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The American Federal System has changed dramatically during the last decade. Starting with Ronald Reagan's New Federalism the balance between the states and the federation has become an important topic in the discussion of politicians and scholars. As a result in the 1990s phenomena like the resurgence of the states, the shift in the system of grants-in-aid, the evolving new judical federalism and the complexity of new institutions of federalism dominate the domestic agenda in the U.S. The crucial question is whether the states still function as laboratories of democracy under the impact of fiscal crisis and the existing institutional and constitutional framework. The American experience is examined in comparative perspective with special emphasis upon German federalism and the dual challenges of unification and European integration.