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Federal States

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Germany’s federal system is intended to limit the power of central government. However, the far-reaching autonomy of Germany’s 16 Länder, or states, also brings disadvantages.

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Federalism has been anchored in the German constitution since 1949. As partially sovereign members of a federation, Germany’s 16 states legislate for themselves in such matters as education, broadcasting and policing. Via the Federal Council (Bundesrat), the upper chamber of the national parliament, the states are additionally involved in the political decision-making process at the federal level. The influence of the states, which is guaranteed by the constitution, is intended to prevent a concentration of power at the centre.

However, the states’ autonomy has given rise to considerable debate. For example, it is a matter of some controversy whether the education system, in its current decentralized form, is satisfactory or should be replaced by an alternative. With its Bildungsmonitor (Education Monitor), published annually, the German Economic Institute (IW) offers a scientific basis for this debate. The Monitor compares the efficiency of the country’s various education systems by means of a range of indicators, such as the drop-out rate and the availability of all-day schooling.

The country’s federal structure is being carefully scrutinised in matters of tax policy, too. This is particularly true of the Interstate Fiscal Equalization System, which, by redistributing tax revenues from states with strong finances to those that are struggling, incentivises inefficiency. Moreover, even with this support, some states look like failing to meet the provisions of the “Debt Brake”, Germany’s constitutional amendment requiring balanced budgets, with continued borrowing beyond 2020. The IW analyses the development of the states’ budgets in its annual Konsolidierungscheck (Consolidation Check of public budgets).

Jürgen Matthes

Jürgen Matthes

Head of the Research Unit International Economics and Economic Outlook

Tel+49 221 4981-754


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