Germany's top court annuls move to repurpose COVID funding

Germany's Constitutional Court on Wednesday ruled that a move to redirect €60 billion ($65 billion) of unused debt from the pandemic era to a climate fund was unconstitutional.

What was the government planning?

In December 2021, the German coalition government agreed on an unusual budgetary maneuver that saw €60 billion ($64 billion) of untapped credit secured to help combat the effects of the pandemic reallocated to its so-called climate and transformation fund (KTF).

The KTF is a special fund, separate from the normal state budget, that finances measures for climate protection. These include support for the development of green technologies to the renovation of old housing stock and oil and gas heating systems.

The reallocation of debt away from its original pandemic purpose to the KTF was made possible by a temporary, pandemic-related suspension of borrowing limits in the constitution. The so-called debt break restricts the German public deficit to 0.35% of GDP but this was suspended due to the pandemic from 2020 to 2022.

Who complained and why?

A total of 197 conservative opposition lawmakers argued that the move effectively gave the government fiscal room to maneuver to which it wasn't constitutionally entitled. They said this could set a precedent for Germany's financing of future crises.

"If the coalition were to be allowed to continue with this practice, every finance minister could in the future accumulate unlimited debt in a crisis year, but then use the money later for completely different purposes and for an unlimited period of time in other years," said Mathias Middelberg, of the CDU/CSU parliamentary group.

Germany's Federal Audit Office also described the budget maneuver as "constitutionally dubious," saying that the government did not provide adequate justification for the "misappropriation" of money intended to combat the pandemic. It suggested that climate protection policies should constitutionally be funded from the general state budget.

The constitutional court agreed with those arguments.

How did the German government try to justify the budget maneuver?

Government budget secretary Werner Gatzer says that the reallocation of the pandemic credit did not constitute misappropriation, arguing that investment in climate protection could actually act as a catalyst for Germany's post-pandemic economic recovery.

He justified the retrospective reallocation of the credit by saying that, otherwise, there could have been a delay of several months to clear funds.

The constitutional court, however, disagreed.

Why is this important?

The ruling of the constitutional court in this matter could have a significant effect on how German states' governments finance their response to future crises.

"Germany’s constitutional court could provide a landmark ruling affecting the government’s fiscal space immediately and in future crises," Christian Schulz, deputy chief European economist for Citi, told Reuters news agency.

What now?

With the government's budget maneuver having been declared unconstitutional, the KTF now finds itself €60bn short, money which will have to be found elsewhere.

Back in June, Robert Habeck, the vice-chancellor and minister for economic affairs and climate action, said that such a ruling would hit Germany hard economically, "pulling the rug on which we are trying to stabilize the German economy from under our feet."

Katja Mast of the center-left Social Democratic Party (SPD), the largest party in the ruling coalition, said that the government's budget plans for 2024 would still go ahead despite the court's decision.

"We are prepared for all scenarios," she said. "As it stands, we will still pass the budget on December 1. The decision [of the constitutional court] will not affect the coalition's climate goals."

She said the government would now carefully consider the court's ruling and that she would be open to a debate on the federal debt brake.

mf/rc (Reuters, dpa)

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