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Germany’s constitutional court has repeatedly proved its readiness to be a pain in the backside of want-to-get-it-done policymakers. It has long been weaponised by opponents of the European Central Bank: in 2020, it infamously usurped the European Court of Justice’s authority to interpret European law, over quantitative easing.
Last Wednesday, it was domestic economic policy that the country’s top court torpedoed. The judges in Karlsruhe barred a €60bn budgetary move made in the early days of the coalition government of social democrats, liberals and greens.
Because of the pandemic, the strict rules of the “debt brake” limiting public borrowing were still suspended in 2021. When the government took office late that year, it used a supplementary budget — for 2021 even if passed in 2022 — to shift unused borrowing authorisation from the main budget into a separate off-budget multiyear fund for green investments. The court has now found that this contravened the constitution’s strict rules against deficit funding.
The striking down of that budget manoeuvre presents an immediate economic challenge. Even Europe’s largest economy cannot effortlessly pull another €60bn (more than 1.5 per cent of annual output) out of its sleeve. If the state has already committed any of the money, then tough luck: the court says it “must compensate for this through other means”.
That is not insurmountable: the €60bn was to be spent over several years. Calculations can be tweaked, technical adjustments made, safety margins and reserves maxed out to find more money. Against that, the ruling threatens other off-budget funds too, at both federal and state levels.
The alternative of not doing the climate spending would be disastrous after two decades of under-investment in an economy that urgently needs to be fitted out for net zero and a geopolitically precarious world. Berlin will no doubt have to look hard at raising taxes.
The political fallout could be greater than the economic consequences. The original manoeuvre played a key role in making the coalition possible: it could satisfy the greens’ climate ambitions while reassuring the liberals’ fiscally conservative voters that German budget probity was being honoured.
But now the court has made it plain that you can’t have it both ways. Hard legal limits on deficit financing, which Berlin introduced in the global financial crisis and pushed hard on the rest of Europe, make it extremely difficult to pursue the economic policy most now deem essential for both industrial revival and planetary survival. Germany has been hoist on its own ordoliberal petard.
This will matter in EU politics too. Finance ministers are trying to agree, by the end of the year, on a replacement for the bloc’s fiscal rules — whose main contribution must be to make fiscal sustainability compatible with more investment. At a late stage in the talks, Christian Lindner, the liberals’ finance minister, has demanded stricter annual deficit limits that even Germany’s most frugal friends did not call for.
It is not a good look to lecture others on fiscal discipline and the need for tougher rules while your highest court slaps you down for accounting trickery to circumvent your own. If Berlin resorts to new budgetary manoeuvring rather than hard economic choices, it will not aid Lindner with his EU counterparts.
Conversely, if the German government responds with serious tax rises or spending cuts to sustain its full investment ambitions, he will be able to say he practises what he preaches. But don’t expect too much of that: those who object loudest to public borrowing are usually also the strongest opponents of higher taxes, while few politicians like to cut spending. Either way, the next days of budget talks in Berlin will matter for those in Brussels.
Something good could come out of this, if the Karlsruhe ruling triggers a serious debate in Germany about how best to do economic policy — and economic politics. For the belief in strict rules reflects a desire to take the politics out of economic management. That betrays politicians’ lack of confidence in one another — but most profoundly, in their own rectitude.
That is the root of Germany’s ordoliberal economic philosophy, for historical reasons, but can be found through much of Europe. It is, however, an illusion. Economic policy is ineradicably political; the question is how to make it responsibly so. If this legal curveball provokes answers to that, in Germany and in the EU, it will have been well worth it.