The Discussion on a National Stability Pact in Germany

Wendorff analyses the German experience in reconciling European fiscal rules and a federal organisation. He highlights the main features of German decentralisation: the emphasis on uniformity of conditions throughout the country, the co-operation of federal and regional governments in shaping budgetary rules and the consequent implicit bail-out provision, and the important roles of shared taxes and intergovernmental transfers. He notes the unsatisfactory results of German budgetary rules, based on the golden rule approach, in terms of deficit control. The effectiveness of the rules was weakened by the broad definition of investment and the failure to consider depreciation. Wendorff recalls that the approval of the Stability and Growth Pact gave rise to an intense debate in Germany on the benefits of a so-called “national stability pact”. The discussion focused on the legal status of the pact, the distribution of deficit between federal and regional/local governments, its distribution within regional/local governments, and the structure and distribution of sanctions. In the end, it proved difficult to reach a consensus on major issues, with the result that no national stability pact has so far been adopted. Wendorff suggests the introduction of a rule prescribing federal and regional governments to balance their budgets over the cycle and notes that this rule should be introduced in the context of a reform disentangling the fiscal responsibilities of the different levels of governments and increasing the revenue responsibility of each public authority