The states would cost the federal government dearly

EThe first and so far the last federal-state bond was not a success story. It was issued in June 2013 and matured seven years later. Together with the federal states of North Rhine-Westphalia, Berlin, Bremen, Schleswig-Holstein, Brandenburg, Rhineland-Palatinate, Saarland, Hamburg, Mecklenburg-Western Pomerania and Saxony-Anhalt, the German state had issued a seven-year bond for 3 billion euros. The then Minister of Finance Wolfgang Schäuble (CDU) had correctly rejected joint and several liability, because the federal government would have had to step into the breach if one of the federal states involved had become insolvent.

Instead, each was fully responsible for its respective share of the issue – with the result that the hoped-for interest savings did not materialize for the federal states, and the federal government had to pay more than for its own emissions. The current Federal Finance Minister Christian Lindner (FDP) can take Schäuble as an example. Everything points to that at the moment. Because the demands of the finance minister of Schleswig-Holstein, Monica Heinold (Greens), after a new federal-state loan, the Federal Ministry of Finance rejected.

Interest costs at a glance

A continuation or resumption of the federal-state bond instrument is not intended, a spokeswoman said on Tuesday for the news agency Reuters. She referred to an audit by the Federal Audit Office, according to which the 2013 and so far only federal-state bond issued was uneconomical on balance. “The savings made by the federal states could not compensate for the additional expenditure by the federal government.” A reissue was “uneconomical and not suitable for relieving the state finances,” it said.

Previously, in an interview with Reuters, Heinold had again suggested joint borrowing by the federal and state governments in view of the rising interest costs. “Especially with rising interest rates and the current financial challenges, federal-state bonds are a useful instrument for shouldering the credit burdens in our federal system at all levels,” she said. Heinold’s party friend Daniel Wesener, who is Finance Senator in Berlin, sees things similarly. “If states could borrow on federal terms, that would increase their financial flexibility and reduce interest costs for taxpayers,” he said.

Bavaria, Hesse, Baden-Württemberg, Lower Saxony, Saxony and Thuringia were left out of the first federal-state bond. This time, too, the demands are coming from countries with rather strained budgetary situations. But the respective state governments are primarily responsible for this – and not the federal government. But some countries want to borrow the federal government’s still prime credit rating (“AAA”) in order to finance themselves more cheaply. Joint and several liability of the federal government is not provided for in the constitution.

This was determined by the Federal Constitutional Court in 2006 when it rejected a lawsuit filed by Berlin. The city-state had sued to establish a budget emergency in order to receive federal aid. But the constitutional judges saw things differently and initially warned Berlin to make its own austerity efforts. This means that the federal government is only indirectly liable for the states. The default of a federal state does not trigger immediate liability of the federal government. This would only take place after a certain period of time.

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