German coalition faces difficult choices after budget hammerblow By Reuters

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© Reuters. FILE PHOTO: Chancellor Olaf Scholz is watched by Finance Minister Christian Lindner and Economy and Climate Minister Robert Habeck during a hearing at Germany’s lower house of parliament Bundestag following the ruling of Germany’s Constitutional court t

By Maria Martinez

BERLIN (Reuters) – Germany’s ruling coalition on Thursday was scrambling to fix a large hole in its finances after a court ruling blocked the government from transferring unused emergency funds from the pandemic towards green initiatives and industry support.

The decision by the constitutional court to wipe 60 billion euros ($65 billion) from the budget has prompted the government to postpone the formal vote of the budget committee until next week after an extraordinary meeting to be held on Tuesday.

The 2024 budget will however be passed as planned at the end of the Bundestag’s budget week on Dec. 1, according to members of the budget committee.

Wednesday’s ruling by the constitutional court dealt a major blow to an already fractious coalition under Chancellor Olaf Scholz, whose popularity has slumped as Europe’s largest economy teeters on the brink of another recession.

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

It will also heap pressure on the fiscally hawkish Finance Minister Christian Lindner, who has yet to divulge a promised “Plan B” on which projects would have to be put on hold or where more money might come from.

It could also put him on the backfoot in negotiations to reform the European Union’s fiscal rules in a pan-European deal 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 had been earmarked for initiatives such as making buildings more energy efficient and subsidising renewable electricity and chips production, as well as supporting energy-intensive companies.

Budget cuts would put at risk the ambitious goals of Germany as the European leader of the green transition. Germany aims to cut greenhouse emissions by 65% by 2030, with a longer-term net zero target by a 2045.

The head of Thyssenkrupp (ETR:)’s steel business Bernhard Osburg called for clarity from the government, arguing that financial support for a greener steel industry would help Germany advance towards its climate goals.

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

CHANGE IS HARDER

The German economy has already been 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 hardly have an impact on growth but for the following years the 60 billion euro hole will make structural changes harder and hence increases the likelihood of a longer stagnation,” said ING’s 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 worsening of international competitiveness,” he told Reuters.

Lindner has so far faced down calls to suspend Germany’s constitutionally enshrined debt brake which restricts the German public deficit to 0.35% of GDP.

Some members of his Free Democrats (FDP) party are collecting signatures to quit the coalition but no senior figure has endorsed such a move. According to a poll by the ARD broadcaster however, 41% of Germans want new elections.

“The economic bottom line is that the court has ordered a €60bn austerity programme to be unrolled over a number of years,” said a note by Eurointelligence.

“The political bottom line is that many coalition disputes will reopen as serious budget constraints kick in. Christian Lindner’s credibility is shot.”

Clemens Fuest of the Ifo Economic Institute said the government could try to suspend the debt brake for 2023 and 2024 by arguing that the transition to a carbon neutral economy is another pandemic-style emergency.

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

Another option would be reforming the debt brake or, according to Berenberg bank, the government may look for some additional wriggle room by shifting spending to public-private partnerships (PPP) or to the state-owned development bank KfW.

($1 = 0.9220 euros)

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