BERLIN — As Germany’s divided coalition government grapples with how to plug a €60 billion hole in the federal budget following a bombshell ruling by the country’s top court, more financial trouble may be looming.
A ruling by the constitutional court last week is already forcing German leaders to reevaluate how to finance subsidies for energy, industry and microchips, potentially undermining ambitious plans to kickstart Germany’s stagnating economy and accelerate the green transition.
The court ruled that a government plan to repurpose €60 billion left over from an emergency COVID-19 fund to finance the country’s green agenda was unconstitutional.
But the financial pain may get worse as the ruling may end up having far wider implications that limit the ability of German leaders — on both the federal and state levels — to draw from a variety of special funds that have been created to bring down energy prices and finance investments in clean energy.
The latest government spending plan to come under the microscope due to last week’s ruling is a €200 billion energy price brake for consumers and small businesses, which was established last year after Russia halted gas deliveries to Germany, sparking controversy at the EU level. This energy subsidy was financed through a special “economic stabilization” fund.
Only a portion of the stabilization fund has been used thus far. But the problem for the coalition is that about €10 billion from the fund was earmarked to finance upcoming energy subsidies until the end of March. That planned spending is now in doubt.
As a consequence, “citizens will face higher electricity and possibly higher gas prices,” Economy Minister Robert Habeck warned Monday in a public radio interview. Last week’s court ruling was “so fundamental,” he added, that it “basically applies to all special funds that have been set up.”
Lawmakers from the Bundestag’s budgetary committee will hold a public hearing with legal experts on Tuesday to assess the damage, but the opposition is already threatening to take action. Friedrich Merz, leader of the center-right Christian Democratic Union (CDU) — the party that launched the lawsuit that led to last week’s court decision — said he is now considering filing another lawsuit challenging the €200 billion fund.
“All special funds are now being analyzed and reviewed,” chief government spokesperson Steffen Hebestreit said Monday.
Getting around the debt brake
Last week’s ruling underscored the degree to which Chancellor Olaf Scholz’s three-party ruling coalition had come to rely on special funds to work around the country’s constitutionally enshrined debt brake, which restricts the federal deficit to 0.35 percent of GDP, except in times of emergency.
In order to fund much of its climate and industrial agenda, the coalition government is relying on a Climate and Transformation Fund that is mainly financed through revenues from the sale of carbon emission certificates. In order to bolster that fund, the government attempted to repurpose €60 billion of loans left over from a COVID emergency fund.
Now that the country’s top court ruled this repurposing of funds to be unconstitutional, Scholz’s coalition is scrambling to come up with alternative financing options. But there’s no sign an agreement is within reach as there are few palatable options that would satisfy three ruling parties with disparate political agendas.
Tax increases are unlikely because Finance Minister Christian Lindner and his conservative Free Democratic Party (FDP), which rules with Scholz’s center-left Social Democrats and Habeck’s Greens, oppose such a step.
On Monday, FDP whip Christian Dürr suggested that Germany could cut social spending. But that proposal is not going down well with many Social Democrats and Greens.
“Where do you want to cut €60 billion in social benefits?” Habeck said on public radio. Such a proposal “misses the dramatic nature of the situation,” he added.
One possibility, considered unlikely, is that the government could declare an emergency in order to suspend the debt brake for the coming year, as the government did during the pandemic and at the beginning of Russia’s full-scale invasion of Ukraine. But such a move would likely lead to more lawsuits.
A somewhat more likely possibility is that the government could push to reform the debt brake to allow for more financial wiggle room.
Habeck, after all, has used alarming language to describe the economic toll of high energy costs, warning that the consequences for Germany’s green transition and overall economic development are vast.
“The exodus of industry is damaging our country and society,” the minister warned in an interview published Sunday in the Frankfurter Allgemeine Sonntagszeitung.
The trouble with the use of special funds is not limited to the federal government.
The states of Berlin, Bremen, North Rhine-Westphalia, Saarland and Schleswig-Holstein have all used special funds outside their regular budget to finance new investments in infrastructure or subsidies for the green transition. If such special funds were to be declared unlawful, the financial pain of states could compound the ruling coalition’s problems.
What’s are the stakes?
Already, various subsidy programs which are financed through the Climate and Transition Fund are at risk.
This includes a new measure to cut electricity costs for energy-intensive industries that had been agreed this month after many months of infighting within the ruling coalition over the measure.
The same uncertainty applies to subsidies for German industry to help support costly transitions to renewable energies like hydrogen. Only a few companies in the steel sector — like Thyssen-Krupp and Salzgitter — have already received guarantees from the government to support climate-neutral production.
Moreover, it’s unclear how Scholz’s coalition will pay for an urgently needed modernization of Germany’s overburdened rail network, which was supposed to be partly financed by the climate fund.
There’s not a lot of optimism that such funds will continue to provide the government with extra financial leeway going forward.
Alexander Thiele, a constitutional lawyer who represented the government in the constitutional court case last week, said during a panel discussion on Friday that there was indeed good reason to believe that the ruling means special funds at federal and state levels will be found to be illegal.
Still, it seems not everyone has gotten the message.
Just on Monday, Berlin’s city government said it wanted to invest in a high-speed magnetic levitation train project. Under the proposal, the city would invest in an urban test track of several kilometers.
That would cost some €80 million, according to estimates, a hefty sum for an indebted city. The solution, according to local leaders?
The money would come from a special fund.