The myth of austerity falters
Germany’s public finances are staggering. The government will have to resubmit the document after being accused by the Constitutional Court of manipulation of the 2024 budget. A great humiliation for an executive which, like its predecessors, always thinks it is top of the class. Now the government and parliament will have to do a marathon to resolve the situation by December 31st and avoid the provisional exercise. It would be another defeat. The most unexpected one which would make the humiliation even more burning. The traditional German severity to keep public accounts in order (as opposed to Italy’s Mediterranean disorder) is a false myth built on false accounting.
Ruling of the Constitutional Court
The leading European economic power thus confirms that it is in a situation of serious difficulty. The government is wavering after the “bombshell” ruling of the Constitutional Court which imposed the accounting of extraordinary expenses related to emergencies (Covid first energy now). Scholz and Minister Lindner had kept them out of the budget given their extraordinary nature. The judges rejected them by ordering them to recalculate and put everything in the budget.
Government in disarray
The decision threw Chancellor Olaf Scholz’s cabinet into disarray. In fact, there is a 60 billion hole in Germany’s accounts which could compromise the stability of Europe’s largest economy until 2027. Not to mention the political implications given that many extraordinary interventions could be cut. First of all, the subsidy on high bills which in fact altered competition because it allowed German industries to obtain a discount on the price of energy.
The budget freeze was ordered by Werner Gatzer, state secretary of the German Finance Ministry, in a letter addressed to 17 ministries seen by the Financial Times. Gatzer also said that all “appropriation commitments” for the remainder of the 2023 budget “must be blocked, with immediate effect”. The growth of the German economy, already shaky, could now be slowed further next year as projects and subsidies for the competitiveness of German industry are at risk.
The three parties in the uneasy coalition of the Social Democrat (SPD) Scholz with the Greens and the Liberal Democrats (FDP) are looking for a solution to keep as many spending commitments as possible and make them comply with the law. Their options include drafting a supplementary budget for 2023 and suspending the debt brake, decided exceptionally in times of pandemic. However, the 2024 budget may not be concluded before the end of the year. Meanwhile, the Government has already imposed a freeze on most new spending commitments and blocked the 200 billion euro economic stabilization fund for this year. Originally established during the pandemic, it was revived after Russia’s invasion of Ukraine to protect consumers from higher energy costs and used to finance a cap on electricity and gas prices
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Subsidies to be given to Intel and Tsmc for new plants intended for the manufacturing of chips could also be at risk. Thyssenkrupp announced that budget restrictions could impact the hydrogen sector, a nascent industry in which Scholz has placed a lot of faith. Political tension is very high and the possibility of a government crisis adds to Germany’s economic difficulties. Paradoxically, it is the debt issue that is putting the country’s system in crisis.