German Chancellor Olaf Scholz will have to overhaul plans for financing climate policy and energy transition after the country’s top judges said that a €60 billion ($65 billion) transfer from a COVID fund was illegal.
In a ruling published Wednesday, the Federal Constitutional Court, or Bundesverfassungsgericht, said the then newly-formed center-left coalition government’s December 2021 supplementary budget broke the law regarding new borrowing.
In the budget, Finance Minister Christian Lindner had looked to move €60 billion of unused emergency COVID-related authorizations into what later became known as the Climate and Transition Fund (KTF in the German acronym).
But the court said that bringing forward this unused borrowing capacity from a time when because of the pandemic normal fiscal rules, known as the debt brake, did not apply, was illegal.
The debt brake, which limits additional government borrowing to 0.35% of gross domestic product, was suspended because of the COVID pandemic, and is due to be reinstated in 2024.
The attempt to transfer the €60 billion into the KTF “does not meet the constitutional requirements for emergency borrowing,” said the court.
The government had hoped to spend the €60 billion on, among other things, improving energy efficiency in buildings, supporting green energy projects and boosting semiconductor production.
The court’s ruling means “the government either needs to cut its deficit spending plans substantially – perhaps by up to €30-40bn for 2024 and a lower amount in the years thereafter – or find new ways around the debt brake,” said Salomon Fiedler, analyst at Berenberg.
In a press conference after the ruling alongside Economy Minister Robert Habeck and Finance Minister Lindner in Berlin, Chancellor Scholz said the judgement meant the KTF fund would have to overhauled. Lindner said the €60 billion in unused credit authorizations will be cancelled.
Markets shrugged off the news. Germany’s DAX index
DX:DAX
was up 0.7% in afternoon trading and the 10-year bund yield
BX:TMBMKDE-10Y
rose in line with European peers, adding 2.1 basis points to 2.627%.
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