The German Chancellor, Olaf Scholz, is facing the challenge of reevaluating plans for financing climate policy and energy transition following a ruling by the Federal Constitutional Court. The court deemed the transfer of €60 billion from a COVID fund to be illegal.
However, the court ruled that bringing forward this borrowing capacity, which was accumulated during the pandemic when normal fiscal rules did not apply due to the suspension of the debt brake, was illegal. The debt brake places a limit on additional government borrowing, restricting it to 0.35% of the gross domestic product. It is set to be reinstated in 2024.
The transfer of €60 billion into the KTF failed to meet the constitutional requirements for emergency borrowing, according to the court. The government’s intention was to invest this amount in various areas, including enhancing energy efficiency in buildings, supporting green energy projects, and bolstering semiconductor production.
Salomon Fiedler, an analyst at Berenberg, explained that as a result of the court’s ruling, the government will need to significantly reduce its deficit spending plans, possibly by €30-40 billion in 2024 and a lesser amount in the following years. Alternatively, they may need to explore alternative solutions to circumvent the debt brake.
Despite this setback, financial markets reacted nonchalantly to the news. Germany’s DAX index experienced a 0.7% increase in afternoon trading, while the 10-year bund yield rose by 2.1 basis points to 2.627%, aligning with its European counterparts.