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Journal for Markets and Ethics/Zeitschrift für Marktwirtschaft und Ethik • 6(1) • 2018 DOI: 10.2478/jome-2018-0034 Journal for Markets and Ethics/Zeitschrift für Marktwirtschaft und Ethik Federalism in Germany, Italy, and the European Union: History, Characteristics, and Perspectives Beate Jochimsen* Berlin School of Economics and Law (HWR), German Institute for Economic Research (DIW), Berlin, Germany Received January 30 2018; Accepted February 18 2018 Abstract: Federalism is always torn between the principles of subsidiarity and solidarity. Defining the federal structure of a country by finding the welfare-maximizing amount and design of government layers is challenging. Thereby, the financial endowment of different layers of government which they need to fulfill their respective tasks is an important aspect. European countries have chosen quite different federal designs to address the question of an optimal degree of fiscal decentralization. The aim of this paper is to analyze these different approaches for Germany, Italy, and the European Union. Parallels can be found in that all the three entities share a form of institutional asymmetry, a kind of fiscal bailout system, and a sort of fiscal equalization scheme. Keywords: Federalism • Germany • Italy • Europe JEL-Classification: H77 • P51 • O52 • N43 European countries have chosen quite different 1. Introduction federal designs to address the question of an optimal Identifying the sources of individual well-being has degree of fiscal decentralization. Germany, Italy, and been a major challenge in social sciences for many the European Union (EU), for example, are all struc- years. To what extent federal institutions support life tured more or less in a federal, i.e., decentral, way. They satisfaction is an interesting aspect in this discussion. therefore face several similar challenges although they Frey and Stutzer (2000) found that individual happiness still vary in many aspects. Parallels can be found in that increases with the degree of decentralization, i.e., with all three entities share a form of institutional asymmetry, the extent of federalism. The question then is what is a kind of fiscal bailout system, and a sort of fiscal equal- the ideal degree of federalism for people’s happiness? ization scheme. Finding the welfare-maximizing amount of government The aim of this paper is to analyze different layers and allocating tasks to these different layers approaches to federalism in Germany, Italy, and the EU are challenges that have already been addressed by giving special attention to fiscal federalism. It is orga- many politicians and academic scholars (Brennan and nized as follows: after this introduction, various aspects Buchanan 1980; Wildasin 1997; Goodspeed 2002). of the history of federalism, mainly within Germany, Italy, One major part of federal structures is the financial and the EU, are provided in Section 2. In Section 3, fol- endowment of different layers of government which lowing a short theoretical overview, three characteristics they need to fulfill their respective tasks. This aspect of of modern fiscal federalism are discussed for the three federalism is usually called fiscal federalism. entities. Finally, perspectives for further developments * E-mail: [email protected] 145 Open Access. © 2018 Beate Jochimsen, published by Sciendo. This work is licensed under the Creative Commons Attribution NonCommercial-NoDerivatives 4.0 License. Federalism in Germany, Italy, and the European Union: History, Characteristics, and Perspectives in (fiscal) federalism in Germany, Italy, and the EU are Diet (Reichstag). In 1495, the Diet of Worms agreed on offered in Section 4. the first central tax, the so-called Gemeiner Pfennig, which had to be paid by each inhabitant above the age of 15 years. Thus, the Gemeiner Pfennig only survived 2. History of federalism 60 years before the Imperial Diet abolished it and turned back to contributions by regions and cities to the central 2.1. Federalism and its roots level according to their ability to pay measured in inhab- itants (Matrikularbeiträge). In contrast to the central tax The ancient Greeks can be seen as the “inventors” of where the Imperial Diet had a fixed tax base and tax federalism. Their civilization was characterized by small rate for the entire taxable territory, how they raised these and large alliances, partly organized like today’s federal contributions in their territory was left up to the regions. states. The core question of each Greek alliance was Consequently, many princes and dukes took the oppor- quite similar to that of modern scholars of federalism, tunity and introduced regional surcharges when they namely what degree of autonomy should members get? collected the central contributions from their subjects Put differently, to what extent should they be allowed (Funk 2010, pp.81-91). Taking into account early mod- to pass own laws or raise revenue? Astonishingly, the ern times’ standard, including a weak tax administration, term “federalism” has its root in the Latin word foedus, tax moral was