Conference on Cooperative Federalism, Globalization, and Democracy Brasilia, Brazil. 9-11 May 2000 German federalism, the subsidiarity principle, and the European Union Gerhard Lehmbruch (Universität Konstanz, Germany) 1o Conference on cooperative federalism, globalization and democracy Brasilia, 9-11 May 2000 The organizers of this conference have asked me to focus on what distinguishes the German model of federalism from that of the United States. Such a comparative perspective is also in the center of a reform debate actually taking place in Germany. German federalism is currently the object of much criticism, and its most recent manifestation was a decision of the Constitutional Court demanding an overhaul of revenue-sharing. How relevant may German federalism, with its complex and often cumbersome structures, be for other federal countries? One point which I want to demonstrate is that it is often difficult to maximize at the same time the goals of equality of citizens, on the one hand, of autonomy and efficiency, on the other. There is often a trade-off between different goals. However, even a much-criticized system such as the German may demonstrate its effectiveness in times of crisis. German “executive federalism”, its origins and its logic The first important distinction is that, basically, the American system is characterized by the systematic duality of federal and state institutions. To be sure, this dual federalism has been modified by trends toward a more cooperative relationship. But in a comparative perspective dualism remains a basic feature. Recently, the fate of little Eilan Gonzalez from Cuba was a good illustration: As this was a matter of federal immigration law, the case was in the jurisdiction of federal courts, and it were federal marshals who took Eilan from he house of his uncle to bring him to his father. In Germany too, federal law would apply in a similar case, but the case would first be tried before state courts, and the state police would have to intervene, if necessary, to implement the federal law. To be sure, the same would be true in Switzerland (which otherwise is much closer to the U.S. model), but Swiss cantons have much more discretion in implementing federal law whereas in Germany also the details of administrative procedure are normally tightly regulated by federal rules. This in turn has to do with a second, and much more fundamental difference. In the American system, the states participate in federal rule-making by elected representatives of their people, the members of the U.S. Senate, whereas in Germany it is the state executive branch that participates in federal rule-making: The Federal Council (Bundesrat) is composed by members of the state governments who vote on instructions decided in their respective cabinet meetings. And in the specialized legislative committees of the Bundesrat the state governments are represented by civil servants from the corresponding state ministries. Hence the bureaucracies of the states are closely involved in federal legislation and can control the ordinances that regulate the details of implementation. A further salient example of this federalism with sharing of functions and with high thresholds of consensus-building which can only be surmounted by negotiation and compromise is the German fiscal system. To this example I will come back immediately. Germany as “unitary federal state” The basic power-sharing deal of German executive federalism in turn explains the third important difference between the German and the U.S. model of federalism: German federalism since its early beginning shuns regional differences and fosters nation-wide uniformity. Already in the first three decades of the Empire (1871-1900), the federal legislator (with the Federal Council) voted not only uniform codes of Civil Law and Penal Law, but also laws standardizing judicial procedure and organization of courts and covering both the federal and state judiciary by integrating them into a hierarchical system. Thus Germany achieved rather soon a legal uniformity still today not found in the United States (and not even in Switzerland). This trend has continued, and in more recent times a prominent legal scholar has (somewhat paradoxically) characterized German federalism as a “unitary federal state” [Hesse, 1962 #259]. Today, the legislative domain of the Länder is largely restricted to education, to the administration of police, and local government. But even here, considerable uniformity was obtained by interstate compacts and – in the case of local government – by model statutes that were drafted by a semi-private agency set up by local governments as an advisory body for “administrative simplification”. I am convinced that this strong trend toward unitarization is due to the powerful model of the big neighboring West European national states, most notably France (but also Britain) that are distinguished by a high degree of national uniformity in legislation and in administrative practice. In the 19th century, the national liberal bourgeoisie considered the fragmentation of Germany into a multitude of small independent states as a strong liability in the struggle for national power on an equal footing with the neighboring powers, and so unitarization was considered as a precondition for achieving a commensurate position within Europe. But whereas in France or in Britain such uniformity is due to highly centralized procedures of decision-making, in Germany it is achieved by complex and often very cumbersome bargaining processes. Basic principles of fiscal federalism So it is not surprising that the Länder have also few fiscal autonomy. That does by no means imply that they have no important fiscal revenue. To be sure, they have practically lost their autonomous taxing power, and most taxes are exclusively