Germany announces special budget to avert crisis
How we got here: A court ruling threw spending plans into disarray.
The move came after days of uncertainty caused by the country’s highest court ruling that declared elements of the 2023 budget invalid due to a rule restricting borrowing. The so-called debt brake can only be suspended in times of emergency, and the government had suspended it for the past three years due to the pandemic and rising energy prices following Russia’s invasion of Ukraine.
Mr Lindner, leader of the fiscally conservative Free Democrats party, has vowed to stick to borrowing limits for the 2023 budget.
“No new debt will be incurred, but the funds already used to overcome the crisis will be placed on a secure legal basis,” Lindner said in a statement on Thursday. He didn’t work it out.
Why it matters: The government is under pressure to close a budget gap.
Chancellor Olaf Scholz has faced mounting unrest since the court ruled that the money the government wanted to spend on green projects had to come from the regular budget, effectively blowing a billion-euro hole in the government’s plans.
Economists and business leaders, as well as some lawmakers from Mr. Scholz’s three-party coalition, demanded that Mr. Lindner take action to clarify 2023 spending plans to ensure stability and clear the way for lawmakers to pass a 2024 budget to approve.
Next year’s budget was due to be approved on Thursday, but the debate was postponed due to the unrest following the court ruling. If the government were to declare a state of emergency for 2023, citing high energy prices due to Russia’s war against Ukraine, it could be seen as a reason to suspend the borrowing limit again.
What economists say: The fallout from German unrest could spread.
The German economy is expected to shrink in 2023, driven by declining industrial production and high inflation. The country’s economy ministry had forecast a return to growth in 2024, but economists warned that without expected investments in infrastructure such as railways and support for green industries, that could be at risk.
The broader European economy could also be hit by a slowdown in spending by the government in Berlin.
“If there is less investment and spending in Germany in the coming years because there is less money available, this will inevitably have consequences for the EU economy,” said Robert Grundke, head of the OECD’s German department. told Reuters.
Background: The German ‘debt brake’ places strict limits on borrowing.
In 2009, Germany imposed borrowing limits on itself as it struggled to emerge from its status as the ‘sick man of Europe’ during the global financial crisis. The debt curb law is enshrined in the country’s constitution and limits annual borrowing to 0.35 percent of gross domestic product, or roughly €12 billion a year.
Exceptions are allowed in emergency situations, including natural disasters or a pandemic. In its ruling last week, the court ruled that funding borrowed during a specific emergency could not be reallocated for other purposes.
What happens next: A plan is presented to the cabinet.
A proposal on how to adopt the 2023 budget will be presented to Mr Scholz’s cabinet next week. Once approved by ministers, it will be submitted to the German parliament.