The blow to Olaf Scholz’s government is severe and risks creating a new political crisis among our neighbors. In a decision made public on Wednesday, November 15, the Constitutional Court ruled that the German executive had circumvented budgetary rules by allocating a fund intended primarily for the fight against the Covid-19 pandemic to another fund devoted to transformation and the climate. The bill is heavy: the targeted 60 billion euros can no longer be used and the government will have to cut back on its budget. In Germany, a rule, called the “debt brake”, governs the use of revenues and the management of expenses. It caps the authorized annual budget deficit at 0.35% of GDP, thus limiting deviations. Justice considers that the redirection of the Covid fund is contrary to the “debt brake”.
For economist Marcel Fratzscher, president of the Berlin Institute for Economic Research, although this decision should have serious political consequences, the German government should not have difficulty finding an emergency solution. He also believes that this should be the moment to reform the “debt brake” rule, given the country’s future transformation needs in the areas of climate, digital technology and even education.
L’Express: What is the importance of this decision by the German Constitutional Court?
Firstly, the German government will have 60 billion euros – 1.5% of GDP – less to spend, particularly on climate and transformation. But immediately and for the next few months, there is no threat. He will have to decide at some point whether to use another exemption from the “debt brake” next year. It’s an option to say, “Okay, we’re making an exception because we need the $60 billion that’s not available in the budget.”
Was this position unexpected?
Yes, because there have already been cases in the past where people have taken the government to the Constitutional Court regarding the “debt brake”. Until now, the Constitutional Court had always sided with him. It is therefore a surprise which constitutes an attack on the reputation of the government. The use of this fund is seen as incompetence. It’s certainly a victory for the Conservative Party, whose members sued. It is important to remember that the debate over financing future transformation needs is very controversial in Germany.
What does this decision say about German budgetary policy?
Looking back, it shows that our government spent a lot of money. Germans tend to forget that there is virtually no other country in the world, except perhaps the United States, that has distributed so much money during the pandemic and now with the energy crisis . A large part of these funds did not go to citizens, but to businesses. 60 billion euros is not nothing, but it is little compared to everything that has been spent over the last three years.
Looking ahead, there will be conflict within the government. The Minister of Finance and leader of the Liberal Party, Christian Lindner, is probably quite happy with this situation because he thinks he will be able to show that he is firm and say: “We must save.” He wants to take this opportunity to signal his rigor, even if, in a way, he is the main person responsible for this fiasco.
Does this episode illustrate German ordoliberalism?
The Constitutional Court did not say that it was necessary to pursue this or that policy. She simply concluded that it was not in compliance with the rules. On the other hand, this triggers an even more intense debate on what we are going to do about the debt brake. Is it still appropriate? Is it still wise when the German economy is lagging behind on important transformation projects, on digital technology, climate protection, energy, and even education? The industry is in difficulty.
Is it time for an even more restrictive policy? It is important to distinguish between structural fiscal policies and crisis support. When it comes to crisis support, the German government has gone a long way and provided considerable assistance. On structural spending, the German government has not been good, just like its predecessors over the past 20 years.
How does this decision differentiate Germany from France?
I don’t think there’s a big difference. France is quite responsible. Every government faces a very difficult decision, which is to limit spending or, at least, not to increase public debt too much. And public debt levels have increased across Europe over the past three years, including in Germany. On the other hand, we must invest in the future.
In this sense, our two governments are each struggling in their own way. The French government is sometimes more courageous, for example with pension reform, which is more urgent in Germany than in France. We have a much bigger demographic problem. Germany also needs major reforms in taxation, social security, as I said. And these reforms are not happening.
Will this compromise the energy transition desired by the country? The German government must now find 60 billion euros…
German finance ministers are very creative. Four weeks ago, the German minister said that there was no more money to finance Germany’s National Child Guarantee Action Plan. This is a program aimed at reducing child poverty and redefining family allowances. There was a big conflict over only 4 billion euros per year.
But last week, the government declared that it would reduce energy costs for businesses by around 10 billion euros per year over the coming years. And the finance minister said, “Oh, I just found another 10 billion in my budget.” So this shows a lot of creativity… I have the impression that the government is going to try to dodge the bullet that the Supreme Court shot at it by saying: “Look, this climate and transformation fund has still money. It generates revenue, for example through the CO2 tax, and so there is no immediate need to cut spending.”