Managing the Economic Crisis in Germany: Building Multi-level Governance in Budget Policy

In 2008, Germany reacted to the economic crisis by implementing stimulus packages. Since this policy resulted in the highest annual rise of public debts, achieving balanced budgets emerged as a new paradigm for budget policy. This change brought opportunities and risks for individual Länder. In the short-term, they could spend the additional money resulting from the federal government’s incentives for investments; but in the long run, they had to face the imperative of achieving balanced budgets by the year 2020 essentially on their own. Consequently, different Länder managed risks and opportunities differently. Economically well-off Länder like Bavaria became even stronger than before the crisis, while economically weaker Länder like Saarland ended up in an even worse position. Some Länder, like Hesse, formerly viewed as financially solid, faced increasing public debts. Others, like Saxony, managed to avoid this. Thus, the convergence of budget policy and the agreement on the new policy paradigm of balanced budgets have increased fiscal disparities among the Länder (“output divergence”), with multilevel coordination of budget policy contributing to this effect. The new system of monitoring budgets works towards the convergence of balanced budgets, but Länder governments have to meet this aim under divergent economic conditions. Rising redistributive conflicts could obstruct multilevel coordination in the future.