Pressure mounts on German government to find way out of budget hole

By Holger Hansen

BERLIN (Reuters) – Germany’s coalition is weighing up options such as suspending the country’s debt brake for this year as it intensifies efforts to find a way out of a deepening budget crisis caused by a court ruling that has forced a freeze on new spending pledges.

Financial plans for Europe’s biggest economy were upended last week by a constitutional court ruling that stopped the government from reallocating 60 billion euros ($65.44 billion) in unused funds from the pandemic to green investments.

The court ruled the budget manoeuvre was incompatible with the debt restrictions enshrined in Germany’s constitution.

The three parties in Social Democrat (SPD) Chancellor Olaf Scholz’s uneasy coalition with the Greens and pro-business Free Democrats (FDP) are trying to hammer out a solution so that as many commitments as possible are kept – and made legally compliant.

With talks among various groups of senior politicians from all parties going on through the day, options include drawing up a supplementary budget for 2023 and suspending a self-imposed debt brake before reinstating it for next year.

The pressure is even more intense as talks for next year’s budget are on the final stretch.

After pausing deliberations last week, budget experts from the coalition are due to meet again on Thursday to discuss next year’s spending before the Bundestag lower house of parliament debates it next week, culminating in a vote on Dec. 1.

Highlighting the gravity of the situation, the government has already imposed a freeze on most new spending commitments on ministries.

It has also blocked spending from the 200 billion euro Economic Stabilisation Fund for this year, a letter seen by Reuters showed, and a government source told Reuters the government wanted to close the fund by the end of the year.

INDUSTRY CALL FOR CLARITY

Almost every item of spending that has not yet been formally approved is up in the air. Among the uncertainties is military aid for Ukraine.

Greens Economy Minister Robert Habeck has warned that Germany’s place as an investment hub is at stake, as are jobs, and industry chiefs have called for clarity quickly.

“German industry is looking at the current political situation with the greatest concern,” said Siegfried Russwurm, president of the BDI industry association.

So far, Berlin has stuck by an agreement for 10 billion euros in subsidies with U.S. chipmaker Intel (NASDAQ:), which will develop two chipmaking plants.

A government source has told Reuters suspending the debt brake, which was lifted between 2020 and 2022 to cushion the impact of the COVID pandemic and Russia’s invasion of Ukraine, would have to follow guidelines set out in the court ruling.

One obstacle to reforming the debt brake, which restricts Germany’s structural budget deficit to the equivalent of 0.35% of gross domestic product, has been Finance Minister Christian Lindner. His pro-business FDP are strong advocates of fiscal discipline and low taxes.

The European Commission said on Tuesday that euro zone fiscal policy would be tighter next year. It had on Nov. 15 forecast that the aggregated budget deficit of the 20 countries using the euro would fall to 2.8% of GDP in 2024 from 3.2% in 2023. ($1 = 0.9168 euros)

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