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German chancellor Olaf Scholz said he would stick to his plans to modernise the EU’s largest economy and invest in the green transition, despite a court ruling that opened up a €60bn hole in the budget.
“I stand by all these goals,” Scholz told the Bundestag on Tuesday, adding it would be a “grave, an unforgivable mistake to stop . . . modernising our country”.
But he provided few details as to how his government plans to dig itself out of its fiscal hole, prompting angry responses from the opposition. Friedrich Merz, leader of the Christian Democrats, accused Scholz of “dogmatism” in wanting to stick to his spending priorities, despite the court’s decision.
Next year’s budget is on hold as ministers and MPs work out the consequences of the court verdict, which said €60bn of unused borrowing capacity from Berlin’s pandemic budget should not have been transferred to another fund for fighting climate change.
Scholz said these consultations were “not yet over . . . due care is more important than speed”, but he acknowledged that it would be necessary to “limit spending”. Experts said his remarks suggest the 2024 budget may not be passed before the end of the year.
Germany’s constitutional court threw Berlin’s spending plans into disarray when it ruled in mid-November that Scholz’s government had broken the law in shifting €60bn of credit lines earmarked for fighting the Covid-19 pandemic into a climate and transformation fund known as the KTF. The court also ruled that the government cannot put aside emergency loans authorised in one year for use in subsequent years.
The verdict focused attention on the way Scholz has used a series of multibillion-euro off-budget funds to get round Germany’s strict curbs on new borrowing.
One such vehicle was the €200bn Economic Stabilisation Fund (WSF), which was set up during the pandemic but then used during last year’s energy crisis to subsidise gas and electricity prices.
The funds allowed Germany to circumvent a rule known as the “debt brake”, which since 2009 has limited the federal government’s structural deficit to 0.35 per cent of gross domestic product, adjusted for the economic cycle.
The court’s verdict not only calls funds like the WSF into question but also left a big hole in the 2023 and 2024 budgets.
Ministers responded to the court judgment by retroactively declaring 2023 a national emergency, paving the way for them to temporarily suspend the debt brake for a fourth year running and put the budget on a sounder legal footing.
Merz said Scholz had resorted to an accounting trick to please the three parties in his fractious coalition — the liberals who wanted to stick with the debt brake, the Greens who wanted massive subsidies for climate projects and the Social Democrats who wanted to expand the welfare budget.
“You tried to square the circle and on November 15, 2023 this house of cards collapsed,” he said. He also claimed that Scholz himself, as finance minister from 2018-21, was the “originator” of the “unconstitutional construction” struck down by the Karlsruhe court.
But Scholz said it had been right to create special investment vehicles, which helped to finance programmes such as the reconstruction of the Ahr valley, a region in West Germany devastated by floods in 2021, and to help consumers with high energy prices.
Gas was still “twice as expensive” as it was before Moscow’s full-scale invasion of Ukraine led to a steep drop in Russian gas exports to Europe, he said, adding: “The energy price crisis is definitely not over yet”.
He also insisted it was right to boost spending to help companies suffering during the pandemic, provide Ukraine with military aid and absorb about 1mn Ukrainian refugees.
Scholz said the government had responded to the ruling by blocking payments from the KTF, freezing new payment commitments from the 2023 budget and making retroactive changes to the 2023 spending plan to bring it into compliance with the constitution.
But he insisted that Germany must continue to invest heavily in future technologies to keep up with countries such as the US, China and France. “We have to ensure that we achieve the transformation of our economy and remain competitive as a strong industrial nation,” he said.
He acknowledged the court verdict had created a “new reality for all current and future governments on a federal and state level — a reality that makes it harder to achieve important and widely shared goals”.
