opportunity will be the local elections (6 May) and I personally think we must look to the regional elections. The people want back their Länder" (regional States).


The GDR local government elections and possible mid-summer State elections will soon overshadow the above 18 March results.  With unification the GDR Parliament will simply disappear. But the "East" German states of Mecklenburg, Brandenburg, Sachsen, Sachsen-Anhalt and Thüringen will then be represented in the Federal Council (Bundesrat) … and their new State Banks at the Bundesbank. (Meanwhile Berlin (Land and City) is still officially "governed" under the post war "Four Power Administration" - though now also a major factor both financially and politically).


But the wave of election dates culminating in this December’s Federal election raises a new problem. Nobody knows if the West German consensus will be shaken by the accession of the five new "eastern" States - and Berlin. The Eastern Länder have a relatively poor economic base and the problem of transforming their social system is enormous. By 19 March it seemed that unification might cost anything between DM 50 billion and DM 100 billion, "depending on what you count"! And nobody knows how patient the newly enfranchised Eastern electorates will be. But this much is certain; never before has West German democratic federalism had to face such wide disparities between States. The present mechanisms may not take the strain!




I had already been to Düsseldorf (Capital of North Rhine Westphalia) to get the reaction of this State - before traveling on to Berlin.  And it may help if I first summarize some of the key features of German democratic federalism. Its main strength lies in the administrative competence of the ten Länder (Federal States). The German Grundgesetz (their Basic Law) guarantees their constitutional position - and that of around 8,500 Gemeinden (local authorities). These can, and frequently do, appeal to the Constitutional Court against decisions that may affect their competence - including any allegedly arbitrary criteria!


State representatives comprise the federal Second Chamber, the Bundesrat or "Federal Council". This is important for their autonomy; imagine a more powerful and reformed House of Lords representing our UK regions! Any law of the German Bundestag (Federal Chamber) which affects the States must have the consent of this Bundesrat. Each State has its own constitution and implements most law, including federal law. States control important aspects of education, local government and planning, social security, media - and law and order. States also act as federal agents for a number of functions, for example motorways.


Local authorities also enjoy a constitutional guarantee of universal competence: (Article 28 of the Basic Law (GG)).  A great deal is claimed for this but the guarantee is limited to "local community matters" and "within the framework of the (State and Federal) laws". In real terms "local government" is really local "self-administration" or the shared administration of some State functions. But guarantees of autonomy are not really meaningful without fiscal autonomy - and this the German local authorities no longer have.




Relatively poor East Germans may be therefore glad to know that there is little purely local discretion for raising taxes. Their constitutional right to a "unity of living standards" (Art.72 & 106 GG) will depend on a complex system of revenue sharing. For a long time money will have to come from somewhere else; from someone else!


This revenue sharing takes three forms; (i) a predetermined sharing of tax revenues between the levels, (ii) "horizontal equalization" - that is to say payment of richer states to poorer ones, and; (iii) intergovernmental grants. Thus while some taxes are specifically earmarked to one level, others (such as income tax, corporation tax and VAT) are shared between Federal and State levels. For example, since 1986 the distribution of VAT has been 65% to the Federal government and 35% to the States.  The Government is now seeking Bundesrat consent for 71% to the Feds. and 29% to the States - (which would deliver an extra DM 8 billion presumably towards a East German ("GDR") Supplementary Budget) - but the States have said "No"!!


Major disputes like this can start eroding consent - and the approach to German joint resource planning. It remains a finely balanced operation. The federal government begins by setting the tone for business cycle policy. Top national organisations (Kommunale Spitzenverbände) offer advice to the statutory Business Cycle Council (Konjunkturrat). The Fiscal Planning Council (Finanzplanungsrat) then determines ways and means of co-ordinating public budgets at all levels. States must remit their current surplus to the Bundesbank and two Federal Chambers limit borrowing by federal, state and local governments.


But given the obvious disparities between East and West Germany, a senior federal official told me, "the States (i.e., the west German Land Governments) will have to pay"!  But these Länder were not about to agree to any such equalization - which points dramatically to the new problem. The West German consensus model of revenue sharing and multi-level joint resource planning has worked well since all the West German states are, relatively, well off;  i.e., without the very wide variation in tax yields now found across "our common European home".. or the new united Germany!




