The German government froze major spending pledges focused on green initiatives and industry support on Wednesday after a constitutional court ruling on unused pandemic emergency funds blew a 60 billion euro ($65 billion) hole in its finances.
The decision threw into disarray budget negotiations taking place this week within Chancellor Olaf Scholz’s three-way ruling coalition, whose popularity has slumped as Europe’s biggest economy teeters close to another recession.
Wednesday’s decision by the constitutional court could also set a precedent for fiscal responses to future crises.
Finance Minister Christian Lindner will meanwhile face increased scrutiny over how he plans to keep spending in check, just days before he is due to meet his French counterpart for talks on enforcing fiscal discipline across the European Union.
Germany has hitherto burnished its reputation as the defender of sustainable financing in negotiations to reform EU fiscal rules in a pan-European deal by the end of the year.
Scholz said the ruling on Wednesday would have far-reaching consequences for the government’s Climate and Transformation Fund (KTF) but that his coalition would look for other sources of funding.
“We will now quickly revise the economic plan, incorporate the necessary changes and adopt new ones,” he said on social media.
Lindner said the ruling could have a big impact on federal and state budgets but the government would respect the decision and not interrupt the process of finalising the budget for 2024.
The 60 billion euros had been earmarked for initiatives such as making buildings more energy efficient and subsidising renewable electricity and chips production, as well as supporting energy-intensive companies.
Lindner said moves to promote energy efficiency and renewable energy use in the building sector would be excluded from the freeze.
But he may face growing calls from within the coalition to suspend Germany’s constitutionally enshrined debt brake again, something he has hitherto ruled out, along with raising taxes.
“This ruling will come as a massive setback to the government. The practice that was now dismissed by the court had allowed the government to forge policy compromises that kept all three parties in Scholz’s coalition satisfied,” said a note by the Eurasia group.
“Spending cuts now look unavoidable and Eurasia Group believes that the bulk of the cuts will likely hit climate-related projects.”