The truth about Germany’s levelling up Only catastrophe can restructure a society

The policy lionised by centre-Left politicians like Schneider and Burnham is the mammoth project known as Aufbau Ost, the rebuilding of the former communist East over the last 30 years. When the two were reunified, the West’s GDP was 50% higher than the East’s; visiting the latter when I was a teenager felt like travelling back in time to a vaguely dystopian past with tiny, sputtering plastic cars, the ubiquitous whiff of coal smoke, and a vast shortage of house paint and non-scratchy toilet paper. Chancellor Helmut Kohl promised “blossoming landscapes” in the East when the Berlin Wall fell. The opposite happened. Industrial production fell by 70%. A third of eastern factories were shuttered; many were sold for a pittance to westerners. Joblessness exploded. The investment flowing in couldn’t stem the haemorrhage. By 1995, the alarmed Kohl government had forged a plan to properly fund the Aufbau, which he named the Solidarpakt: the “solidarity pact”. The plan was designed to honour the constitutional clause vaunted by Burnham, which makes the federal government responsible for the “creation of equivalent living conditions” across the land.

What constitutes equivalent conditions is, of course, open to interpretation. Conservatives usually understand it to mean equality of public infrastructure — roads, railways, telecommunications. But the Left often stress that it should also mean similar wage and pension levels. Periodically, the state governments bicker over the details of the formulas, with suggestions of tweaks that would work in their favour. Nonetheless, the principle of federal redistribution has remained robust.

After all, the Solidarpakt turbocharged a system that had actually been in place since 1949, when the Federal Republic was created under the watchful eyes of the occupying Allies. That system is known as the Länderfinanzausgleich (literally: “State Financial Equalisation”), and grew out of another article in the constitution, which states that “it shall be ensured by law… that the different financial strength of the Länder is adequately compensated for”. Essentially, it regulates the transfer of tax revenue from richer Länder (states) to poorer ones.

But in the Nineties, the Länderfinanzausgleich didn’t provide nearly enough money to prevent total economic meltdown in the East. For this, hundreds of billions were needed. A new temporary “solidarity surcharge” to fund the East appeared on wage slips as 7.5% of Germans’ income tax. Petrol taxes were raised. In addition, large special funds were set up to finance culture, police and infrastructure in Berlin, commensurate with the city’s status as the new-old capital of the reunified country. Additional hundreds of billions of euros flowed into the East, in the form of state pensions that recognised the working lives of easterners, even if they’d been working in a system that had collapsed and whose currency was almost worthless.

Nobody knows exactly how much reunification “cost”, because there are so many different ways of calculating it, but it’s certainly well over a trillion euros. Aufbau Ost was a huge burden on the economy, but it meant that the “new federal states” soon received smooth autobahns and glittering train stations. Town centres and castles from the Baltic to the Czech border were impeccably renovated. Gradually, the solidarity tax was lowered. Today, only high earners pay the surcharge.

Would the English ever accept such a burden? Despite complaints in the press, West Germans generally saw it as a duty towards their brethren who suffered under communism. The fall of the Berlin Wall gave the project an unprecedented historical urgency. There simply was no alternative. Can one really imagine London and the Home Countries taking one for the North? For as long as it really takes to make a difference?

And how inspired should we be by Germany anyway? Länderfinanzausgleich is complicated in a way that only Germany can do complicated: Sueddeutsche Zeitung once wrote that only a few dozen people actually understand how it works — which shouldn’t be the case in a democracy.

And though the work of “levelling up” Germany has come a very long way, it is by no means finished. Many cities in the East — Leipzig, Dresden, Berlin — are more prosperous than some of their western equivalents. The country’s unemployment deadbeat is no longer the capital, but Bremen, in the North-West. But income levels in the East remain stubbornly lower: in 2020, the average gross salary, at €36,499, was still €7,440 lower than in the West.

