Germany's €60b budget hole leading to state crisis

Germany's governing coalition has been in crisis since the country's Federal Constitutional Court tore a 60 billion-euro hole in the planned budget for the next year, by ruling against the reallocation of COVID-19 emergency funds for climate measures, reported Xinhua.

"This ruling creates a new reality -- for the federal government and for all current and future federal and state governments," German Chancellor Olaf Scholz said on Tuesday.

Following the COVID-19 pandemic and the energy crisis, Germany is now facing challenges that it "has probably never experienced before in this concentration and severity," Scholz stressed.

Due to the suspension of significant expenditure from Germany's Climate and Transformation Fund (CTF) following the court's rule, many important green transformation projects such as the promotion of domestic chip production, and subsidies in the construction and transport sectors, are now on hold.

Electricity tax relief for the country's industry, as well as ongoing inflation support for citizens, are also affected. The loss of such state aid would place an additional burden on the ailing German economy, which is forecast to shrink by 0.4 percent in 2023, before recovering slightly by around 1 percent next year.

Due to the budget crisis, the increase in gross domestic product in 2024 is "now likely to be even lower than already expected," Oliver Holtemoeller, vice president of the Halle Institute for Economic Research (IWH), told Xinhua on Wednesday. He called the constitutional court ruling a "major burden for the government."

There are fundamental disagreements between the coalition partners on solving the matter. While Scholz's Social Democratic Party (SPD) and the Greens agree on taking on new debt, the smallest partner -- the liberal Free Democratic Party (FDP) -- is insisting on solving the problem with savings alone.

For the FDP, led by Minister of Finance Christian Lindner, adhering to the so-called debt brake is a central concern. This instrument, which prohibits new borrowing except for crises, was suspended for three years due to the COVID-19 pandemic, but should take effect again from 2023.

For the current year, the debt brake is now to be suspended again due to the energy crisis, which counts as an emergency. However, as yet there is no solution for the 60 billion euros that were to be spent in the coming years. The FDP rejects both a reform of the debt brake and tax increases for the rich, as proposed by the SPD and the Greens.

Poll ratings of the three governing parties have been falling for months. Scholz's SPD continues to lose ground as the crisis worsens. According to the latest Forsa election poll, the party lost 12 percentage points compared to the last election, down to 14 percent. The FDP halved its election result and would barely reach the required 5 percent hurdle to enter the Bundestag.

Although the poll confirmed 15 percent for the Greens, the party will only come third behind the conservative Union (CDU/CSU) with 30 percent, and the right-wing Alternative for Germany (AfD) with 21 percent. The CDU/CSU, which initiated the lawsuit that led to the reallocation of pandemic funds being overturned, has already called for new elections.

"The sooner this government is replaced, the better for Germany," said CDU leader Friedrich Merz. Like the FDP, the party rejects new debt, and is prepared to sue a second time if the government suspends the debt brake again in 2024. Both the liberals and conservatives also reject a reform of the debt brake instrument.

Many economic experts, on the other hand, are supporting a reform. "The debt brake is no longer in keeping with the times because it deprives politicians of the leeway they need to combat crises and invest in the future," said Marcel Fratzscher, president of the German Institute for Economic Research (DIW Berlin).

In the case of early elections in Germany, only the so-called grand coalition of CDU/CSU and SPD is likely to win a majority. Due to the fundamental disagreements between the FDP and the Greens, Scholz should "dismiss the partners he has now," said CSU leader Markus Soeder. "We would be ready to perhaps take responsibility in an emergency."