Harmonization and Public Finance in Germany and Europe

2 Colum. J. Eur. L. 519 (1996)

Lerke Osterloh. Professor of Law, Johann Wolfgang Goethe-Universität, Frankfurt; Dr. iur. Hamburg.


The basic legal and structural questions of public finance are quite clear. What sorts of revenue, and how much, are needed by a state, and who must decide on them? The answers are also rather clear. The state should receive just those revenues required to accomplish its functions, while the main decisions in a democracy as to what those functions are, and how much revenue and spending are necessary, belong to parliament, subject perhaps to special legal or constitutional constraints on deficit spending. Tax and budgetary laws are therefore meant to guarantee democratic legitimacy and control of public financial management.

In the history of western European states, the right of parliaments to decide on tax and budgetary questions has been the principal legislative means of controlling the substance of governmental action.) Maintaining a police force or an army costs money, and the power to decide on war or peace presupposes a power to finance. In the long-established systems of parliamentary democracy, the constitution of public finance is “consecutive”; by this we mean that general policy defines cost-effective public functions and projects, whereas a second level of decisionmaking defines the appropriate means by which those projects might be financed, notably through taxation or borrowing.

Naturally, the choice of means is never easy. Very special and intricate legal questions relating to fiscal constitutions arise in federal systems, and constitutional principles often do not provide definite answers. Indeed, rather different arrangements involving vertical and horizontal coordination of the federal members’ financial interests may be constitutionally acceptable. In fact, the features of federal fiscal systems in Europe, as well as in the U.S., show a remarkable spectrum of varying rules.

In the reunited Germany, the question of a reasonable and just federal fiscal constitution has attracted attention, not only among economists and political and constitutional experts, but also a broader public. How much regional diversity should be permitted in the standards of living of residents of the various states in the Federal Republic? What degree of autonomy should the different levels of government possess? Is the current system capable of managing the major problems which confront Germany today (and will likely continue to confront it in the future) or should our fiscal constitution be fundamentally reformed? These questions have implications for the overall constitutional framework as well as its specific financial aspects, although these financial aspects are the ones likely to have an impact on individual citizens.

The need for reform was explicitly recognized in the German treaty on unification. Nevertheless, our financial polity, a special and very detailed part of our written constitutional law, has almost escaped reform entirely. A major reason – apart from the natural conflict between the goals and interests of federal and state governments in any federal system – may be uniquely German. The German law of public finance is extremely complex. Perhaps the only certain thing is that it is neither flexible, transparent, nor simple.

Yet there is another reason of general importance which makes reforming finance law so difficult: limited resources. Governments must today assume a shortage of funding to pursue public goals. In Germany, for example, the tax burden, including social security contributions, amounts to about 50% of GNP. The statistical average person –  if employed –    works about half of his or her time for the benefit of the public treasury. Hence we have likely reached the limits of taxation on employees in both a de facto as well as de jure sense. Although there are no explicit limits on taxation in the German constitution, the federal constitutional court has started a modest “tax revolution” in past years, enunciating substantial limits on the tax power. Paul Kirchhof, judge and
scholar, is widely reputed not only “to be the principal architect of the Maastricht decision,”‘ but also the architect of the new decisions limiting tax legislation.

A shortage of resources to pursue policy goals is certainly not unique to federations, existing also in centralized states. But such shortages present federal systems with the problem of the distribution of dwindling financial resources.

Undoubtedly, the challenge of distribution is at the center of the debate on the European Union’s fiscal constitution. Of course, the Commission, like any government, is certain to have insufficient means to reach its goals, and that includes inadequate cash funds. Yet, the purpose and success of the planned expansion of the EU, especially toward eastern states, will depend on the willingness of the wealthier Member States to finance the transfers needed to support the economic development of the new, poorer states.

In any discussion about harmonization of laws in public finance, certain tensions must thus be kept in mind: autonomy versus interdependence; equality versus diversity (in German terms, equal versus diverse regional conditions); transparency, simplicity and flexibility of the law versus an understandable tendency toward complexity; and, last but not least, limitation of resources – resources of governments as well as those of individuals – versus increasing social demands, which render fiscal federalism a problem of distribution and redistribution.

The EU’s further development seems uncertain. Recently, President Chirac of France said that the Union is neither a federation in the German sense nor simply a free-trade area as the British government wishes, and some aspects of the fiscal constitution, but not all of them, seem to confirm that statement. The elaborate German system, albeit ripe for reform, is worth examining first as a model (both negative and positive) for the EU’s public finance system.