(Bloomberg) — Germany’s ruling coalition is engaged in near-relentless negotiations to rein in an unprecedented budget crisis triggered by last week’s surprise ruling on the extrabudgetary budget through the country’s highest court.
As Chancellor Olaf Scholz held a normal weekly meeting in his cabinet on Wednesday morning, lawyers and government officials continued their frantic efforts to capitalize on the Constitutional Court’s ruling, which blew up a 60 billion euro ($65. 4 billion) hole in a fund meant to finance weather coverage. initiatives and stimulate Germany’s business transformation.
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The resolution also calls for another special budget loaded with billions of euros in debt authorizations, which will most likely force Scholz’s ruling alliance of his Social Democrats, Greens and Free Democrats to review the federal government’s monetary plans for this year and next.
Budget lawmakers on Wednesday postponed a meeting scheduled for Thursday afternoon to put the finishing touches on the financial plan for 2024 and the ruling coalition also removed the budget from the calendar for next week’s Bundestag session.
Thursday’s budget committee meeting was first seen as an unofficial deadline to reach a coalition agreement on how to put the court ruling into effect. Lawmakers said the reason for postponing the assembly was to give the opposition more time for the government’s proposals once again. They were accepted.
“Our purpose is to talk about the budget temporarily but carefully to create certainty in the plans,” the three parties in Scholz’s alliance said in an emailed statement. Normally, the budget would be approved in a final vote in the upper house, where all 16 regions of Germany will be represented by mid-December.
Here are some of the features the government is considering, according to other people familiar with the discussions:
SUSPEND THE DEBT BRAKE
One proposal on the table is a retroactive revision of this year’s budget that would come with an additional suspension of a constitutional limit on net new borrowing known as the debt brake.
The mechanism can be suspended in the event of an emergency, an option the government has exploited for three consecutive years until 2022 to deal with the consequences of the Covid-19 pandemic and energy crisis.
Economy Minister Robert Habeck said the court’s ruling applies broadly to the maximum of Germany’s extrabudgetary funds, adding one that funds measures to moderate energy costs for households and businesses.
This means that Finance Minister Christian Lindner would have to factor around €37 billion of new debt into a revised financing plan for 2023, because that budget can no longer be set aside outside the normal budget. The legal net debt for 2023 is set at €46 billion and has already been exhausted.
Lindner would be forced to cancel the reinstatement of the debt brake he had insisted on for this year, a painful fall for the FDP leader, who is considered the father of fiscal stability.
Some senior figures in Scholz’s SPD also called for postponing the debt brake next year to allow for more borrowing for climate replacement measures and for companies in the green transformation.
The coalition can suspend the debt brake rule thanks to its majority in the reduced space of Parliament, but it would potentially face some other legal challenge as well.
In what might have been only the first sign of an imminent shutdown, one of Lindner’s economic advisers reportedly said on Tuesday that a retroactive emergency suspension of the debt brake for 2023 would be justifiable.
INCLUDE FUNDS OUTSIDE THE BUDGET IN THE CONSTITUTION
The government may try to incorporate part of that special budget into the German constitution, a feat Scholz achieved last year with a €100 billion debt-financed fund to modernize the armed forces.
The amendment to the charter requires a two-thirds parliamentary majority and Scholz would have to convince the main opposition conservatives, just as he did with the military fund after Russia’s invasion of Ukraine.
This time cooperation between the parties is much less likely, especially since it is the conservative bloc that has filed a complaint against the extrabudgetary budget with the Constitutional Court.
OTHER OPTIONS
Reducing subsidies, deferring some spending, and expanding taxes and levies can also help the fiscal dilemma, even if such measures would only offset a small component of the potential deficit.
To close the loophole at the heart that is the subject of the legal challenge, Germany could simply increase its carbon tax and expand the European Union’s emissions trading formula for other sectors of the economy, scheduled for 2027.
(Delayed updates to the 2024 budget starting in the fourth paragraph)
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