Why it matters: A limitation on Germany’s green ambitions.
The decision, which set a precedent for Germany’s fiscal maneuvers during financial crises, places a constraint on the country’s green ambitions and could raise tensions within the ruling coalition.
The Climate Transformation Fund has €212 billion dedicated to projects from 2024 to 2027. The court ruled that the added money from unused pandemic funds must now be reduced by €60 billion.
“If this means that the obligations already assumed can no longer be fulfilled, the budget legislator must compensate for this elsewhere,” the court stated.
The fund supports a wide range of measures to help Germany reach its goal of net zero greenhouse gas emissions by 2045. Projects include the deployment of heat pumps, incentives for electric vehicles and spending on hydrogen infrastructure.
Robert Habeck, Germany’s economy minister, said all commitments already made to the fund would be met. But his Finance Ministry counterpart, Christian Lindner, said he would withdraw €60 billion from the fund and effectively freeze any future pledges until the gap could be filled.
The heart of the matter: Germany’s ‘debt brake’
Germany is the only leading industrial economy that has a so-called debt brake written into its Constitution. The law, enacted in 2009, restricts annual borrowing to 0.35 percent of gross domestic product, representing approximately 12 billion euros a year. Exceptions are allowed in emergencies, including natural disasters or a pandemic.
Debt limits have led to increasingly creative and complex measures to cover the country’s expenses. The German economy, Europe’s largest, is expected to contract this year and recover only slightly in 2024. The climate fund is part of Scholz’s government effort to revive the industry by investing in green technology and renewable energy sources .
“The question remains whether the debt brake makes economic sense when the country is struggling with structural stagnation and a long list of serious challenges and transitions, many of which need fiscal support,” said Carsten Brzeski, chief economist at ING Germany. .
What happens next: Increasingly tense budget negotiations.
This week, German lawmakers are negotiating the 2024 budget and financial plans through 2027 amid tensions over spending cuts, aid to Ukraine and now the ability to finance green projects.
Fiscal policy has been a source of conflict between the three parties in Scholz’s coalition government (his Social Democrats, the Greens and the Free Democrats), which have different views on how to negotiate the debt brake restrictions.
