Germany Faces Urgent Need to Resolve ‘No-Debt’ Crisis After Court Ruling

Germany is currently grappling with a major crisis following a ruling by the constitutional court that declared the government’s budget illegal. The court cited the violation of German laws against taking on new debt, leaving the government with a significant budget shortfall of billions of euros. This has created an urgent need for the government to come up with a solution and pass the national budget for the upcoming year before 1 January. The crisis has sparked intense debates and negotiations among coalition partners, with the last cabinet meeting of the year scheduled to address the issue. The crisis is not simply a debt crisis, but rather an anti-debt crisis, as Germany’s “debt brake” law limits the government’s new borrowing capacity. The law has been a fundamental pillar of German fiscal policy since its introduction by Chancellor Angela Merkel in 2009. Conservative opposition parties successfully challenged the left-leaning government’s violation of this law, resulting in the court ruling. The German government’s focus on balancing the budget, known as the “schwarze Null” or black zero, restricts the budget deficit to 0.35% of economic output, with exceptions allowed in national emergencies like the Covid-19 pandemic. The government had planned to use leftover emergency debt from the pandemic to invest in green energy transition, but the court deemed this illegal, leading to a considerable budget shortfall for the next two years. To address the current year’s budget deficit, the government has declared 2023 an emergency year due to the energy crisis resulting from Russia’s invasion of Ukraine, although this decision may also be contested in court. Chancellor Olaf Scholz has not yet clarified his proposal for the 2024 budget, creating further uncertainty. The coalition parties have been engaged in intense negotiations to reach an agreement, with potential solutions including tax increases, spending cuts, or additional debt. However, the parties have conflicting views on borrowing and spending, making consensus challenging. The liberal FDP opposes higher taxes and prioritizes maintaining the “debt brake,” while the center-left SPD aims to increase social spending, and the Greens are determined to boost investment in renewable energy. The coalition’s poor poll numbers and recent electoral defeats have resulted in less willingness among party leaders to compromise, making the path to agreement more difficult. Additionally, softening the “debt brake” would require a two-thirds majority in parliament, where opposition conservatives have shown little willingness to compromise. Despite these challenges, the coalition may find a way to allocate funds to prioritize their respective party agendas, albeit in reduced amounts.