subject to federal legislation. However, the proceeds from the most important taxes – the incomes tax, the corporation tax, and the (value-added) sales tax – are divided between federal and states governments according to rules laid down either in the constitution or in laws that cannot be changed without the assent of the Federal Council, i.e., of the state governments. (Also, a portion of the income tax is reserved for local governments). Revenue-sharing is thus a pervasive feature of Germany’s fiscal federalism. This system of revenue-sharing involves also complex mechanisms for redistribution between the richer and poorer states. One of its basic principles, according to Art. 106 al. 3 of the constitution, is that revenue-sharing has to guarantee the “uniformity of living conditions in the federal territory”. This involves equal access of all citizens to the technical and social infrastructure, from roads and dykes against foods to schools and all sort of public amenities. Obviously, the reality of the German fiscal system is far away from the model world of the economic theory of fiscal federalism. The Länder have practically no autonomous taxing power left. In the past they have found it more convenient to cede their taxing powers to the federal legislator in exchange for a share in other taxes that formerly were exclusively federal taxes. In consequence, the most important taxes (income tax and value-added tax) are now “common taxes” (Gemeinschaftssteuern or Verbundsteuern) the proceeds of which are divided between the federal and state levels according to fixed quotas, and they are voted by the federal legislator. An important consequence is that fiscal competition between the states is completely excluded. There is an economic rationale underlying these arrangements which is derived from traditional German beliefs about what constitutes a competitive market. According to this belief, undistorted competition presupposes equality of those conditions that – like taxes – can be manipulated by governments. Hence it is a logical conclusion to avoid tax competition between states. (There is some limited fiscal competition between local governments which is limited to local business taxes and some minor sources of revenue, such as a tax on dogs…). This aversion to fiscal competition is in turn related to another basic belief which distinguished Germany from the model world of fiscal federalism. North American specialists of public finance often tend to believe that “voting with the feet” is an important corrective mechanism in fiscal federalism: If you feel that your local or state governments spends to much on welfare or not enough on schools, if taxes are too high or roads are too bad, you may move to another jurisdiction that its your tastes better. But when such issues are discussed in Germany, the prevailing beliefs are very different: “Heimat”, the home country, is a highly valued good, and you must not oblige people to abandon it. One might say that the right to stay in one’s home country if an unwritten but important right. Hence our fiscal system is biased against encouraging internal migrations, and implicitly governments are expected to make sure that people can stay in their home town or region if they so wish. All this explains why such an enormous effort was made after German unification to discourage East-West migration. Historical experience seemed to indicate that inequality of living conditions, with certain regions lagging behind the better-to-do, might foster political radicalism and endanger political stability. The massive financial transfers to East Germany in the past decade were very much motivated by such concerns. Now it is of course undeniable that this fiscal system has considerable shortcomings. Modern fiscal federalists quite convincingly argue that such a system of massive revenue-sharing, where states are no longer autonomous in raising their own revenue and in deciding how to spend it creates perverse incentives and fosters economic inefficiency. German federalism thus has a mixed record. It has been very successful in creating the conditions for stable democracy, in particular individual equality of living conditions across the territory of the Federal Republic. But it is not very efficient in economic terms, and it discourages growth. Federalism and party politics As I have shown, federal and state governments are closely linked in the policy-making process. Their relationship is one of mutual dependency where they have to cooperate to get things done and, in particular, to legislate. Otherwise the high thresholds for the formation of consensus built into the system could not be overcome. This creates particular problems when the opposition party in parliament obtains a majority of seats in the Bundesrat. This is not an exceptional situation. Of the fifty-one years since the present constitution was voted, for more than twenty years the Federal Government had no majority in the Federal Council. With such a constellation, the opposition is in measure to veto important laws (and., in particular, most tax legislation). We thus have an in-built tension between party competition, on the one hand, and the need for cooperation in the federal system, on the other. And this in-built tension may eventually degenerate into an institutional gridlock. Subsidiarity as a solution? Because of these experiences the view has become popular in public opinion that federal and state politics should be disentangled. It is in this context that much attention has been focused on the “principle of subsidiarity”. As you may be aware, this principle is now enshrined in the law of the European Union. Article 3b of the Maastricht treaty of 1991 stipulates that “in areas which do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community, Any action