The German coalition is faced with difficult decisions after the budget hammer blow

BERLIN (Reuters) – Germany’s ruling coalition struggled on Thursday to plug a huge hole in its finances after a court ruling blocked the government from transferring unused pandemic emergency funds into green initiatives and industry support.

The Constitutional Court’s decision to cut 60 billion euros from the budget has prompted the government to postpone the budget committee’s formal vote until next week, after an extraordinary meeting is scheduled to take place on Tuesday.

However, the 2024 budget will be passed as planned at the end of the Bundestag’s budget week on December 1st, according to members of the budget committee.

Wednesday’s Constitutional Court ruling dealt a blow to the already fractious coalition led by Chancellor Olaf Scholz, whose popularity has plummeted as Europe’s largest economy teeters on the brink of another recession.

“The court’s decision creates a budget dilemma and forces the government to choose between cutting climate spending or finding new sources of financing,” said Yesenn El-Radhi, vice president at ratings agency DBRS Morningstar.

This will also increase the pressure on the fiscally restrictive Finance Minister Christian Lindner, who has not yet revealed a promised “Plan B” about which projects would have to be put on hold or where more money could come from.

This could also put him behind in negotiations on a pan-European reform of the European Union’s financial rules by the end of the year. On Friday, Lindner will meet his French counterpart in Berlin for talks on fiscal discipline, sources told Reuters.

The 60 billion euros were earmarked for initiatives such as improving the energy efficiency of buildings, promoting renewable electricity and chip production and supporting energy-intensive companies.

Budget cuts would jeopardize Germany’s ambitious goals as a European pioneer of the green transition. Germany wants to cut greenhouse gas emissions by 65% ​​by 2030, with a longer-term net zero target by 2045.

The head of the Thyssenkrupp steel group Bernhard Osburg called for clarity from the government, arguing that financial support for a greener steel industry would help Germany move closer to its climate goals.

In particular, further work must be done to keep electricity prices affordable, he said. “The steel industry alone can help reduce a third of total industrial emissions – and thus has enormous leverage to save millions of tons of CO2 in the coming years.”

The German economy was already struggling to grow due to weak foreign demand, high inflation and a record high interest rate from the European Central Bank.

“For 2024 it will have little impact on growth, but for subsequent years the 60 billion euro hole will make structural changes difficult and thus increase the likelihood of prolonged stagnation,” said ING economist Carsten Brzeski.

“The debt brake was useful in the 2010s, but given the long list of structural challenges, Germany’s problem is not debt sustainability, but too low growth and a deterioration in international competitiveness,” he told Reuters.

Lindner has so far resisted calls to suspend Germany’s constitutional debt brake, which limits the German government deficit to 0.35% of GDP.

Some members of his Free Democrats (FDP) party are collecting signatures to leave the coalition, but no senior member has endorsed such a move. However, according to a survey by the ARD broadcaster, 41% of Germans would like new elections.

“The economic end result is that the court has ordered that an austerity program worth 60 billion euros be implemented over several years,” said a statement from Eurointelligence.

“The political bottom line is that many coalition disputes will flare up again if serious budget shortfalls occur. Christian Lindner’s credibility has been shaken.”

Clemens Fuest of the Ifo economic institute said the government could try to suspend the debt brake for 2023 and 2024, arguing that the transition to a carbon-neutral economy is another pandemic-like emergency.

“However, whether this would be compatible with the constitution is unclear after this ruling,” said Fuest.

Another option would be to reform the debt brake, or, according to Bank Berenberg, the government could gain additional leeway by shifting spending to public-private partnerships (PPP) or to the state development bank KfW.

(Reporting by Maria Martinez, Christian Kraemer, Andreas Rinke and Tom Kaeckenhoff; Text by Matthias Williams, Editing by Alexandra Hudson)

Copyright 2023 Thomson Reuters.

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