German chancellor Olaf Scholz and his traffic-light coalition, consisting of the Social Democrats (SPD), Free Democrats (FDP), and Green Party, are facing a new crisis. The Federal Constitutional Court ruled that the reallocation of 60 billion euros of unused pandemic debt to finance environmental projects and sustainable technology was unconstitutional.
Germany is not able to borrow funds because of a clause in its constitution, added after the 2008 financial crisis, which states that Germany may only borrow 0.35% of its GDP a year; this translates into roughly 12 billion euros. While exceptions are allowed in emergencies, the reallocation was deemed unconstitutional since the current situation did not qualify as an emergency situation, while the funds are only able to be used for purposes related to the spread of Covid-19. This ruling is already affecting the German economy, since its reputation as a reliable industrial and trading partner and front-runner in green investment is on the line. Hence, the ruling is likely to impact foreign investment where Germany is already “fighting for investment with locations in Asia and the United States and faces the risk of big industrial players moving sites abroad.”
Germany has long been criticized for its perceived lack of investment in key domestic economic infrastructure, but the ruling has now cast doubt over the future of Germany’s ability to finance and sponsor the economic transformation of its industries. Businesses will be unsure whether there may be funds to aid in the climate transition or cushion the energy crisis, thus making foreign investment into the German economy seem more precarious.
Given that Germany has already been struggling to maintain its position as one of the primary global industrial locations, the fact that its spending plans are now thrown into disarray means that Germany’s economic growth in 2024 may be affected negatively. Moreover, the ruling may impact the ability of German federal and state leaders to utilize funds that were created to bring down energy prices.
Therefore, projects to lower energy prices for important industries, such as chemicals, steel production, or car manufacturing, could be derailed because of the need for a new budget. With the German economy expected to contract in 2023, due to high inflation and slowing industrialization, the finance ministry was forced to impose a spending freeze on all federal institutions until the budget crisis is resolved. Therefore, the German economy may see a rise in tax, since the government is currently considering a rise in inheritance and carbon levies. To conclude, the German economy will face an array of major issues, of which the most important include legal and economic uncertainty, as well as lower public investment. If not addressed, Germany’s future economic growth may be jeopardized, which would incidentally lead to a higher debt-to-GDP ratio; the exact issue the Federal Constitutional Court has been trying to prevent.
Written by Johannes Kühn von Burgsdorff
