How we got here: A court ruling derailed spending plans.
The move came after days of uncertainty caused by a ruling by the country’s highest court that declared elements of the 2023 budget invalid due to a rule limiting 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.
Lindner, who leads the fiscally conservative Free Democrats party, has promised to respect borrowing limits for the 2023 budget.
“No new debt will be assumed, but funds already used to overcome the crisis will be placed on a secure legal basis,” Lindner said in a statement Thursday. She did not give further details.
Why it matters: The government is under pressure to plug a fiscal hole.
Chancellor Olaf Scholz has faced growing 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 multimillion-dollar hole in the government’s plans.
Economists and business leaders, as well as some lawmakers in Scholz’s three-party coalition, demanded that Lindner take steps to clarify spending plans for 2023 to ensure stability and clear the way for lawmakers to approve a 2024 budget.
Next year’s budget was due to be approved on Thursday, but debate was postponed due to turmoil following the court ruling. If the government were to declare an emergency situation for 2023, citing high energy prices caused by Russia’s war against Ukraine, that could be seen as reason to suspend the borrowing limit again.
What economists say: The effects of the unrest in Germany could spread.
The German economy is expected to contract in 2023, dragged down by weakening industrial production and high inflation. The country’s Economy Ministry had forecast a return to growth in 2024, but economists warned that without expected investment in infrastructure such as railways and support for green industries, that could be in jeopardy.
The broader European economy could also be affected by a slowdown in government spending 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 an impact on the EU economy,” said Robert Grundke, head of the OECD’s Germany office. told Reuters.
Context: Germany’s ‘debt brake’ imposes strict limits on borrowing.
In 2009, Germany imposed debt limits on itself as it struggled to emerge from its status as “Europe’s sick man” during the global financial crisis. The debt brake law is enshrined in the country’s constitution, restricting annual borrowing to 0.35 percent of gross domestic product, or about 12 billion euros a year.
Exceptions are allowed in emergencies, including natural disasters or a pandemic. In its ruling last week, the court stipulated that funds borrowed during a specific emergency could not be reallocated for other purposes.
What happens next: A plan is presented to cabinet.
A proposal on how to set the 2023 budget will be presented to Scholz’s cabinet next week. Once approved by ministers, it will be presented to the German parliament.
