Germany will again lift the debt limit to solve the budget crisis

Chancellor Olaf Scholz urged lawmakers on Tuesday to ignore German borrowing limits for a fourth straight year, allowing his government to take on billions of euros in new debt to modernize his country’s economy despite a budget crisis that sparked a ruling of the Constitutional Court.

“It would be a serious, unforgivable mistake to neglect the modernization of our country in the face of all these acute challenges,” Scholz told Parliament, citing persistently high energy prices and the wars in Ukraine and the Middle East .

Afterwards, a powerful leader of the Christian Democrats signaled he might be willing to accept Scholz’s plan, a sign that the budget crisis that has gripped Germany for two weeks and threatened to fracture the government’s three-party coalition could be easing .

Germany’s highest court on November 15 threw out a special fund set up by the government that shifted credits approved in 2020 to combat the coronavirus pandemic to financing environmental projects and green technology. The court ruled that funds withdrawn for a specific purpose in a particular year must be spent within that time and for the intended purpose.

That ruling left a 60 billion euro (or $64.6 billion) hole in the budget and forced Scholz’s government to find a new way to meet the spending demands of the already divided coalition between his center-left Social Democrats, the have put further pressure on environmentalists. The Greens and the fiscally conservative Free Democrats.

Lawmakers had planned before the court ruling to hold a vote Friday to approve next year’s budget. That plan has been postponed until the government can provide clarity on expenditure for the current year. Mr Scholz said his government would finalize a new spending plan for 2024 “as soon as possible” and warned it would include cuts.

For the current year, the government is now preparing to ask Parliament to approve around 45 billion euros, or $49 billion, in new debt for 2023. To justify these loans, a supplementary budget prepared on Monday cited the spillover effects of the energy crisis. caused by the Russian invasion of Ukraine.

But that will still leave a gap, requiring painful cuts of several billion euros at a time when high energy prices, persistent inflation and a slump in foreign trade are expected to hit the German economy.

One part of the budget that will not be affected by cuts is aid to Ukraine. Germany is Ukraine’s second-biggest donor after the United States, and Mr Scholz has pledged to double Berlin’s support to 8 billion euros next year.

This support was of “existential importance” for Kiev and for Europe, Mr Scholz said. “We will continue this support for as long as necessary.”

Other major spending commitments include billions in subsidies aimed at attracting new industries to Germany, such as chipmakers Intel and TSMC. Both companies have planned factories in states in eastern Germany, lured in part by government subsidies financed by the fund that was scrapped by the court ruling.

Governors of the two states where the chipmakers plan to build have expressed confidence that the grants will be fully funded, but the government has not yet clarified where the money would come from.

On Monday, Economy Minister and Vice Chancellor Robert Habeck heard from leaders of Germany’s 16 states – including several Christian Democrats – have urged the government to maintain its spending commitments on projects aimed at attracting green industry and modernizing the economy to achieve its carbon neutrality target by 2045.

Mr Scholz needs parliamentary approval for two special funds to allow the government to borrow more than the limit set in the constitution, which limits annual borrowing to 0.35 percent of gross domestic product.

This borrowing limit can only be exceeded in emergencies, as happened when the economy came to a standstill at the start of the pandemic in 2020, or to provide aid to a region hit by a natural disaster, as happened when severe flooding hit the country. Ahrdal in 2021.

Friedrich Merz, leader of the center-right Christian Democrats, the party that launched the legal challenge to the special funds approved by Scholz’s government, indicated that his party would scrutinize the proposed solution, but it did not seem likely that he would oppose it.

But he warned that his party, the leading opposition to Scholz’s Social Democrats, would be less willing to support more emergency funds in the budget next year.

“If the federal government believes that there should be another extraordinary emergency in 2024, then I do not consider this constitutional,” Mr Merz said. “At least from today’s perspective.”