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German states agree on radical new federal-state finance system

Premiers from Germany's 16 states have agreed on a radically new financial system between federal and state governments. The federal government still has to approve the measure, which is set to cost billions yearly.

After lengthy negotiations, Germany's state premiers submitted a proposal on Thursday that would drastically reorganize the federal-state financial model. Premiers from all 16 states met in Berlin to finalize and present their proposals.

In order to finance the new system, the states require 9.6 billion euros ($10.5 billion) per year from the federal government. It is still unclear whether

Federal Finance Minister Wolfgang Schäuble

will agree to the conditions, since his previous offer to the states was 8.5 billion euros per year.

German Chancellor Angela Merkel reacted cautiously to the states' agreement, saying: "The federal government has taken note of it. We have not had any opportunity to deal with the proposals."

Under the proposed financial system, the controversial practise of fiscal equalization between the states would be replaced with a turnover tax system. The financial system would be valid until 2030 and could be canceled at any time, if at least three states side against it.

The compromise is an achievement in its own right, since there have been tensions between financially strong and weak states for years, as well as resistance from eastern German states. Volker Bouffier, state premier of the state of Hesse, remarked: "It is almost historic, what he have accomplished here today."

Watch video 01:48

East Germans get seven more years

Breaking old borders

According to the state premier of Saxony-Anhalt, Reiner Haseloff, the previous special position of east German states will no longer exist. In its place, there will be a provision for the promotion of structurally weaker regions. "The old GDR-border does not play a role anymore," the politician said. He also pointed out that in order for the new rules to be adopted, changes must be made to the constitution.

Bavaria's state premier Horst Seehofer also left the meeting satisfied. He went so far as to hint that he would withdraw Bavaria's lawsuit against the financial equalization practice."After long discussions, we finally have a reorganization of fiscal equalization," he told the German newspaper "Kölner Stadt-Anzeiger."

"The process of financial compensation will be canceled and the tax distribution will be fairer," Seehofer said, adding that the agreement would relieve Bavaria's tax burden by 1.3 billion euro.

The financial laws governing federal and state governments - including a solidarity package for East-German states - are set to expire in 2019. This reform is one of the key collaborative projects between Germany's CDU and SPD governing coalition.

rs/rc (AFP, dpa, Reuters)

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