German court deals blow to Scholz government with budget ruling

By Maria Martinez

BERLIN (Reuters) -The German government faces a 60 billion euro ($65 billion) hole in its finances after the country’s constitutional court ruled on Wednesday that a plan to spend unused emergency funds from the pandemic on climate initiatives was unconstitutional.

The decision will complicate budget negotiations taking place this week within Chancellor Olaf Scholz’s three-way ruling coalition, whose popularity has slumped as Europe’s biggest economy teeters close to another recession.

Wednesday’s decision by the constitutional court could also set a precedent for fiscal responses to future crises.

Finance Minister Christian Lindner will meanwhile face increased scrutiny on how he plans to keep spending in check, just days before he is due meet his French counterpart for talks on enforcing fiscal discipline across European Union countries.

Germany has hitherto burnished its reputation as the defender of sustainable financing in negotiations to reform EU fiscal rules in a pan-European deal by the end of the year.

Lindner has previously said he had a “plan B” to deal with a negative ruling but has not divulged its contents. The ruling may force the government to make spending cuts given that Lindner has ruled out tax rises or suspending Germany’s constitutionally enshrined debt brake again.

Lindner, Scholz and Economy Minister Robert Habeck were due to give a press conference at 1145 GMT.

The government had earmarked the 60 billion euros for initiatives such as making buildings more energy efficient, subsidising renewable electricity and chips production, as well as supporting energy-intensive companies.

“FAR-REACHING CONSEQUENCES”

“The court ruling has far-reaching consequences for fiscal policy in Germany,” said Clemens Fuest, President of the Ifo economic institute.

“There are significant constraints for federal budgets in coming years in terms of spending on government support for decarbonisation.”

Scholz’s centre-left Social Democrats (SPD), Habeck’s pro-spending Greens and Lindner’s fiscally cautious Free Democrats (FDP) agreed in December 2021 to transfer the pandemic debt to a climate fund. The move allowed the parties to make the most of a temporary, pandemic-related suspension of borrowing limits in the constitution.

This was done with the Second Supplementary Budget Act 2021, which retroactively amended the Budget Act for 2021. The constitutional court ruled that this act was incompatible with Germany’s Basic Law and so was void.

In addition, the government changed the accounting principle by which borrowing counted against the budget deficit in the year it was actually done. Therefore, the 60 billion euros transfer counted only as a deficit in 2021, but not in the years 2023 and 2024 when most of the spending was supposed to occur.

This enabled Lindner to return this year to the debt brake rule, which restricts the German public deficit to 0.35% of GDP. The rule was suspended due to the pandemic from 2020 to 2022.

“This valve is now closed,” Commerzbank (ETR:)’s senior economist Ralph Solveen said. “It will certainly not be easy to resolve this conflict in the ongoing final consultations for the 2024 budget.”

Germany’s 2024 budget and financial plans through 2027 are to be finalised on Friday, as Germany curbs spending that surged in response to COVID-19 and the Ukraine war.

Habeck had previously warned that a negative ruling would “sweep the rug from underneath” the government’s plans to stabilise the economy.

Friedrich Merz, whose main opposition Christian Democratic Union party had launched the lawsuit against the government, said the ruling had stopped what he called “the self-service mentality” of the government and strengthened the debt brake.

“A key cornerstone of the government’s budget and financial planning is collapsing,” he told local media.

($1 = 0.9357 euros)

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