The German government has made a bit of a mess of the public debt

The German Constitutional Court issued a ruling on Wednesday judgement on certain moves in the 2021 federal budget, which have been declared unconstitutional. That year, the government of Olaf Scholz – a center-left government led by the Social Democrats, Liberals and Greens – allocated 60 billion borrowed euros to meet emergency spending related to the coronavirus pandemic: these 60 billion, which are emergency funds, were not counted in the public debt of the State, on the basis of German law. But after allocating them, the government did not spend them and then decided to allocate them to finance a fund for the energy transition, while continuing not to include them in the public debt.

The Constitutional Court ruled that this maneuver is unconstitutional and violates a German law on debt limitation: the 60 billion euros will have to be returned to the debt, which will thus increase. This will not only have accounting consequences, but will influence both the policy of the German government and the upcoming negotiations on the stability pact within the European Union.

According to the Constitutional Court, the government, by deciding to shift the allocation of emergency funds to ordinary energy transition expenses without including them in the debt, violated the constitutional rule known as the “debt brake”. which imposes very strict rules. constraints on public spending and state debt. The law dates back to 2009 and requires that public debt not increase by more than 0.35% of GDP each year, except in exceptional situations, such as a pandemic or recession. In certain cases, the government may therefore exceed this limit and funding intended to deal with certain emergencies is not taken into account in the calculation.

The 60 billion contested by the Constitutional Court were released precisely in derogation of this rule to deal with the coronavirus pandemic, and if they were counted, they would have led to an increase in public debt of 1.5 percent of GDP . In 2021, they were not spent and the government decided to use them for something else: given the different use, according to the Court, these funds should no longer be considered linked to the emergency and should therefore have be counted within the ordinary limits. for annual debt.

This is the first time that the German Constitutional Court has ruled on the “debt brake” since its introduction. Although it is a budget that now belongs to the past, this judgment has very concrete consequences for the present, both at national and European level.

On the internal political level, the problems are diverse, some practical and others more political. The first is that the judgment establishes that the government will have to find more money to finance the energy transition fund. The Climate and Transformation Fund (KTF) is one of the Scholz government’s flagship projects, which aims to decarbonize and digitalize the German economy at a time when it is not doing very well.

The fund had planned to distribute more than 177 billion euros in subsidies over the next three years but, unless it finds funds to replace the disputed 60 billion, it will have to scale back its ambitions. Finance Minister Christian Lindner told a news conference that disbursements would be temporarily suspended and a new financial plan would be drawn up taking into account the decision, without specifying whether the budget would be reduced or alternative resources would be found.

In addition to more practical questions, there are various political questions. The first concerns reputation: in Germany, public opinion is very attentive to the rigor of accounts and the fact that the Scholz government has taken on more debt than it could possibly have risks making it lose consensus. The main opposition parties – the conservative Christian Democratic Union (CDU) and Social Democratic Union (CSU), as well as the far-right Alternative for Germany (AfD) party – are paying a lot of attention to this question, accusing the government of having been less attentive. as transparent and prudent in the management of accounts.

The sentence then arrives at a time when they are in progress political negotiations very complex for next year’s budget. The budget committee of the Bundestag, the German parliament, postponed the vote on this issue for at least a week, precisely to understand all the possible implications of the decision on public finances.

The second is that a debate has reopened on the inclusion of the “debt brake” rule in the Constitution, a very polarized historical debate: on the one hand, there are those who believe that it it is right that the government maintains rigor in the accounts by law; on the other hand, many point out that it risks being too restrictive when the state must spend more to stimulate the economy, but without a major emergency such as a war or a pandemic.

And the current moment is precisely a moment when the German government is trying to invest and spend to support the economy: according to the estimates of most international institutions, among advanced economies, the German economy is the only one that risks end a year in recession. In any case, it is unlikely that this rule can be changed in the short term: as an amendment to the Constitution, it would require two-thirds of the votes of both houses of Parliament, a majority which does not have not the current government.

The sentence then risks having consequences which go beyond domestic politics and concern European negotiations for the reform of the new Stability Pact, that is to say the European rules for the management of public accounts which have always been criticized for their rigidity. The negotiations are very tough because two opposing positions clash: the first, led by Germany and other so-called “frugal” countries, such as Austria and the Netherlands, would like to maintain rigorous and equal parameters for all. countries, without making too many concessions and containing the risks linked to excessive debt; the second group, which includes France, Spain and Italy, among others, calls for more flexible rules, facing a fiscal and economic situation deeply influenced by unpredictable events, such as the pandemic and the war in Ukraine.

Germany is one of the most influential countries in the European Union and its position leans towards rigor: after the ruling of the Constitutional Court, it could have an even tougher attitude, to maintain its internal reputation as a financially responsible country and dedicated to savings. It could then demonstrate that, even if the decision increased public debt, its accounts still remained compliant with European rules. The risk is therefore that the tightening of Germany’s negotiating positions will lead to the approval of a more restrictive reform, which would greatly complicate the management of public spending for highly indebted countries like Italy.

Source: ilpost

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