- Germany’s constitutional court ruled on November 15 that the government’s reallocation of €60 billion to a “climate and transformation fund” (KTF) was illegal.
The Debt Brake Rule Explained
- Definition and Goal: The debt brake law regulates federal government borrowing and limits the federal government’s fiscal deficit to 0.35% of GDP, while restricting deficit spending by Germany’s 16 regions.
- Enactment: A coalition adopted this provision into German legislation in 2009, reflecting the EU’s Stability and Growth Pact and the Fiscal Compact Treaty of 2012.
The Legal Challenge and Its Consequences
- The opposition contended that because climate change and energy transition investments are long-term, they should not be supported by the debt brake’s emergency exception, which was limited to COVID-19 relief.
- The government said that the relocated funds addressed the economic repercussions of the pandemic by tying investment deficits to the economic impact of COVID-19.
Germany’s Post-2009 Economic Performance
- Mixed Results: Germany had growth and budget surpluses throughout the previous decade, owing to the ECB’s low-interest policies.
- Zero-Deficit Budget: The administration implemented a zero-deficit budget, touting it as an appropriate strategy for the EU amid a sovereign financial crisis.
- Criticisms and challenges: A slowing economy revealed infrastructure underinvestment. Critics advocated for budgetary growth, while others advocated for more taxes. Chancellor Angela Merkel emphasised the need of not burdening the next generation with debt.
- Pandemic Response: The debt brake regulation was waived for pandemic-related borrowing in 2020, with plans to resume it later.
Source: https://www.reuters.com/world/europe/german-finance-minister-defends-2023-debt-brake-suspension-forced-by-court-2023-12-01/