Last Wednesday, the court ruled that transferring €60 billion of unused COVID-related debt from 2021 into the “Climate and Transformation Fund” was unconstitutional. The money could only have been used to tackle the COVID-19 pandemic, the judges said.

Among other things, the Climate and Transformation Fund includes subsidies for the renovation of buildings, electric mobility, hydrogen production, and subsidies for chip factories by Intel and TSMC to locate production in Germany, announced over the summer.

After the ruling, Berlin needs to either cut the planned expenses from the fund or find alternative funding. The €60 billion accounts for a fourth of the total fund, which spreads over the 2024-2027 period.

“In the future, there will be a lack of state funding earmarked for the renewal of the economy and infrastructure,” Finance Minister Christian Lindner (FDP/Renew Europe) told tabloid BILD on Sunday (19 November).

Lindner, however, said that he welcomed the ruling. For the budget hawk, it is a welcome challenge.

“We are now being forced to modernise the economy with fewer public subsidies,” he said. “It is now about less bureaucracy, more agile administration, technology-friendliness and the mobilisation of private capital for investments”.

Economy Minister Robert Habeck (Greens) disagreed on Monday morning with his colleague, calling the situation “dramatic”.

“It’s so easy to say ‘then with fewer subsidies’ […] but the reality is different,” Habeck told Deutschlandfunk.

“The investments, so the money for the transformation, will probably only come if it is subsidised by the state,” he said. “And that money has now been cancelled”.

The ruling will not endanger Germany’s climate targets but could be a factor in deciding whether green production sites will be located in Germany or elsewhere. “Half the world is subsidising precisely this process: China, South Korea, and the USA in particular,” Habeck said.

Without the subsidies for production such as green steel, “there will be fewer CO2 emissions in Germany, but not because we have a green industry, but because we may have no industry at all or a less strong one,” he added.

Reform of the ‘debt brake’

In a parliamentary debate on Thursday (16 November), Lindner ruled out tax increases to finance the planned expenses from the fund and also said he opposed a general weakening of Germany’s “debt brake” rule.

The debt brake, defined in Germany’s constitution since 2009, limits the allowed net structural borrowing of the federal government to 0.35% of GDP per year, with additional borrowing allowed in times of economic downturn.

It is thus much stricter than the EU’s rules for national budgets, which allow for a structural deficit of 3% of GDP per year.

The rule can be suspended in times of natural disasters or emergency situations, as was done from 2020 to 2022 due to the COVID crisis and the Russian aggression against Ukraine.

Saskia Esken, head of the leading government party SPD (S&D), told Funke Mediengruppe that a reform of the debt brake rule was “unavoidable” due to the necessary investments into the digital and green transformation, as well as the ageing population.

“It is clear that we will not allow any cuts in climate protection and its socially just organisation, nor in the welfare state,” she said.

A fundamental reform of the ‘debt brake’ would however require a two-third-majority in the parliament, and thus the support of opposition parties, the conservative CDU/CSU (EPP), who oppose such a measure.

Suspend the rule as an interim solution

As an interim solution, the government could suspend the debt brake for 2024 on the grounds of an emergency, such as the ongoing impact of the Russian attack on Ukraine.

This could allow the government to find an interim solution before adhering to the strict debt limits again. Neither Lindner nor Habeck ruled out the possibility in their interviews, with Habeck arguing that the impact of COVID and the war in Ukraine would still be felt today.

“Since 2019, we have not been in a normal economic and social situation, but rather in a crisis or at least a pressure situation,” Habeck said.

Lindner has so far refused to declare an emergency situation for 2024, arguing that the EU did not prolong the exemption from its own fiscal rules, which, too, had been suspended due to the energy crisis.

EU Commission to police public deficits again in 2024

In its fiscal policy guidance for 2024, the European Commission struck down the general escape clause that deactivated the EU’s fiscal rules since the start of the pandemic, announcing that it will launch “Excessive Deficit Procedures” (EDP) in spring 2024.

[Editing by Zoran Radosavljevic]

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