- Germany’s Constitutional Court last week ruled on the government’s move to reallocate emergency debt assumed during the pandemic into the current budget.
- This has created a €60 billion funding gap in government budgets, hitting climate change policies particularly hard.
- The crisis has highlighted the rift between the coalition partners, and so far no immediate solution has been found.
German Chancellor Olaf Scholz (center), Finance Minister Christian Lindner (R), and Economy Minister Robert Herbeck issue a statement to the media after the weekly government cabinet meeting in Berlin, Germany, on November 15, 2023. .
Sean Gallup Getty Images News | Getty Images
Germany’s budget is in dire straits.
The Constitutional Court ruled last week that it is illegal to reallocate unspent debt originally earmarked for emergency funding for the COVID-19 pandemic into the current spending plan.
The Treasury Department this week froze spending across all ministries.
But this could be just the tip of the iceberg, as financial difficulties could lead to political problems and even jeopardize the future of the Berlin coalition government.
However, Germany did not reach this situation overnight. In some ways, the roots of the current crisis predate the pandemic. That’s because of Germany’s so-called debt brake.
The debt brake, enacted in 2009, limits the amount of debt the government can take on and establishes a maximum structural budget deficit for the federal government. Regulations state that it cannot exceed 0.35% of Germany’s annual GDP.
Since the global financial crisis, the debt brake has been a cornerstone of Germany’s fiscal policy.
But then the coronavirus disease (Covid-19) pandemic broke out. The government took on emergency debt to try to stem the fiscal impact of the pandemic by temporarily suspending the debt brake.
As it turned out, additional funds were not really needed. The current coalition government has therefore decided to reallocate funding to fund climate change and policies towards a greener and more sustainable economy.
German opposition parties were unhappy with the reassignment and eventually took the issue to Germany’s Constitutional Court. In a blow to the government, the court ruled last week that emergency funds cannot be used for policy projects unrelated to the pandemic.
The government appeared to be somewhat unprepared for the ruling, leaving it fumbling for answers to questions from colleagues and the press.
Some observers (and several Green Party members) have suggested that the climate crisis is as urgent as the pandemic. But the court’s ruling stands, and there is now a 60 billion euro ($65 billion) hole in Germany’s budget.
Since then, the government has been busy formulating a fiscal plan, with German media reporting earlier this week that the finance ministry had all but sealed the possibility of additional spending not planned for 2023.
A key factor in the government’s dilemma is the wide range of political positions held by the three coalition partners.
The Green Party is the main instigator behind the currently endangered climate change policy agenda and is therefore very attached to its success. Next, the SPD, the Social Democrats, will be content with relaxing the debt brake or raising taxes. Then there are the FDP and the Liberal Democratic Party, which control the Ministry of Finance and do not want to increase taxes or expand debt.
However, a research note published by Eurasia Group directors Jan Tekau, Mujtaba Rahman and Jens Larsen says the government is unlikely to dissolve completely.
“There is no question about the stability of the government, and it is likely that the coalition will still complete its term,” he said.
“In the (unlikely) case of a snap election, all three parties would face crushing defeats, reducing their desire to break with the current system. A clear new majority is impossible in the current parliament. ” they said.
Solutions, especially those that are applicable in the near term, remain few, and the government is still working on a spending and funding realignment plan that its coalition partners can agree on.
And in the long run?
“The obvious solution would be to change the constitution,” Holger Schmieding, chief economist at Berenberg Bank, said in a note. This would require a new agreement with at least some opposition politicians needed to reach the necessary two-thirds majority, and would require political bargaining and sacrifice on divisive topics such as asylum rules. explained that it means.
“For now, such an agreement seems unlikely. However, after the next elections in September 2025, it will again be necessary to include parts of the centre-right and centre-left. The (new) government may perhaps conclude such an agreement,” Schmieding said. He said.
Reforming the debt brake after the next general election is also one path forward predicted by Citi economists Christian Schulz, Giada Giani and Benjamin Navarro. They also point out that long-term changes to the way the German government is funded could be coming.
“This ruling will encourage governments to increase their actual cash reserves in normal times and in emergencies, allowing them to deal with the long-term effects of the crisis without breaking debt forgiveness. “Deaf,” they wrote in a research note.
And finally, the criteria for what constitutes an “emergency” could be lowered (thus allowing the suspension of the debt brake), and could eventually include the climate crisis.