Germany: Court srikes down fund transfer by ruling coalition

Chancellor Olaf Scholz’s coalition suffered a setback on Wednesday when the German constitutional court declared that the government’s transfer of 60 billion euros ($65 billion) in unused debt from the epidemic era to a climate fund was unlawful. This is a crucial choice because it establishes a standard for budgetary responses to crises in the largest economy in Europe. However, it may also cause divisions within the coalition during a crucial week for budget talks. The coalition agreement reached in December 2021 by the center-left Social Democrats (SPD), pro-spending Greens, and cautious Free Democrats (FDP) allowed the parties to take advantage of a brief constitutional suspension of borrowing limitations due to a pandemic. The Second Supplementary Budget Act 2021, which altered the Budget Act for 2021 retroactively, was used to accomplish this. The act was declared invalid by the constitutional court because it conflicted with Germany’s Basic Law. Furthermore, the accounting principle used to calculate borrowing’s impact on the budget deficit in the year it was actually incurred was modified by the government. Consequently, the transfer of 60 billion euros only qualified as a deficit in 2021; it did not qualify as such in 2023 or 2024, when the majority of the expenditure was scheduled to take place. Christian Lindner, Germany’s finance minister, was able to reinstate the debt brake rule this year as a result. The pandemic in 2020 caused the regulation, which caps the German public deficit at 0.35% of GDP, to be suspended. The federal court used three criteria to make its decision. First of all, the court ruled that the transfer of the monies to the climate fund did not meet the requirements for exceeding the debt ceiling, even though the coronavirus epidemic qualified as an emergency. “The legislator failed to sufficiently demonstrate the necessary factual connection between the emergency and the crisis management measures taken in response,” the judge said. Second, it stated that it was unlawful to date the credit authorization to the fiscal year 2021 while scheduling the measures that required funding for the upcoming fiscal years. Thirdly, it stated that the Basic Law’s requirement that the budget be decided upon beforehand was broken by passing the law after the fiscal year 2021 ended. The decision puts more strain on budget discussions. Germany, the largest economy in Europe, is reducing spending that spiked in reaction to COVID-19 and the conflict in Ukraine. The country’s 2024 budget and financial plans until 2027 are due to be approved on Friday. The government must now find funding for the climate fund elsewhere due to the verdict against it, which will be difficult given the current budgetary constraints and coalition strife. (With agency inputs)