German Court Says Government Cannot Shift Covid Funds to Climate Projects

Why It Matters: A Restraint on Germany’s Green Ambitions.

The decision set a precedent for Germany’s fiscal maneuvers during financial crises, could heighten tensions within the governing coalition and imposes a restraint on the country’s green ambitions.

The Climate Transformation Fund has €212 billion dedicated to projects from 2024 to 2027. The court ruled that it must now be reduced by €60 billion, the money added from unused pandemic funds.

“If this means that obligations already entered into can no longer be met, the budget legislator must compensate for this elsewhere,” the court said.

The fund supports a wide range of measures to help Germany reach its goal of net zero greenhouse gas emissions by 2045. Projects include the rollout of heat pumps, incentives for electric vehicles and spending on hydrogen infrastructure.

Heart of the Issue: Germany’s ‘Debt Brake’

Germany is the only leading industrial economy to have a so-called debt brake written into its constitution. The law, enshrined in 2009, restricts annual borrowing to 0.35 percent of gross domestic product, amounting to roughly €12 billion a year. Exceptions are allowed in emergencies, including natural disasters or a pandemic.

The borrowing limits have led to increasingly creative and complex moves to cover the country’s expenses.

“The circumvention of the debt brake is becoming increasingly absurd,” said Marcel Fratzscher, head of the German Institute for Economic Research, a Berlin-based think tank. “It is not in keeping with the times because it deprives politicians of the leeway they need to combat crises and make urgent investments in the future,” he added, naming education, climate protection, innovation and infrastructure as examples.

What Happens Next: Increasingly Fraught Budget Negotiations.

This week, German lawmakers are negotiating the 2024 budget and financial plans through 2027 amid tensions over spending cuts, aid for Ukraine and now the ability to finance green projects.

Fiscal policy has been a source of conflict between the three parties in Mr. Scholz’s coalition government — his Social Democrats, the Greens and the Free Democrats — which have differing opinions on how to negotiate the restrictions of the debt brake.