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The accounting error that could kill Germany’s coalition

The accounting error that could kill Germany’s coalition

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BERLIN — When Germany’s Social Democrats formed a three-way coalition with the Greens and the conservative Free Democrats in 2021, they sold the unconventional alliance as a progressive ménage à trois that would transform German politics.

Two years later, it looks more like a clusterfuck.

The government’s disarray was on full display after Germany’s highest court ruled Wednesday that the centerpiece of the alliance’s environmental strategy — a plan to repurpose €60 billion left over from an emergency COVID-19 fund to finance the coalition’s climate agenda — was unconstitutional.

The decision blew a massive hole through the middle of the coalition’s signature legislative agenda, in particular a plan to remake the German economy root and branch by weaning it off of fossil fuels. If the parties fail to find a new way to finance those plans, the coalition itself could quickly collapse, some analysts warn.

“If you want to put a fine point on it, you could say that this coalition is back to square one,” said Albrecht von Lucke, a prominent German political scientist and commentator. “I get the impression that none of the three parties is capable of finding a solution.”   

The end of the affair?

German governments rarely collapse, due both to constitutional hurdles and the fact that almost all coalitions since World War II have been alliances of two, which tend to be more stable. Yet the deep discord in the current coalition has fueled speculation that Chancellor Olaf Scholz might dump the Greens and Free Democrats, or FDP, and pursue a coalition with the center-right Christian Democrats.

With less than two years until the next national election, expected in the fall of 2025, such an outcome seems unlikely, especially because it’s not clear how the Christian Democrats, who now lead the polls by a wide margin, would benefit as a junior partner.

Still, the fact that serious observers even consider a collapse a possibility underscores the depth of Berlin’s disarray.

The judicial rebuke, the first time the constitutional court has struck down a federal budget, highlights what critics see as a gaping divide between the neophyte coalition’s lofty ambitions and its legislative skills.

In July, the government faced a similar embarrassment when the court suspended a vote in the Bundestag, the German parliament, on a landmark household heating law because the coalition hadn’t given the opposition enough time to evaluate it. Other major initiatives, such as a child welfare law, have been delayed by persistent infighting within the coalition, which, polls suggest, is one of the least liked in German history. Only one-third of the population wants the current government to remain in office, according to a poll for German public television released last week, with more than 40 percent calling for a new election.

No new taxes

Spanning the ideological divide between the hawkish FDP — a party that rejects tax increases and repealing the debt brake — and the leftist Greens has proved particularly challenging for Chancellor Olaf Scholz.  His efforts to resolve the tensions in recent months have led to temporary truces without resolving the underlying conflicts.

The plan to use the COVID money, originally devised by Scholz, was essential towards marrying the fiscal demands of the FDP with the environmental priorities of the Greens when the coalition was first formed.

The SPD formed a three-way coalition with the Greens and the conservative FDP in 2021 | Carsten Koall/Getty Images

That’s why compensating for the €60 billion shortfall looks next to impossible. The only options to do so are tax hikes, which the FDP rejects, substantial spending cuts, which neither the Greens nor the SPD will support, and repealing the debt brake, for which the coalition lacks the requisite two-thirds super majority (even with the FDP’s backing).

The FDP, led by Finance Minister Christian Lindner, has been thrashed in a string of recent regional elections, in part because its base worries that the party abandoned fiscal discipline by accepting a series of “shadow” budgets, such as the climate fund and a €100 billion “special fund” for the military that is also outside the regular budget.

While Germany’s regular €446 billion budget for 2024, expected to be finalized as planned in the coming weeks, is not at risk, the future of a host of infrastructure investments and environmental subsidies is.

The coalition created what it called a “Climate Transformation Fund” with the €60 billion outside the normal federal budget and had already earmarked the money to fund everything from curbside charging stations for electric vehicles to modernizing the tracks of Germany’s state-owned railway over several years.

The advantage of this structure for the coalition was that it would allow them (or so they hoped) to finance the subsidies without issuing new debt.

With Germany’s budget already strained to the limit, the planned climate spending would have been impossible without violating the country’s “debt brake,” a balanced-budget law meant to enforce fiscal discipline. The same is true of generous subsidies Germany has offered to lure chipmakers (including €10 billion for Intel), money it planned to draw from the climate fund.

The plan to use the COVID money, originally devised by Scholz, was essential towards marrying the fiscal demands of the FDP with the environmental priorities of the Greens when the coalition was first formed | Daniel Roland/AFP via Getty Images

The debt brake was introduced in 2009 but largely forgotten until the pandemic in 2020, when the government had to trigger a clause allowing its suspension in times of crisis.  

Since then, the German economy has stagnated, making it difficult for the coalition to finance its legislative agenda within the deficit limit.

On a wing and a prayer

Despite doubts that the constitutional court would rubber stamp the government’s decision to repurpose the leftover COVID money, the coalition pushed ahead anyway, convinced its legal arguments were sound.

In the wake of the ruling, Chancellor Olaf Scholz and his partners tried to put a brave face on the court’s decision, thanking the court for the clarity of its ruling, while insisting their agenda wasn’t in danger.

“Together with the parliament, we are going to carefully evaluate the detailed reasoning behind the ruling and its repercussions,” Scholz told reporters, adding that the government would put together a new plan to finance the climate fund.

That’s easier said than done, as Vice Chancellor Robert Habeck, a Green who is spearheading the climate coalition’s climate reforms, acknowledged in June.

If the constitutional challenge to the climate budget succeeded, he said, “it would hit Germany’s economic policy very hard — probably so hard that we wouldn’t survive.”

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