Other vectors point to inequality as well. According to a study by the Friedrich Ebert Foundation, a think tank linked to the centre-Left SPD, most rural areas in the East are in a “lasting structural crisis” — thanks to depopulation, low wages and not enough broadband. Many smaller Western cities also struggle with deindustrialisation and rising poverty — not unlike the North of England. Levelling up hasn’t prevented their decline. Nevertheless, most of the net recipients of Länderfinanzausgleich are still in the East.

Then there is the capital — that strange spawn of East and West — which, although it now displays above-average growth, still receives the largest helping out of the pot: €3.6 billion from a total of €17 billion in 2021. It receives additional billions, too, from a separate federal fund for troubled regions, because otherwise the city wouldn’t be able to service its €60 billion in debt. This has been met with grumbling in certain parts of the nation. Though Berlin has rebounded, it is still considered run-down, decrepit and lawless by the rest of the country. When, on New Year’s Eve, youths attacked and injured police and first responders with fireworks in war-like scenes on the streets of Berlin, Bavarian leaders railed against the “chaotic” capital. Once a poor rural kingdom populated by Lederhosen-wearing yokels, Bavaria was a net recipient of financial transfers until the late Eighties. Now, it leads Germany in everything from tourism to tech to education.

Why, Bavarians asked, should they fund the “failed state” of Berlin, which can’t even maintain order — and has to re-do a local election next month because of rampant irregularities?

Likewise, when Berlin decided to become the first and only German state to offer free day-care a few years ago, the protest coming out of Munich was loud: why should we pay for something those loser Berliners, with their €60 billion in debt, can scarcely afford? On such occasions, politicians from richer states inevitably demand reform: a kind of anti-levelling-up. Last week Bavarian finance minister Albert Füracker said he no longer wanted to fund Berlin’s “feel-good programmes” and  announced Bavaria would challenge the Länderfinanzausgleich in the constitutional court. Should someone tell Andy Burnham?

Just like in Britain, Germany’s capital indubitably gets more than its fair share. Can we, then, really be holding the nation up as a model for levelling up? And, perhaps more to the point: is the Herculean challenge of grafting a bankrupt former communist country onto a modern capitalist economy in any way comparable to the task of tackling industrial decline and a lack of investment in regions like North Eastern England or Wales? Can Britain learn from Germany, or is the German solution too, well, German?

To fully answer this question, we need to look beyond the birth of the Länderfinanzausgleich to the history the policy grew out of. That history is radically different from England’s. Until Prussia bundled together most of the German-speaking lands into an empire (the Second Reich) in 1871, the place we call Germany comprised dozens of kingdoms and dukedoms. No single metropolis lorded over the rest. England, on the other hand, became a country in the year 927. The monarch’s government has been collecting tax from its perch in London for more than a millennium. Only with the Third Reich did Germany truly centralise power (and finances) in Berlin. We know how that went.

After the war, the country was purposefully re-crafted to have no strong centre. Although Berlin is beginning to flourish economically again — it attracts more start-up capital than any other German city — it will never be a London, generating the bulk of the nation’s wealth then distributing it like a whimsical king. To disrupt structures so deep-rooted takes a catastrophe, or else decades of slow change. German “devolution” was originally imposed by the force of a few words in a constitution, dictated by occupying powers, the country having been at the stage of some of the 20th century’s most harrowing dramas. The collapse of two dictatorships demanded drastic measures. England has not seen such severe upheavals in modern times.

An awareness of history and a deep desire for stability means the German state has been willing to take on huge tasks — and throw real money at them — in a way that might seem foreign and exaggerated to some in Westminster. I’m not sure Andy Burnham realises the scale of change required to transform England’s system into something like Germany’s. One might dream of transforming the United Kingdom of Great Britain and Northern Ireland into a federation. Maybe that’s what it really takes to achieve more equality. But would London ever agree to such a radical move? Muddling through, having the provinces beg for crumbs, probably suits the capital just fine.

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Maurice Frank co-founded the English magazine Exberliner and now co-writes the newsletter 20 Percent Berlin. 

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