German Government Faces Budget Crisis

Date: 20 November 2023 - 21:56

News ID: ۱۲۱۶۹۱

BERLIN (DW) - The German government is at a breaking point over a €60 billion ($65.3 billion) hole in its budget. That’s because the Constitutional Court has ruled that a financial maneuver on climate mitigation policies is illegal.
The Constitutional Court’s verdict on November 15 was a political bombshell for Chancellor Olaf Scholz and his federal government. It ruled that the government cannot reallocate €60 billion meant to fight the COVID-19 pandemic to instead address climate change.
Whether for more efficient heating, expanded rail or subsidizing energy costs, virtually none of the climate-friendly projects the government had envisioned can be funded as currently planned. More money, in the form of credit, was earmarked for the pandemic than turned out to be necessary.
Shortly after coming to power in late 2021, the current government led by the center-left Social Democrats (SPD) in coalition with the Greens and neoliberal Free Democrats (FDP) transferred the remaining allowance to a climate transformation fund. The fund was to be used to finance energy-efficient refurbishment of buildings and electromobility projects, but also for the modernization of Germany’s rail network.
The court has ruled this fund to be unconstitutional, because it violates Germany’s debt rules — the so-called “debt brake” enshrined in the country’s constitution. It restricts new debt to 0.35% of nominal GDP annually for the federal government and also banks it for Germany’s regional states.
The rule was written into Germany’s Basic Law in 2009 in the aftermath of the European financial crisis to ensure the nation’s debt-to-GDP ratio does not exceed the 60% threshold fixed in the European Union’s Maastricht Treaty.
The debt rules were suspended to fight the COVID pandemic, as it was classified as an emergency exception.
Climate change, which some have called a crisis, has not been officially designated as such and therefore the normal debt rules still apply. The government, the court said, therefore can’t borrow the money.
The latest ruling was in response to a lawsuit filed by the conservative opposition bloc of Christian Democrats and Christian Social Union (CDU/CSU). After the verdict, its lawmakers have been jubilant. The conservatives were in power until two years ago, and are again polling ahead of their competitors.
So what options does the government have now? And, first and foremost: Can the ruling coalition survive this crisis? The high court’s ruling lays bare the tensions inherent among the coalition parties.
The SPD wants to financially protect low- and middle-income voters, who it believes have shouldered enough of a burden.
Given the multitude of crises and projects facing Germany, voices within the SPD have been calling for higher taxes for some time already. In his reaction to the ruling, party leader Lars Klingbeil stopped short of explicitly demanding tax hikes, but he hinted at turbulent negotiations.
“It’s important that we do not now stop modernizing this country. In the coalition, we’re going to put our heads together, with the government, the parliamentary groups and with the parties. We’ll have to discuss a lot of fundamentals,” he said.
Tax hikes, however, are a no-go for the FDP, the party of Finance Minister Christian Lindner. An end to the debt brake is likewise off the table. The FDP has maintained its budget-cutting ways, and considers the Greens’ investment plans exaggerated. They have now suggested cutting back on social spending.
As Lindner has repeatedly said, the FDP rejects any tinkering with the debt brake. And, in any case, changing the mechanism would require a two-thirds majority in parliament. With the opposition CDU-CSU firmly backing the debt brake, that would be currently impossible.
Green Party co-leader Ricarda Lang has rejected the idea of saving on social issues. “We know that right-wing parties in particular are constantly mobilizing people’s social concerns and fears,” she told public broadcaster ZDF.
With the debt brake staying in place and tax hikes likely doomed to fail against the resistance of the FDP and opposition CDU-CSU, the only option remaining is tight-fisted austerity. That would hit the Greens hardest, for whom investments in climate change mitigation have become an existential necessity.
The Greens — the only party in government that has not seen its voter support diminished since the 2021 general election — see the expensive climate-friendly retooling of the state as the core reason for their participation in government. They are willing to take on new debt to finance their plans.