German budget crisis deepens with freeze on new spending commitments

Existing liabilities will be honored but new commitments can be unblocked only in exceptional cases, according to a letter sent to government ministries

By Kamil Kowalcze and Michael Nienaber

Germany imposed an emergency spending freeze in response to last week’s ruling by the country’s top court, deepening an unprecedented budget crisis that has rocked Europe’s biggest economy.
 

Chancellor Olaf Scholz’s government has been racing to work out the implications of the Constitutional Court judgment, which called into question hundreds of billions of euros of financing in special funds that are not part of the regular federal budget.

The Finance Ministry in Berlin on Monday froze virtually all new spending authorizations for this year as it tries to identify the broader and longer-term impact, according to a letter sent to government ministries seen by Bloomberg.

Existing liabilities will be honored but new commitments can be unblocked only in exceptional cases, the letter stated. The decision applies to all federal ministries, with only bodies like the two houses of parliament in Berlin and the Constitutional Court exempted.

The bombshell legal ruling cast doubt on Germany’s entire financing plans, including projects ranging from subsidies for chip and battery plants to sorely needed investment in the railway network. Senior officials have canceled some public appearances, clearing their calendars to deal with the upheaval.

Judges ruled Wednesday that €60 billion in unused debt authorizations earmarked for tackling the pandemic can’t be transfered into a fund for initiatives like greening manufacturing and expanding solar power.

The judgment is likely to affect other such special funds, including one that pays for measures to ease the burden on households and companies from high energy prices, according to Economy Minister Robert Habeck.

If officials conclude that the ruling applies more broadly, as expected, Finance Minister Christian Lindner will have to retroactively account for at least €30 billion of new debt in a revised 2023 federal budget, people familiar with the discussions told Bloomberg on Monday.

As a result, he would be forced to drop his plan to restore constitutional rules limiting new borrowing known as the debt brake, a key policy of his pro-business Free Democratic party.

The court’s judgment has sparked renewed infighting on budget priorities within the ruling alliance of Scholz’s Social Democrats, the Greens and the fiscally hawkish FDP.

Kevin Kuehnert, the SPD general secretary, said Tuesday that the party is committed to finding the money to plug the €60 billion hole the court ruling created.

That money is crucial for Germany’s international competitiveness and climate transformation and the party also won’t agree to any cuts in areas like social benefits, Kuehnert said in an interview with public broadcaster ARD.

“That is not what the SPD was elected for in 2021 and we would never support that in parliament,” he said.

Germany has 29 off-budget funds worth around €870 billion, though a €100 billion pot for military spending is not expected to be affected as it’s written into the constitution.

Budget lawmakers were due to finalize next year’s federal budget last week but a final agreement was delayed by the court ruling. They will make another attempt this week and are meeting with experts to discuss the next steps later on Tuesday in Berlin.