So I visited the Finance Ministry in a prosperous North Rhine Westphalia (NRW). On my arrival in their capital city (Düsseldorf) I found myself in Königsallee, one of the most expensive shopping streets in Europe. There I saw earrings for £3,400, coats for £7,000 - a wrist watch for £8,400. Window shoppers and tourists sat at a pavement café basking in the passing wealth and extravagance: the ultimate "place in the sun". It all seemed a long, long way from Leipzig!


So North Rhine Westphalia is wealthy and a net contributor to the other West German States ("horizontal equalization"). With a population of almost 17 million it is over a quarter of population of "West Germany" - and more populous than the Netherlands. Just as the Allies imposed the federal solution on West Germany , the British were particularly influential in NRW.  I well recall a 1980 comment from their official (Dr Zimmerman) who held "the golden reins" of local government finance; "We did not willingly accept the local government system remodeled on the English pattern but the occupation forces made us accept it….and we have come to love it"!


I arrived just after a meeting between NRW Minister President Rau and the EEC (Delors). Rau’s Office (Dr Lieb) said they were in common cause with Delors; and that German unification would give a boost to "Europe of the Regions"; the move towards regionalism that (according to Dr Lieb) is also "taking root in France, Belgium, Italy and Spain". A number of senior officials seem to even imagine the importance of the central Federal level now diminishing between the Federal States (Länder) and Brussels. But do Governments so easily step down?! Chancellor Kohl met the Minister Presidents of all the Federal States on 15 March and - according to Dr Lieb - while all the Länder wanted to take part in the wider unification process Chancellor Kohl "wants to keep them out".  Nevertheless the Länder; still seem to see unification as "a new chance to strengthen federalism".


What was meant by "strengthen"?  I pressed Dr Lieb to say what sort of specific constitutional improvements were sought in NRW’s future meetings with Chancellor Kohl?  I noticed that NRW had already targeted DM 163.5 million in guarantees and small grants for specific environmental projects in (East German) Leipzig. Like similar action by other Federal States, this was a purely ad hoc unilateral action.  But it again prompted my question about the continuing need systematic co-funding when the established Federal mechanisms became relevant to the orderly inclusion of the German Democratic Republic (GDR)?


A formal response came from NRW’s Minister of Finance, Heinz Schleusser: "The system of financial equalization between the constituent States of the Federal Republic will be put to a severe test in the wake of unification. I am not, in the first place, thinking of the co-funding of joint tasks, such as the expansion and construction of institutions of higher education.  I am thinking of the system of financial equalization between prosperous and weaker states of the Federal Republic. If we simply applied the present system to the former States of the GDR (East Germany) without alterations, North Rhine Westphalia would stand to lose more than DM 5 billion of its own revenue; about 10% of the State’s tax receipts. Obviously this is not a viable approach".



Thus Heinz Schleusser’s statement suggested that an interesting feature of German federalism (a formulaic approach to "financial equalization") should not apply to a united Germany - (or perhaps to some united Europe of the future?).  His initial objection to the extension of "financial equalization" to the East German Länder might suggest that future and similar EEC extensions to Portugal, Poland or Ireland will be even more unlikely.


And yet the German approach to the co-funding of joint tasks ("co-operative federalism") has been both useful and exciting and - in retrospect - something which has vastly contributed to West Germany’s "economic miracle"! Admittedly I found that senior Federal Finance officials consistently disliked and hoped to phase out this co-funding of joint Bund/Länder tasks. The German "marble cake", they said, should give way to a more traditional "layer cake"! And in any event it was sometimes claimed that "lumpy" or unusual special tasks and/or concentration of problems at the more local levels of government will soon all be resolved. Indeed one of the Land Governments (Baden-Württemberg) is currently arguing (in the German Constitutional Court) that each State should cope with all special tasks themselves.


Thus the present de facto unification of Germany now throws into stark relief some practical and profound political questions - not just for Germany but also for any considered ongoing approach to the wider challenges of European integration.



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Contact to Des McConaghy:


eMail:  desmc@talktalk.net


5 Glenluce Road, Liverpool L19 9BX,   Tel. 0151 427 6668


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