by the Community shall not go beyond what is necessary to achieve the objectives of this Treaty”.. It was largely due to German demands that this article has been inserted. Given that there exist remarkable institutional similarities between German federalism and the federal structure of the EU, German insistence on the subsidiarity principle might suggest that this principle too has been patterned after the German federal model. However, nothing could be less true: Subsidiarity has only recently been discovered as an eventual constituent principle of federalism, and the reality of German federalism is far away from it as I hope to have made clear at least implicitly. The origin of that idea is not the federalist tradition but the social doctrine of German catholics, and in this doctrine it originally referred to the relationship between the society and the state. Its was first formulated by two German Jesuits (Gustav Gundlach and Oskar von Nell-Breunung) who were advisers of Pope Pius XI. and who played a key role in drafting the encyclical Quadragesimo Anno published in 1931. A key sentence in para. 79 of this encyclical reads: “Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and industry and give it to the community, so also it is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do. For every social activity ought of its very nature to furnish help to the members of the body social, and never destroy and absorb them”. And para. 80 continues: “The supreme authority of the State ought, therefore, to let subordinate groups handle matters and concerns of lesser importance, which would otherwise dissipate its efforts greatly. … Those in power should be sure that the more perfectly a graduated order is kept among the various associations, in observance of the principle of “subsidiary function,” the stronger social authority and effectiveness will be the happier and more prosperous the condition of the State.” German Catholics have since that time cherished the subsidiarity principle, not least because the minority position which they occupied in Germany between 1971 and 1945 made them receptive for the idea that the state (in their case, a state dominated by protestant elites) should not become to powerful and should not infringe upon the autonomous rights of lower (e.g. Catholic) associations. Only in the last two decades was it discovered that the subsidiarity principle might also apply to federal organization. Among those who discovered it outside the Catholic camp we have to mention, in the first place, German neo-liberal theorists of fiscal federalism. In their view, it complements the “principle of fiscal equivalence” (discovered by Mancur Olson) to which it seemingly bears a strong conceptual affinity. However, subsidiarity as originally conceived in Quadragesimo Anno is a highly abstract principle, not always easy to translate into practical conclusions. In particular, in a complex modern society it is not always self-evident what the “lesser and subordinate organizations” are. The Maastricht treaty only mentions the member states as eventual claimants, To be sure, at the Amsterdam conference the federally organized EU countries (Germany, Austria and Belgium) proclaimed that they wanted to extend the subsidiarity principle to the lower levels of government so that the EU would have to respect the domain of, e.g., the German or Austrian Länder (states). But it is by no means sure that this demand has the whole-hearted agreement of other EU member states with a centralist tradition. For the German states, moreover, the danger is twofold. On the one hand, the EU may be tempted to pre-empt matters that traditionally belonged to their exclusive jurisdiction, such as education. Such attempts they may indeed resist by invoking the principle of subsidiarity. But much more problematic is that – as I have pointed out above – the Länder have abandoned much of their original domain in exchange for participation in the federal law-making process. If such matters are pre-empted by the EU, it would become rather difficult for the states to maintain their veto power and preserve their political influence.. One can, after all, not expect the partners of an already enlarged Union to include, in their intergovernmental negotiations, not only the Federal Government but also sixteen state governments. To be sure, on the insistent demand of the Länder , an amendment to the German constitution was recently passed guaranteeing to the states that the would be consulted by the Federal Government in those EU matters where their interests are in jeopardy. But it is rather doubtful that this obligation will decisively contribute to check the erosion of the autonomous power of the states. In my view they would be much better advised to change their traditional strategy based upon an exchange of influence and to reassert the demand for an autonomous domain. The subsidiarity principle would legitimate such a demand, provided it is interpreted in a broader sense than in the Maastricht treaty. Conclusion German federalism, as I have shown, is a complex and cumbersome structure. However, this is a price which Germans have been willing to pay after the traumatic experiences of the Nazi dictatorship. It was so far a unique case the institutional framework of which was due to specific paths of historical development. Although now the European Union appears to move in a quite similar direction, this type of federalism will probably – as an institutional pattern – serve as a model which other countries should copy. However, I am convinced that important lessons can be drawn from the German federalist experience. One of them, I submit, is that federalism can serve to balance the goals of equality and social solidarity, on the one hand, of autonomy, efficiency and innovation, on the other.