Germany's federal and state governments have reached a long-disputed agreement to ease the financial pressure on municipalities. Chancellor Friedrich Merz (CDU) announced on Thursday, following talks with state premiers at the Ministerpräsidentenkonferenz, that the federal government will cover 80 percent of costs imposed on municipalities by new federal legislation. Merz described the deal as "a new chapter in federal, collegial, cooperative partnership."
"The new arrangement follows the principle: whoever orders, pays," Merz said. The cost-sharing rule applies to all legislation passed by the federal government after 1 September of this year that creates financial obligations for states and municipalities. It does not apply to tax legislation that may result in revenue losses at state or municipal level, nor to EU legislation. A minimum threshold of 200 million euros also applies.
"We all face strained budget situations," Merz said. "In future, out of a shared interest, we will ensure that what we decide, we also pay for together — whether at the federal, state, or municipal level."
Gordon Schnieder (CDU), Minister-President of Rhineland-Palatinate, said the financial relief for municipalities could reach three billion euros in the coming year, with the figure set to grow over time. "The signal we can send today is: this state works," Schnieder said. He stressed that strengthening municipalities was particularly important because it is at the local level that "politics proves it can actually act." It is crucial, he added, "to show people who feel left behind that the state works."
Lower Saxony's Minister-President Olaf Lies (SPD) called the agreement "a novelty." "If you want a functional state, you need unity between the federal government and the states," Lies said. "I think we have demonstrated that here impressively."
In recent years, three federal laws in particular had placed significant financial burdens on municipalities: the Federal Participation Act, which aims to give people with disabilities greater self-determination; the Child and Youth Welfare Act; and the Maintenance Advance Act, which governs cases where a child living with a single parent does not receive regular financial support from the other parent.
Cost-containment measures in these areas are also planned, with the details to be worked out by a working group. "Nothing final has been decided there," Merz said.
The Chancellor emphasised that the financial relief is designed to work in both directions. When the federal government passes legislation that creates financial burdens, states and, where applicable, municipalities will receive compensation through VAT revenue. Conversely, the federal government will reclaim VAT points if it passes legislation that reduces financial obligations.
The agreement resolves a long-standing conflict between the federal government on one side and the states and municipalities on the other. The core grievance was that the federal government regularly passed laws imposing additional expenditure or revenue losses on municipalities, without those municipalities having any means of redress.
Municipalities had long demanded a rule based on the motto: "Whoever orders, pays." The legal term for this principle is "Veranlassungskonnexität", causal linkage between the ordering authority and the cost burden. They secured this demand on Thursday.
Federal and state governments also agreed on Thursday to a comprehensive state modernisation programme. Under the plan, correspondence with public authorities will in future be handled electronically as standard, rather than requiring handwritten signatures on forms. Application and registration procedures are also to be simplified across the board.
The "Federal Modernisation Agenda" contains more than 200 concrete measures for faster procedures, digitalisation, and the reduction of bureaucracy, to be implemented at federal or state level within set deadlines, according to the federal government.
Additionally, the federal and state governments agreed on a new rule-of-law pact, under which the states will receive almost half a billion euros for their justice systems. The federal government will provide states with a total of 450 million euros through to 2029: 240 million euros as start-up funding for new positions in the justice system, and 210 million euros for digital projects. In return, the states commit to creating 2,000 new posts in the justice sector.
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