Germany Announces Special Budget to Avert Crisis

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Germany announced a plan to resolve a looming budget crisis on Thursday, proposing a resolution that would make it possible to fill a hole in its spending plans without requiring fresh debt. But details about the plan, which came amid growing unease about Europe’s largest economy and rising tensions within the government’s three-party governing coalition, were scarce.

The finance minister, Christian Lindner, said the government would seek to adopt a special budget to cover the cost of energy subsidies. The move would address a court ruling that said repurposing a credit line of 60 billion euros ($64.6 billion) approved during the Coronavirus pandemic to finance environmental projects and green technology violated the constitution.

How We Got Here: A court ruling put spending plans into disarray.

The move came after days of uncertainty triggered by the ruling from the country’s highest court that declared elements of the 2023 budget invalid because of a rule that limits borrowing. The so-called debt brake can be suspended only in times of emergency, and the government had suspended it the past three years because of the pandemic and surging energy prices following Russia’s invasion of Ukraine.

Mr. Lindner, who leads the fiscally conservative Free Democrats party, has vowed to abide by the borrowing limits for the 2023 budget.

“No new debt will be taken on, but the funds already used to overcome the crisis will be placed on a secure legal basis,” Mr. Lindner said in a statement on Thursday. He did not elaborate.

Why It Matters: The government is under pressure to plug a fiscal hole.

Chancellor Olaf Scholz has faced growing turmoil since the court ruled that the money the government wanted to spend on green projects had to come from the regular budget — effectively ripping a multibillion-euro hole in the government’s plans.

Economists and business leaders, as well as some lawmakers from Mr. Scholz’s three-party coalition, demanded Mr. Lindner take action to clarify spending plans for 2023 to ensure stability and clear the way for lawmakers to approve a budget for 2024.

Next year’s budget was supposed to be approved on Thursday, but the debate was postponed because of the turmoil after 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 grounds to again suspend the limit on borrowing.

What Economists Say: The effects of Germany’s turmoil could spread.

The German economy is expected to contract in 2023, dragged down by flagging industrial production and high inflation. The country’s economy ministry had forecast a return to growth in 2024, but economists warned that without the expected investment in infrastructure, such as railways and support for green industries, that could be in danger.

The wider European economy could also be affected by a slowdown in spending by the government in Berlin.

“If there is less investment and spending in Germany over the next few years because there is less money available, this will inevitably have an impact on the E.U. economy,” Robert Grundke, the head of the O.E.C.D.’s Germany desk, told Reuters.

Background: Germany’s ‘debt brake’ imposes 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 brake law is enshrined in the country’s constitution, restricting annual borrowing to 0.35 percent of gross domestic product, or roughly €12 billion a year.

Exceptions are allowed in emergencies, including natural disasters or a pandemic. In its ruling last week, the court stipulated 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 fix the 2023 budget will be presented to Mr. Scholz’s cabinet next week. Once it is approved by ministers, it will be put before the German Parliament.