Germany averts financial shutdown after last-minute budget deal

A last-minute budget agreement was reached on Wednesday by German Chancellor Olaf Scholz’s coalition, averting an uncontrollable political crisis following the upheaval of its spending plans by a constitutional court order.

Scholz acknowledged that some places would need to be saved, but he promised Berlin would continue to support Ukraine financially in its conflict with Russia. He also said he would push for “sustainable” EU assistance for Kyiv.

Last month, the highest court in Germany determined that the government had violated a constitutional debt rule by moving $60 billion (or $65 billion) intended for pandemic assistance to a climate fund.

The shocking decision destroyed budgetary plans and caused chaos in Scholz’s triangular alliance.

Scholz and his junior coalition partners fought for weeks before coming to a deal for 2024 early on Wednesday, following the adoption of an emergency budget for 2023.

Germany will be able to adhere to its financial obligations for Ukraine and its aspirations to become climate neutral thanks to the coalition’s new measures. According to Scholz, it would also uphold its welfare commitments.

Additionally, Germany is going to restore its debt brake rule, which is a national legal requirement that prohibits the government from borrowing more than 0.35 percent of GDP annually to finance a structural deficit unless there are special circumstances.

Scholz declared that “climate-harming subsidies” would be eliminated in order to close the 17 billion euro deficit revealed by the court decision.

However, Robert Habeck, the Greens’ minister of economy, acknowledged that incentives to encourage people to transition to electric cars and support for the solar energy industry will also suffer.

The budget compromises were met with quick criticism, and the crisis occurred during a period when the German economy was already experiencing difficulties.

According to Gerd Landsberg of the federation of German cities and towns, “the savings coming at a time of economic weakness will have a negative impact on the economy,” the daily Rheinische Post said.

According to ING analyst Carsten Brzeski, “the risk is high that the German economy will remain in a minor recession next year” because of the more “restrictive” budget in 2024.

Under former chancellor Angela Merkel, the debt rule was implemented in 2011 with the intention of emphasising Germany’s dedication to budgetary restraint.

The conservatives have contended that it would be reckless to saddle younger generations with additional debt in light of the ageing population.

Opponents, however, see the regulation as a German preoccupation that is impeding the potential for expansion of the EU heavyweight. There has been an increasing demand for Berlin to expand its budget at a time when the largest economy in Europe is already in danger of going into recession.

Due to the coronavirus pandemic and an energy crisis brought on by Russia’s conflict on Ukraine, the rule had been suspended since 2020.

The government was forced by a court judgement to temporarily postpone the debt brake rule for 2023, even though it was supposed to return this year.

Scholz’s Social Democrats had requested for a two-year extension of the debt brake suspension during negotiations over the 2024 budget. However, the liberal FDP of Christian Lindner had strongly objected to this action.

Scholz did, however, imply that should more be required for Ukraine, the government might reconsider its position on the brake.

“If the situation through Russia’s war against Ukraine were to intensify — because of a worsening situation at the front or should other supporters withdraw their help, or due to a growing threat for Germany or Europe — we would have to react,” Scholz said.

Ahead of a conference of EU leaders on Thursday, Scholz spoke in parliament later to lay out Berlin’s position. He urged allies to be “realistic on other wishes and expectations for the EU budget” while stressing that obtaining ongoing assistance for Ukraine was a top priority.

(With agency inputs)