Continuity despite Critical Juncture: Dynamics in Germany’s Federal System during the Economic Crisis

The economic crisis in Europe has triggered a great deal of political tensions and reforms in many governments. Though implications varied across countries, all member states of the EU perceived the crisis as a critical juncture. Unsurprisingly, federal governments experienced particular conflicts due to the need to coordinate crisis management and redistribute resources among government. In Germany, the shock of the crisis came at a time when federal and Länder governments still tried to adjust federalism to the challenges of German Unification and European integration. The federal government responded to the crisis as member of the Eurozone where it advanced measures to stabilize the Euro. These decisions affected relations between the federal and Länder governments, intensifying pressures to reform fiscal federalism ‘at home’. Thus German federalism provides an excellent case for studying reform and adaptation under intense pressure. Based on the framework of a “dynamic institutionalism” (Benz and Broschek 2013) and comparative historical analysis, the paper examines the effects of economic crisis on continuity and change in federalism. While the growing tension within the territorial cleavage since Unification spurred institutional reform in German federalism to adjust the federal balance, the financial crisis provided a critical juncture conducive to undertaking extensive reforms designed to increase economic efficiency. However, as we will demonstrate, quite the contrary occurred. So far, the structure of the federal system persisted and, as things stand, fiscal federalism has hardly changed. Those changes achieved, such as the establishment of a Stability Council for budgetary monitoring, reinforced the already-predominant structures of joint-decision making, in contrast to ideas that have guided the reform process at the outset. Thus, institutional rigidity seems to prevail despite both pressures of the crisis and societal-political change. Accordingly, the case study sheds light on the complex interplay of path-dependence of institutions, society-driven change and institutional policy in federal systems.