A RAP ON the knuckles hurts. It hurts even more when delivered with a gavel by the highest court in the land. For Germany’s governing coalition, a judgment issued on November 15th by the Federal Constitutional Court, retroactively blocking a transfer of unspent funds that were originally earmarked for covid-19 to other purposes, is both a political embarrassment and a budget nightmare. More subtly, the ruling is also a reprimand to Germany as a whole, showing how the national obsession with imposing “debt brakes” on government spending leads to all kinds of silliness.

The sum involved, €60bn ($65bn), is big. It had been borrowed in early 2021, by Germany’s previous government, outside the regular budget to cover expected extra spending on the covid emergency. This needed special dispensation because of Germany’s constitutionally enshrined limits on budget deficits.

But by the time the newly elected “traffic-light” coalition took office at the end of 2021 the covid emergency was over. So Olaf Scholz, a former finance minister now serving as chancellor, shifted the money into another extra-budgetary box, a climate and transition Fund (KTF) meant to cover costs associated with ambitious climate-change policies.

This switcheroo did not just mean the government could spend more without bothering taxpayers. It helped bridge differences with both of the Social Democrat chancellor’s coalition partners. For the Greens it meant more cash to pay for their own agenda, including big subsidies to encourage adoption of fuel-saving heat pumps. For the liberal Free Democrats (FDP) it meant they could stick to their main promise to voters, which was to uphold fiscal probity. Christian Lindner, the finance minister and leader of the FDP, has repeatedly insisted that under his watch the government would never challenge the debt brake. In theory—excepting emergencies—it limits the “structural” budget deficit to 0.35% of GDP.

Not surprisingly, the Christian Democrats (CDU), now out of power after 16 years in office, filed a lawsuit challenging the diversion of “emergency” funds from one purpose to another. The government’s defence—that the covid crisis had indirectly caused an ongoing economic emergency—met with some sympathy from German courts. Last November, at a moment when Germans widely feared an imminent energy shortage following Russia’s invasion of Ukraine, an interim ruling allowed the government to divert the €60bn.

The coalition seems to have taken that reprieve as a licence to spend. The KTF as a whole has committed some €212bn towards a range of purposes over the next three years, from building municipal-level heating systems, to creating a costly hydrogen grid, to upgrading the frayed national rail network, to pumping up to €20bn into Germany’s chip-making industry.

The court ruling does not just jeopardise some of these projects. It calls into question the use of all kinds of “special” funds to circumvent debt rules. Many of Germany’s 16 states have been just as imaginative as the federal government, which has, among other vehicles, created a €200bn fund to insulate industries from high energy costs (of which only a fraction has actually been spent). A special €100bn fund to top up the defence budget is legally safe because the constitution was tweaked to permit it. But that required a two-thirds vote of parliament, which will not be easy in other cases.

The judgment’s immediate effect has been for Mr Scholz’s government to put a freeze on spending from the KFT until further notice. This comes at a critical time for the coalition, days before it is meant to finalise its budget for the coming year. Once that immediate hurdle is over, Germany needs to discuss its too-constricting rules on government finance. “Debt-brake orthodoxy scored a legal victory,” tweeted Jens Südekum, a prominent economist, after the court ruling. “But the lesson of today could be that there is now no way around a fundamental reform of the debt brake.” ■