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The Mother of All Reforms (November 8, 2006)

After years of negotiations, the Bundestag and the Bundesrat passed the first part of the so-called federalism reform in the summer of 2006. The history of the reform effort and the most important changes are summarized in this annual report of the German Council of Economic Experts, an academic body of political advisors.

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IV. Federalism Reform: A Start Has Been Made

456. The German Council of Economic Experts has repeatedly noted in the past that it views the existing structure of federalism in Germany as a serious obstacle to the implementation of fundamental reform (Report 2004, nos. 787 ff.; Report 2005, nos. 30 ff.). More than half of the laws dealt with by the German Bundestag in past legislative periods have regularly required the approval of the Bundesrat. Important economic policy initiatives were contingent upon Bundesrat approval in virtually all cases. Especially because of the different political power configurations in the German Bundestag and Bundesrat, the participatory rights of the Bundesrat delayed decision-making processes. When it came to key issues, in particular, compromises were often made in a faulty and opaque manner, which made it virtually impossible to determine who was responsible for decisions relating to revenue and expenditures. Furthermore, one characteristic of so-called cooperative federalism is that the autonomy of, in particular, local communities and the federal states is greatly limited when it comes to decisions on budgetary revenue matters. In the absence of such autonomy and without the clear-cut division of decision-making competencies, it is difficult for a federal system to cultivate its very advantage – the availability of public services that are closely geared toward citizen preferences. The council has therefore spoken out in favor of the disentanglement of federal-state relations by way of a clearly defined division of decision-making competencies. Moreover, there should be a greater degree of tax autonomy at all levels of government in order to reduce unclear [divisions of] responsibilities in the area of both expenditures – by reducing mixed federal-state funding – and revenue for public budgets.

457. The need for federalism reform has long been recognized in political circles. In 2003, a Joint Bundestag-Bundesrat Commission on Modernizing the Federal System was appointed. Although key and therefore particularly conflict-laden issues in the area of fiscal federalism did not even form part of the commission’s investigatory work, the chairs of the commission declared in December 2004 that the project had failed. However, in the fall of 2005, the results of the commission’s deliberations were incorporated into the CDU/CSU and SPD’s negotiations on forming a Grand Coalition. Ultimately, a comprehensive appendix was attached to the Coalition Agreement of November 11, 2005; it contained proposals for an amendment to the Basic Law which had already been agreed upon by the coalition partners and the federal and state governments. These proposals were incorporated virtually unchanged in the Act to Amend the Basic Law and the Act Concomitant to Federalism Reform [Föderalismusreform-Begleitgesetz], both of which were passed by the German Bundestag on June 30, 2006. Approval by the Bundesrat followed on July 7, 2006.

458. At the heart of the agreed-upon federalism reform is the disentanglement of decision-making processes. In particular, the portion of federal legislation that must be approved by the Bundesrat is to be reduced through a rewording of Article 84 (Basic Law), which, up to now, applied to approximately half of the legislation requiring approval (Burkhart and Manow, 2006).

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