The German TC aborts the Government's attempt to use Covid credits in the fight against climate change

The German Constitutional Court has ruined the plans of the Government of Chancellor Olaf Scholz to allocate the 60,000 million euros in loans agreed at the time to overcome the coronavirus crisis to a fund to fight against the climate. “The amendment to the 2021 supplementary budget is unconstitutional,” the highest German court ruled on Wednesday in Karlsruhe in a decision considered historic. According to the president of the court of the Second Senate, Doris König, the underlying issue is the effectiveness of the debt brake included in the Magna Carta.

The court decision “retroactively reduces the financial resources available to the Climate and Transformation Fund by 60 billion euros,” the court explained.. “To the extent that obligations already incurred can foreseeably no longer be fulfilled due to the €60 billion reduction in the size of the fund, this must be compensated elsewhere by the budgetary legislator.”

Due to the emergency situation during the coronavirus pandemic, the federal government increased the 2021 budget by €60 billion in the form of credit authorization. In such extraordinary situations, it is possible to request loans despite the debt brake. In the end, however, the money was not necessary to deal with the pandemic and its consequences.. For this reason, the federal government formed by the Social Democratic Party (SPD), the Greens and the liberals of the FDP wanted to use the money for the so-called Climate and Transformation Fund and, with the approval of the Bundestag, reallocated it retroactively in 2022. The 197 members of the CDU/CSU parliamentary group in the Bundestag took legal action against this in Karlsruhe because, in their opinion, the debt brake was being circumvented in this way.

The Minister of Finance, Christian Lindner (FDP), had said on the eve of the trial that, in the event of a ruling unfavorable to the Government, he had a plan B, but he did not give further details.. The TC's decision comes at an inopportune time for the coalition. And starting on Thursday, the last modifications to the disputed budget project for 2024 will be finalized in the Bundestag.

The Second Senate of the TC also deliberated on whether a credit authorization can also cover the consequences of an economic crisis and when subsequent budget modifications should be approved.. At the June oral hearing, Mathias Middelberg, deputy leader of the CDU/CSU parliamentary group, said that the debt brake must have a real braking effect so that reserve funds are not repeatedly created and their uses changed.. Even in emergency situations, it must be clear where the State's margin to authorize credits ends, added the representative of the Union, Karsten Schneider.

On the contrary, government representatives argued that the economy had weakened as a result of the pandemic and that it was also necessary to stimulate private investment.. The reallocation of money was intended to create some reliability for investments. In parallel with the negotiations, the Federal Minister of Economy, Robert Habeck (Greens), explained that a decision against the supplementary budget would severely affect Germany in terms of economic policy.

Marcel Fratzscher, President of the German Institute for Economic Research (DIW), praised the TC's decision on Wednesday. “Attempts by federal governments over the last twelve years to circumvent the debt brake are increasingly absurd. “The debt brake no longer works because it deprives politicians of the room for maneuver they need to combat crises and invest in the future,” he declared..

Fratzscher believes that it is “more urgent than ever for the federal government to launch an investment offensive for the future: in education, climate protection, innovation and infrastructure”. There is still enough money in the Climate Fund, so the ruling will not cause immediate problems, however, and as a consequence of that ruling, the Government will have to suspend the debt brake for at least another year to be able to borrow. necessary for the measures that have already been promised.

According to Jens Boysen-Hogrefe of the Kiel Institute for the World Economy, special fund expenditure will now have to be recognized on a large scale in the core budget.. This puts “enormous pressure” on spending plans for 2024, and it remains unclear what this means for the reserves that were built with the 2020 funds and for other special funds (with the exception of the special fund of the Bundeswehr).

“The way out could be to declare an emergency situation again for 2024, which could also be constitutionally difficult, or to enshrine the Fund's billions in the Basic Law with a two-thirds majority,” Boysen-Hogrefe said.