(Bloomberg) -- Germany’s top court struck down a key element of the government’s plans to address climate change and transform the economy, dealing Chancellor Olaf Scholz’s coalition a major setback that throws its budget policy into disarray.
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The Federal Constitutional Court ruled that the shifting of €60 billion ($65.2 billion) earmarked to tackle the Covid-19 pandemic into an off-budget fund violated German constitutional law. The challenge was filed by lawmakers from the main opposition conservative alliance, who said they wanted to ensure the sustainability of the country’s public finances.
In a statement issued Wednesday in Karlsruhe, the court said that the scope of the fund, which in August was topped up to €212 billion for the period 2024 through 2027, must now be reduced by €60 billion. The ruling doesn’t in any way limit the amount the government can spend on tackling climate change but rather the budgetary methods it can use.
“If this means that obligations already entered into can no longer be met, the legislator must compensate for this in some other manner,” Doris Koenig, vice president of the court, said in delivering the ruling, which was carried live on German television.
Funds raised must be spent in the year they were authorized and the government may not circumvent these rules by shifting them to a off-budget fund, she added.
Scholz will give his reaction to the ruling in a statement at 12:45 p.m. in Berlin alongside Finance Minister Christian Lindner and Economy Minister Robert Habeck.
At issue was whether the government violated the rules enshrined in Germany’s so-called debt brake — created in the aftermath of the 2008 financial crisis — which limits annual net new borrowing to 0.35% of gross domestic product. Exceptions are permitted to help deal with natural disasters and other emergencies.
Parliament approved a suspension of the mechanism for three years through 2022 to fight the pandemic but the government subsequently switched untapped borrowing worth €60 billion into its Climate and Transformation Fund, known as the KTF.
Opposition lawmakers argued that by channeling those debt authorizations into the KTF, Scholz’s administration had broken the debt-brake rules.
Coalition lawmakers failed to show that the funds were still linked strongly enough to tackling the fallout from the pandemic to justify the maneuver, according to the court ruling. They also violated the constitution by approving the additional new borrowing in early 2022 when the 2021 budget year had already elapsed, the judges ruled.
Evelyne Gomez-Liechti, a strategist at Mizuho International, said the decision could lead to an adjustment of the funding needs for the KTF that means lower than expected debt issuance for 2024 and beyond.
Dirk Schumacher, an economist at Natixis SA, said it’s not clear how much fiscal tightening the ruling implies, noting that “there are other ways the government can raise the money, though less convenient than the one it chose.”
Budget policy has been one of the main points of contention in Scholz’s coalition of his Social Democrats, the Greens and the Free Democrats and Wednesday’s ruling could spark renewed infighting.
Lindner, the FDP leader, is a self-styled budget hawk who insisted on the restoration of the debt brake, while the SPD and Greens are broadly more open to relaxing the borrowing rules.
The issue is likely to be prominent in campaigning for the next general election due in the fall of 2025.
The KTF supports a wide range of measures to accelerate Germany’s transition to a less-polluting economy, including the rollout of heat pumps, electromobility or hydrogen infrastructure.
It also funds investments in the nation’s rail network and in building out semiconductor production, including €10 billion in subsidies for a new Intel Corp. plant in the eastern German city of Magdeburg. The funds specific to the case dealt with on Wednesday weren’t earmarked for that project.
The court’s ruling may have significance for some of Germany’s other off-budget special funds, including one worth €100 billion for investing in the nation’s armed forces.
They currently number around 30 and Lindner has vowed to gradually scale them back. The Federal Court of Auditors has criticized the funds as a violation of budget transparency.
“Today, the Federal Constitutional Court saved the debt brake and thus made an important contribution to intergenerational financial justice,” CDU lawmaker Helge Braun, who chairs the lower house of parliament’s budget committee, said in a post on X.
“This has made it clear that the government’s policy of ostensibly fulfilling the debt brake in the federal budget, but booking large amounts of additional debt into the past through illusory shadow budgets, is a breach of the constitution,” he added.
The case is: BVerfG, 2 BvF 1/22.
--With assistance from Michael Nienaber, James Hirai and Anchalee Worrachate.
(Updates with analyst reaction starting in 11th paragraph)
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