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With Surpluses Here and Deficits There, Federal Germany Looks Financially Shaky

  • Why it matters

    Why it matters

    Throughout Europe’s debt crisis, Germany has remonstrated other E.U. nations to get their finances in order. But the country’s own system of fiscal solidarity is exposing its limits.

  • Facts

    Facts

    • In German many cities and municipalities, deficits are growing again.
    • Germany’s federal structure includes redistribution of tax revenues among the states.
    • The upcoming budget talks will create plenty of haggling between richer and poorer regions.
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    Audio

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Bavaria's Munich has plenty of money thanks to tourism and industry. Source: DPA
Bavaria's Munich has plenty of money thanks to tourism and industry. Source: DPA

 

It all seems so simple: The economy and the labor market surge ahead, driving up tax revenues and making deficits go away. Budgetary consolidation achieved like clockwork.

Yet, because all financial relationships between Germany’s federal, state and local governments have to be completely renegotiated by the time the debt cap for the country’s 16 states comes into force in 2020, some state leaders appear to be fed up with saving. Being overly thrifty wouldn’t exactly strengthen their negotiating position in forthcoming rounds of financial haggling.

So in many places across Germany, budget deficits have grown again for the first time since the end of the Great Recession. Eight of the 16 states made ends meet, but the other half spent a total of €5.6 billion ($4.2 billion) more than they earned. All that is needed for these states to face a fiscal disaster is a change in interest rates or a serious economic downturn.

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