How budget ruling will affect German finances, coalition By Reuters

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© Reuters. A spot light is set up for a joint statement of German Chancellor Olaf Scholz, Finance Minister Christian Lindner and Economy and Climate Minister Robert Habeck on the ruling of Germany’s Constitutional court that the government’s re-location of 60 billio

By Sarah Marsh and Maria Martinez

BERLIN (Reuters) – Germany’s constitutional court ruled that the coalition government’s decision to re-allocate 60 billion euros ($65.21 billion) of unused debt from the pandemic era to its climate and transformation fund was unconstitutional.

Here are some of the implications for the economy, the budget, German fiscal policy and Chancellor Olaf Scholz’s three-way coalition:

CONSEQUENCES FOR THE GERMAN ECONOMY?

In the short-term, a somewhat less expansionary fiscal stance should not hold the economy back too much, Berenberg’s economist Salomon Fiedler said.

He noted that other factors, like the repercussions from the energy price shock and weak global demand, are more important at the moment.

In the long-term, however, the 60-billion euro hole will make structural changes harder and hence increases the likelihood of a longer stagnation, ING’s economist Carsten Brzeski said.

WHAT COMES NEXT FOR THE 2024 BUDGET?

Germany’s 2024 budget and financial plans through 2027 were due to be finalised on Friday, as Europe’s biggest economic power aims to curb its spending after a surge in response to COVID-19 and the Ukraine war.

The budget committee will still hold the planned discussions on Thursday, but the formal vote has been postponed until next week, with an extraordinary meeting set for Tuesday to discuss the repercussions of the court ruling.

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.

WHAT ARE THE GERMAN GOVERNMENT’S OPTIONS?

The government has ruled out two possible options: increasing taxes and suspending the debt brake.

Clemens Fuest of the Ifo economic institute said one option would be to suspend the brake for 2023 and 2024, arguing the transition to a carbon-neutral economy constitutes another emergency situation.

He noted, however, that whether this would be compatible with the constitution is unclear after the ruling.

Another option would be to reform the debt brake, which seems unlikely as it would require a two-thirds majority in both houses of parliament. The opposition Christian Democratic Union party is against this option, and Finance Minister Christian Lindner has said the debt break is not up for discussion.

With these options off the table, the government will have to get more creative.

According to Berenberg, the government may look for some additional wiggle room around the debt brake by shifting spending to public-private partnerships (PPP) or to the state-owned development bank KfW.

HOW WILL IT AFFECT GERMAN FINANCIAL POLICY?

Germany has in the past few years used what some analysts call accountancy tricks to get around its debt brake, which restricts the German public deficit to 0.35% of GDP, such as creating off-budget “exceptional funds”.

One method was to change the accounting principle by which borrowing counted against the budget deficit in the year the borrowing was actually done. Therefore, the 60 billion euros transfer counted only as a deficit in 2021, but not in the years 2023 and 2024 when most of the spending was supposed to occur.

The ruling against this, however, indicates that Berlin will either have to stick more closely to the spirit of the debt brake, suspend it again or reform it altogether.

WHAT CAN HAPPEN WITH OTHER SPECIAL FUNDS?

There are currently 29 special funds at the federal level, with a total volume of 869 billion euros, according to the independent auditing institution Bundesrechnungshof.

It is still not clear which of these funds are at risk, with the exception of the 100-billion special fund for Germany’s army, which is covered by a separate constitutional exemption from the debt brake.

Following the verdict, there are three requirements that a fund needs to fulfil to comply with the constitutional budget rules.

These conditions suggest that other special funds similar to the Climate and Transformation fund may also violate the debt brake, Berenberg’s Fiedler said.

Another lawsuit in Karlsruhe would be needed to identify whether these special funds are in line with the constitution, said ING’s economist Carsten Brzeski.

WHAT WILL BE THE IMPACT ON RULING COALITION?

The ruling is expected to heighten tensions in Scholz’s already fractious three-way coalition, which has seen support slump since taking office nearly two years ago as it tackles a series of crises, in part due to public infighting.

Just a third of voters would vote for the parties of the coalition if elections were to be held now, according to the latest survey by pollster Forsa.

Several Free Democrat (FDP) lawmakers have in recent months called for the party, which has fallen out of several state parliaments in regional elections over the past year, to leave the coalition.

No senior figure has endorsed such a move, but leaders are increasingly expressing their frustration with the coalition.

Meanwhile, demands from the Greens to reform the debt brake to enable more investment after years of neglect are likely to pick up, clashing with the FDP’s insistence on sticking to the rules and remaining fiscally cautious.

According to a poll by the ARD broadcaster, 41% of Germans want new elections – which leading figures in the opposition conservatives, such as the head of Hesse’s government, have called for.

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