Germany Cannot Shift Covid Funds to Climate Projects, Court Rules

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Germany’s highest court ruled on Wednesday that the government’s plan to repurpose tens of billions of euros from a pandemic fund to help finance environmental projects violated the nation’s Constitution. The decision threatens to rip a hole in the country’s budget and complicate its transition to a greener economy.

The ruling means that the government of Chancellor Olaf Scholz cannot shift 60 billion euros, about $64.6 billion, earmarked for tackling the Covid-19 pandemic into a special fund aimed at helping Germany meet ambitious goals to reduce carbon emissions.

The case was brought before the court by the center-right opposition, which argued that the government could not redirect emergency funds raised for one purpose to another without approval by lawmakers.

Mr. Scholz said his government would respect the ruling and pledged to “swiftly revise” the affected fund.

Chancellor Olaf Scholz of Germany had planned to move about $64.6 billion from a Covid program into a special fund to tackle carbon emissions.Credit…Liesa Johannssen/Reuters

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

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

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.

Robert Habeck, Germany’s economy minister, said that all commitments already made from the fund would be honored. But his counterpart in the finance ministry, Christian Lindner, said that he would remove €60 billion from the fund and effectively freeze any future pledges until the gap could be filled.

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 German economy, Europe’s largest, is expected to shrink this year and recover only slightly in 2024. The climate fund is part of Mr. Scholz’s government effort to revive industry by investing in green technology and renewable energy sources.

“The question remains whether the debt brake makes economic sense when the country struggles with structural stagnation and a long list of serious challenges and transitions, of which many need fiscal support,” said Carsten Brzeski, chief economist at ING Germany.

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.

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