quite high. Up to 90% of assessed taxes meaning “treaty, pact, or covenant” although the Roman could be collected. When the Turks were underway to Empire was organized centrally. Renownedly, all roads attack the Reich, the taxpayers’ willingness to pay was lead to Rome (Funk 2010, p.27). particularly high (Funk 2010, p.92). These contributions Some people argue that elements of political federal- remained in place for >500 years and were only aban- ism can be found in Christianity, too. They refer to the doned in 1919. Fifteenth century, therefore, can be seen structure of the early Christian Church as described in as the cradle of fiscal federalism in Germany. the New Testament. Federal elements might be seen, for Similar to the Holy Roman Empire, which ended example, in the Council of Jerusalem, described in Acts of in 1815, the German Confederation (1815–1866) had the Apostles, chapter 15, where the Apostles and elders always been designated to balance two different aims meet to discuss the rules for the Christian Church; the of territorial government, namely the preservation of the Apostles being representatives of the universal Christian autonomy of local units and intra-institutional power shar- Church, i.e., the central level, and elders being repre- ing through federal institutions. In addition, indeed, traces sentatives for local churches corresponding to the local of this distribution of power were carried over from those level. To this day, elements of federalism can be found earlier arrangements into the constitution of the (second) in almost every Christian denomination. Corresponding German Empire in 1871. On the one hand, Article 4 of the to federal states, the Christian Church, particularly the constitution gave legislative powers over a wide range of protestant, is based on several layers of “governments,” subjects to the federal Reichstag, whereas the constitu- i.e., vertical organizational entities. tion did not specify competences of the states. Further- more, Article 2 established the superiority of federal over 2.2. History of federalism in Germany state law. Both provisions can be seen as an indispens- able concession that Bismarck had to make to the strong Germany had been organized under the federal mode unitarian ambitions of the liberal national movement and, of government for >1000 years with no concrete start- partly, the social democrats. These political movements ing point. In medieval times, princes and dukes of were advocating to abolish (or at least to reshape) the German regions regularly elected a king from its midst. majority of German federated states of that era, as they This was a major root of federalism, because it pre- were considered to be mostly monarchist remanences vented a single noble family from gaining concentrated of the feudal structures of the Middle Ages (Funk 2010, power and territory among their members. The Golden p.236). On the other hand, the states were left with sub- Bull of 1356 can be taken as a first constitution regulat- stantial autonomy in areas such as social welfare, edu- ing – among others – the election of the king who, by cation, and cultural policies (Broschek 2012, p.669). then, was the emperor of the Holy Roman Empire of However, with the introduction of a nationwide social the German nation. Therefore, voting rights were split security system in the 1880s, the states soon lost impor- between four secular and three spiritual princes coming tant parts of their autonomy in the field of social welfare. from various regions of the empire (Funk 2010, pp.35- In contrast to modern times, the constitution of 36). One consequence of the Golden Bull were the reg- 1871 was provided for a clear division of taxing pow- ular meetings of the regional princes, called the Imperial ers between the central level (Reich) and the states. 146146 Beate Jochimsen According to Article 70 of the constitution, the federal in West Germany relaunched federalism in 1949. level only had access to tariffs, revenue from postal The founders of the Federal Republic of Germany com- services, and excise duties such as taxes on beer, ing from both central and regional government layers tobacco, coffee, tea, salt, or sugar, whereas the states reestablished the federal system based on its roots in had exclusive jurisdiction over direct taxes on income the (second) German Empire of 1871. and property. Still, the states had to continue to support The federal government reoccupied a large part of the financial needs of the central government with their legislation formally falling under concurrent legisla- Matrikularbeiträge based on the number of inhabitants. tion including predominance of the federal level over To overcome the dependency of the Reich on the states’ concurrent legislation. State governments often volun- contributions, German chancellor Otto von Bismarck tarily agreed to transfer legislation to the federal level in heavily raised tariffs – with overall negative conse- exchange for a more extensive role in the federal legis- quences for the economy (Funk 2010, pp.239-241).

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