Social Costs, Economic Strength and State Capacity of Sub-National Units in Germany – Effects of National and European Re-Distributive Finance Streams

Despite an overall high level of income in Germany, economic inequality increases among it sub-national units, the German Länder. Within the German federal state, redistributive payments aim at balancing those inequalities. Those finance streams follow generally the logic of fiscal power, i.e. Länder with low fiscal power receive more funds than those with a higher fiscal power. The effect of such purely redistributive payments is an equalization of financial strength. Funds allocated from the European level, in contrast, are typically allotted on the basis of competitive procedures, and many of them require a co-financing of the receiving unit. That is, in order to increase the chance of winning such funds, a certain infrastructure and state capacity is required. Funds allocated on a competitive basis are thus susceptible of increasing, rather than decreasing economic inequality.

In this paper, I disentangle the effects of finance streams flowing from the national and the European level to the German Länder. In order to answer the question whether and to what degree finance streams contribute to alleviating the economic inequality between the German Länder, I compare indicators of financial and economic strength as well as of social costs with the money the Länder attract from national and European level.