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Germany's budget woes: A threat to the government?

November 21, 2023

Finance Minister Christian Lindner has imposed a freeze on the federal budget. This is the latest dramatic twist triggered by a bombshell ruling by the Federal Constitutional Court, which threatens all policy plans.

Chancellor Olaf Scholz and Economy Minister Robert Habeck sit side by side, looking unhappy
Chancellor Olaf Scholz has taken pains to remain confident after the blow to his budgetImage: Jens Krick/Flashpic/picture alliance

A matter-of-fact announcement was issued by the Finance Ministry on Monday evening: With immediate effect, a spending freeze applies to almost the entire budget for 2023, it read. This drastic step was taken due to "the need to review the overall budgetary situation for the federal budget," read a statement from the ministry.

The government is sending the message that it considers last week's dramatic landmark ruling by Germany's highest judges to have much more severe consequences than initially thought.

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.

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.

Berlin can't use pandemic funds for climate projects

Germany's 'debt brake'

The court ruled this fund to be unconstitutional saying that loans can not be taken out for one purpose and then be reappropriated for another and also that emergency funds can not be set up one year and then used to cover projects spanning several years.

Germany's "debt brake" enshrined in the constitution in 2009, in the aftermath of the European financial crisis to ensure the nation's debt-to-GDP would not exceed limits imposed by the EU. 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 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.

SPD eyes tax hikes

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.

On Tuesday (21.11.), the leader of the Social Democrats' parliamentary group, Rolf Mützenich, spoke out: "Some things that are currently happening in the world are leading to extraordinary emergency situations that are beyond the control of the state and are significantly affecting the state's financial situation," he said.

He called on all three government partners to quickly state an emergency situation for 2024 in the Bundestag which allows it to take out a special loan and set up a new emergency fund with the votes of the ruling coaltion.

Parliament was this week intending to vote on the budget for the coming year 2024, but it remains to be seen whether this will happen.

Climate wrangling: Germany's coalition on the brink?

FDP backs strict savings

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.

Greens on the brink

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.

The Greens have already swallowed several bitter pills in the coalition, notably the recent tightening of refugee policies. If the Greens' core issue, climate change mitigation, loses its financial backing, the party could soon be asking what point there is in staying in the coalition. Later this week at the Green Party congress in Karlsruhe, Robert Habeck — the German vice chancellor and economy minister — will surely be getting an earful from the rank and file in his party.

Influential environmental groups are also putting on the pressure. Greenpeace has called the Constitutional Court's ruling "a bitter setback for climate protection."

Government without direction?

Evidently, Germany's three-way coalition government is not marching in one direction. Chancellor Scholz attempted to put on a brave face, telling the parliament that he remained "convinced that the governing coalition will succeed in making all the right suggestions."

But the government's approval rating among voters has hit rock bottom. Fresh elections would therefore likely hurt all three parties. The SPD, Greens and FDP are desperately seeking a solution — one that's nowhere in sight.

This article was originally written in German. It was first published on Monday, November 20, 2023, and then updated a day later to reflect the latest developments.

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Jens Thurau Jens Thurau is a senior political correspondent covering Germany's environment and climate policies.@JensThurau