The crisis Germany has been going through since November 15 is astonishing. Because it has failed to comply with the stringent rules it has itself imposed, the eurozone's leading economy finds itself in a state of budget gridlock, forced to freeze spending and unable to pass its Finance Act for 2024, after acknowledging that the 2023 law was probably unconstitutional. Never since its formation just two years ago has Olaf Scholz's government been faced with this kind of credibility crisis. The shock is so severe that the very survival of the coalition is at stake.
How did Germany, who so willingly presents itself as a model of fiscal virtue, come to this? As so often in the past, the tremor was triggered by the Federal Constitutional Court in Karlsruhe. In a landmark ruling on November 15, the judges ruled against a controversial financial maneuver that had played a central role in the formation of the three-party coalition headed by Scholz in the fall of 2021. The Social Democratic Party (SPD), the Greens and members of the Liberal Democratic Party (FDP) had sealed their union around the transfer of an unused credit of €60 billion, originally voted to combat the consequences of Covid-19, to an off-budget "Climate and Transformation special fund."
The political agreement rested on the following principles: The fund would provide sufficient resources to finance, over several years, the decarbonization and economic transformation measures desired by the Greens, without burdening the social reforms expected by the SPD. All this while respecting the constitutional principle of the "debt brake," which limits the federal government's annual structural deficit to 0.35%, a principle dear to the FDP. The "Climate and Transformation fund" in question has become the government's preferred investment tool, from the renovation of the rail network to the replacement of gas-fired boilers to a €10 billion subsidy for a chip factory in Magdeburg, Saxony-Anhalt (east).
Recourse to this type of special, off-budget fund has proved so attractive that the government has multiplied them, creating a special fund for the army, then a €200 billion fund to cope with the energy shock in autumn 2022. Budget controversies within the government – on refugee reception or support for Ukraine – were thereby eased by funds that bypassed the "debt brake" without admitting as much.
Nightmare
But that ignored the vigilance of the constitutional judges, who insisted that the rules governing public finance also apply to special funds: Funds may not be used for any purpose other than that for which they were voted, and all appropriations must be used within the year. In the wake of this ruling, the entire budgetary architecture of the last two years collapsed. The emergency clause was invoked to lift the debt brake and retroactively validate the 2023 budget. The years ahead are a nightmare: up to €100 billion of committed expenditure is up for review.
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