German top court strikes down €60bn off-budget climate fund

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The German government has ordered a freeze on all payments from its centrepiece climate transformation fund, after the country’s top court ruled €60bn allocated to it was illegal. 

Chancellor Olaf Scholz’s government was left scrambling to contain the economic and political fallout from the decision on Wednesday morning, admitting that the ruling had thrown its energy and climate policy plans for years ahead into disarray. 

“Careful consideration is now imperative,” said Scholz. “The judgment may have an impact on budgetary practice not only at federal level, but also in the federal states.”

In a judgment issued from Karlsruhe, Germany’s federal constitutional court found against the government in a case over the reallocation of unspent funds borrowed under emergency legislation during the coronavirus pandemic. 

The case was filed by Germany’s conservative opposition parties, the CDU and its sister CSU.  

“This judgment has potentially far-reaching implications for government practice and the budgetary policy,” said finance minister Christian Lindner. 

“We are immediately drawing our own conclusions and initiating our own measures,” he said. 

The transfer of €60bn of unspent coronavirus support that the government had allocated to its Climate and Transformation Fund (KTF) would be “cancelled immediately” Lindner confirmed, adding that he had “placed a freeze” on future dispersals from the fund as a result.

The loss blows a huge hole in the finances of the KTF, which had planned to spend more than €177bn over the next three years alone to speed up Germany’s industrial modernisation and green energy transition, in projects ranging from semiconductor factories to railway upgrades.

Germany’s constitution places hard limits on government borrowing through a mechanism known as the debt brake, which can only be circumvented in exceptional circumstances.

The brake limits extra government borrowing to 0.35 per cent of gross domestic product.

It was suspended under an emergency “escape clause” because of the Covid-19 pandemic, but it is due to come back into force next year. 

The constitutional court found that the government’s attempt to shift the €60bn of unused borrowing capacity from its pandemic budget in 2021 into the KTF “does not meet the constitutional requirements for emergency borrowing”. 

Berlin had not demonstrated enough of a link between the new uses of the debt issuance and the pandemic emergency that caused the debt brake to be suspended in the first place, the judgment said.

It also rejected the attempt to use debt capacity from an earlier budget to cover future spending commitments and said the transfer from the 2021 budget was invalid because it was only arranged in a “second supplementary budget” that was passed in 2022.

Wednesday’s ruling could throw into question other off-budget funds that do not count towards the debt brake. These include the government’s €200bn economic stabilisation fund, and several others used by regional states.

It is likely to spark further unrest in Germany’s fractious ruling coalition between finance minister Lindner’s liberal Free Democrats, which fiercely defends the debt brake, and its partners — Scholz’s Social Democrats and the Greens of vice-chancellor Robert Habeck.

“The verdict will likely trigger significant soul-searching within the SPD-Green-FDP coalition,” said Salomon Fiedler, an economist at German bank Berenberg.

The outcome could be “a combination of lower government spending than planned so far, no room for any further fiscal initiatives, and some creative ways to still keep as much as possible of the spending plans on track”, he said.

The judgment also leaves Lindner in breach of his own country’s law on debt reduction at a time when he is calling on other EU countries to agree to a stricter set of rules than some want to govern their future spending and borrowing under a reformed Stability and Growth Pact.

“This is a tough ruling for the traffic-light coalition, pretty much the worst-case outcome for them,” said Friedrich Heinemann, an economist at the Leibniz Centre for European Economic Research.