Experts warn against investment cuts after German top court ruling

As Germany scrambles to find €60 billion after the constitutional court ruled that transferring unused COVID-related debt to a climate fund was against the constitution, economists warned that spending cuts could cost the country economic growth in the coming years following a parliamentary hearing on Tuesday.

Last week, Germany’s Constitutional Court ruled that transferring €60 billion of unused COVID-related debt to a climate fund was against the constitution. With the amount removed from the fund, the government is now discussing how to close the funding gap, with Finance Minister Christian Lindner (FDP/Renew Europe) calling for spending cuts.

But, at a parliamentary hearing on Tuesday, economists warned that cutting back on planned investments could prevent Germany from recovering from its current economic recession.

“We are stuck in stagnation, and we are facing a multiple, supply-side challenge for our economy,” said Michael Hüther, director of the German Economic Institute (IW), which is linked to German employers’ organisations.

The challenges of the green transition, infrastructure deficits and an ageing society “mean that we actually have a great need for investment here,” he added.

“If this doesn’t happen, and we see this in the description of historical investment crises, then they tend to feed on themselves over a longer period of time,” Hüther said, adding, “this means that we can probably no longer expect GDP growth next year”.

So far, economic forecasts by the EU Commission have predicted a contraction of the German economy by 0.3% in 2023 and a growth of 0.8% for next year.

His view was echoed by Jens Südekum, an economist at the University of Düsseldorf, who urged the government to resolve the issue quickly but without cutting back on investment, which could also put Germany at a competitive disadvantage internationally.

“The US is currently pursuing a very expansive fiscal policy, which is strongly focused on investment in future technologies, especially in areas where Europe and Germany can still be considered international leaders,” said Südekum.

“There is a certain fear that an engine of prosperity that is expected to generate growth, innovation, etc., in the future is in danger of migrating,” he added.

Money from the Climate and Transformation Fund was supposed to finance, among other things, the expansion of electric mobility, subsidies for new chip factories, and the production of hydrogen needed for products such as green steel.

The court’s ruling could also affect other funds, such as the €200 billion “energy shield”, which was designed to protect consumers and businesses from high energy prices following the cut in gas supplies from Russia, said Hanno Kube, a law professor at the University of Heidelberg, during the hearing.

Because of the uncertainty over funding, the finance ministry issued a moratorium on new payment obligations for the coming years for all ministries on Monday evening, SPIEGEL reported.

Florian Toncar (FDP), state secretary in the finance ministry, said on Tuesday that the ministry would use the hearing results and present a proposal on how to proceed before the final adoption of the 2024 budget, which is scheduled for 1 December.

(Jonathan Packroff | Euractiv.de)