European Economy. Economic Papers. Germany's growth performance in the 1990's

Box 3 (continued)
(and social) costs. Hence, people take up a job only if they expect an increase in purchasing
power taking into account the costs of moving, local prices, taxation, social transfers etc. The
social security system, while indispensable for those who cannot provide for their own income,
takes away much of the pressure on unemployed people to move to areas where they could find
employment or to take on a lower-paying job. While certain elements have been reinforced in
recent years to condition unemployment benefits on the preparedness to move, these have been
applied rather reluctantly. Particular problems at the lower end of the wage scale arise from the
tax-benefit system which reduces incentives to create or take up jobs in that it introduces wage
floors and sometimes makes employment financially less attractive than remaining unemployed.
B3.2 The efficiency of regional policy
Since 1996, the new German 
Länder
fully participate in the sophisticated (and therefore
complicated) scheme of fiscal equalisation (
Finanzausgleich
) between the different
administrative levels of 
Bund
(federal government), 
Länder
(states) and 
Gemeinden
(local
communities). In June 2001, an agreement modifying certain elements of the
 Finanzausgleich
was reached between the federal government and the 
Länder
governments. It was facilitated by
the federal government’s commitment to take over some public debt from the 
Länder
and to
finance a second “Solidarity Pact” for East Germany from 2005 to 2019 totalling about € 156
billion. The latter will have a decreasing path (from € 10.4 billion in 2005 to € 2.1 billion in
2019) of which € 51 billion is ring-fenced for business and infrastructure development while the
remaining € 105 billion will be unconditional. In addition, a whole range of programmes is
specifically targeting East Germany.
22
Several innovation and technology schemes, although most of them are also applied to West
German regions, are a particular focus of government programmes targeting the innovation
capacity of small and medium-sized firms in East Germany. These schemes concentrate on
directly strengthening corporate innovation, promoting co-operation between firms and
universities and research centres. They support regional innovation competence centres and
promote universities and technical colleges as well as expanding the scientific and research
centres.
Economic development policy is composed of different elements. First, the 
Bund-Länder
“Joint
Task for Improving the Regional Economic Structure”, to which all new 
Länder
are eligible,
gives assistance to private investment and local infrastructure related to private investment.
Maximum rates of assistance which vary according to sector, firm size and structural problems
of a region can reach 50% for investment grants and 80% for local infrastructure. Second, East
Germany has been eligible for EU Structural Funds assistance under Objective 1 since 1991.
The Community Support Framework for the period 2000-2006 has been adopted in June 2000
and has a financial volume of EU funds of € 20.7 billion, which are co-financed by national
public (€ 12.4 billion) and private money (€ 17.2 billion). Third, a tax investment grant is given
for initial investment at a rate of up to 12.5% for large firms and up to 25% for SMEs, increased
by 2.5 percentage points in border regions (INTERREG III regions). Fourth, several specific
SME schemes are channelled through state-owned banks (
Deutsche Ausgleichsbank
and
Kreditanstalt für Wiederaufbau
which have been merged recently) with various financial
instruments such as support to start-ups with equity capital, loans or guarantees.
Infrastructure investment has been a focus of public investment in East Germany. In the
transport sector, about 50% of the federal investment programme 1999-2002, (which totals
22
Cf. Bundesministerium der Finanzen 2001, pp.53ff.

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