German finance minister Christian Lindner has imposed a spending freeze on all government ministries in response to a bombshell court ruling that has shredded his budgetary plans and risks undermining the three-way coalition of chancellor Olaf Scholz.
The move came after the finance ministry blocked access on Monday evening to the pandemic-era economic stabilisation fund (ESF) and its remaining €60 billion, earmarked for future climate and infrastructure spending.
Last week Germany’s highest court ruled unconstitutional a government move to rededicate such emergency funds – intended to stablise the pandemic-hit German economy – for other purposes.
The ruling has hit both the government’s fiscal plans and its common political future, with a leading Lindner adviser blaming Scholz for the disaster.
In a full-page article in Monday’s Frankfurter Allgemeine daily, economist Dr Lars Feld said the idea to repackage Covid funding for new coalition projects arose “in October 2021, shortly after the federal election when the finance minister was still called Olaf Scholz”.
Supplementary budgets were agreed, he added, “in spite of federal finance ministry misgivings, before and after the start of the new minister’s term”.
“This transaction had the political advantage, of bringing together more easily SPD, Green and FDP finance political plans that lay poles apart,” added Dr Feld, a special adviser to Mr Lindner.
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It allowed Social Democrat (SPD) and Green finance their campaign promises, particularly climate change measures, using off-balance sheet ESF funds which, in turn, would not undermine an election promise of Mr Lindner’s Free Democrats (FDP), to return to balanced budgets and the so-called fiscal debt brake.
This eurocrisis-era debt brake limits fresh government borrowing to 0.35 per cent of gross domestic product (GDP) but was, through an emergency provision, set aside in the pandemic.
Germany’s constitutional court dismissed these moves as balance sheet trickery, an unprecedented intervention of the judiciary in day-to-day politics.
Tuesday’s finance ministry’s budget freeze – and blame-shifting article – are unlikely to improve a mood in the three-way “traffic light” coalition which, leading officials say, has been tense for much of its two-year existence.
Time is running out to reach a consensus: by Thursday, coalition partners must present a plan to the Bundestag budgetary committee. The ruling does not just affect a €30 billion hole in the 2024 and 2025 spending plans, a finance ministry source said, but could require retrospective changes to budgets going back seven years – with so-called shadow debt likely to be returned to the balance sheet.
“We are all in constant contact,” said Robert Habeck, the Green economics minister and vice-chancellor, on Monday. He described the spending freeze as “the right thing to do in this situation”.
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Mr Habeck and other Green ministers know that scaling back their ambitious plans on green building renovations and e-mobility will be as fatal for his party’s support base as abolishing the fiscal brake will be for liberal FDP voters.
At the weekend, as Mr Lindner demanded belt-tightening and austerity to salvage his balanced budget, SPD and Green politicians began a push for a new emergency budget to bridge the fiscal gap.
Beyond the immediate fiscal fallout, which is still being calculated and could run as high as €165 billion, last week’s ruling will have many immediate real-world effects. The Scholz administration tapped the fund to finance €20 billion in subsidies for a new Intel plant in eastern Germany. Similarly uncertain are plans to use ESF money to finance a massive €25 billion spending plan to overhaul Germany’s crippled rail network.
Equally uncertain are plans to secure the country’s industrial base with lower energy prices, subsidised from the ESF fund.
Despite the budget tightening, German defence minister Boris Pistorius on Tuesday announced another military aid package for Ukraine worth €1.3 billion, including four additional Iris-T air defence units.