Germany freezes new spending commitments as budget woes deepen

BERLIN, Nov 21 (Reuters) – The German government has imposed a freeze on most new spending commitments, which authorities called on Tuesday a necessary step as Chancellor Olaf Scholz’s coalition struggles to find a way out of a crisis worsening budget.

Government spending plans were upended by a court ruling last week that blocked the government from shifting 60 billion euros ($65 billion) in unused pandemic funds to green initiatives, potentially depriving some industries German companies with the support they need to remain competitive.

The verdict deepened tensions within the three-way coalition between Scholz’s ruling Social Democratic Party (SPD), the pro-spending Greens and the fiscally conservative Free Democrats (FDP) over whether to suspend auto limits. -imposed on the increase in new debt.

A Forsa poll showed that although support for the parties ruling together is as low as 34%, around 58% of Germans expect the trio to continue governing until the next election in 2025.

The Ministry of Finance has frozen its promises of future spending on almost the entire federal budget, shows a letter from the Secretary of State for the Budget, a sign of the seriousness with which it takes the potential consequences on its finances.

The measure applies to all ministries and a 200 billion euro fund created to support businesses during the pandemic and energy crisis following Russia’s invasion of Ukraine.

LEGAL CHALLENGE?

Berlin blocked Economic Stabilization Fund spending for this year after the court ruling, a source close to the Finance Ministry said on Tuesday.

The 200 billion euro fund is threatened by a possible legal challenge from the resurgent main opposition, the Christian Democrats (CDU), who successfully filed a lawsuit against the so-called Climate and Transformation Fund last week last.

The government wants to close the stabilization fund by the end of the year, a government source told Reuters.

Economy Minister Robert Habeck warned that the court ruling could seriously damage Germany’s ability to support its industry in a green transition and prevent jobs and value creation from moving to the ‘stranger.

This could include the proposed chip factories, battery supply chain expansion and steel decarbonization, government sources said on Monday.

“These funds are not a supplement that can be carelessly dispensed with… the loss for the economy if the investments were not made now would be even greater,” Habeck said at a digital summit in Jena, in the east of the country.

So far, the coalition is sticking to its timetable of completing consultations on next year’s budget, a member of the parliamentary budget committee said. The lower house must vote on the budget on December 1.

SUSPENSION OF THE DEBT BRAKE?

Pressure is mounting within the SPD for the government to change the debt brake enshrined in the Constitution to free up more spending, a move that Finance Minister Christian Lindner opposed because the brake is sacrosanct for many members of his FDP.

“The debt brake in its current form is not adapted to the challenges of the future, as the ruling of the Constitutional Court has shown (…),” declared the leaders of the SPD parliamentary groups in the lower house of the Bundestag, the European Parliament and the Länder.

“It is impossible to avoid a fundamental reform of this brake in the future,” they said in a joint resolution.

Berlin plans to suspend the debt brake again this year, a government source said, stressing that its justification should follow the guidelines set out in the court ruling. The curb was lifted in 2020 until 2022 to mitigate the economic fallout from COVID and Russia’s invasion of Ukraine.

Public opinion appears divided over how the government, whose popularity has fallen amid economic weakness and rising inflation, should proceed.

According to an RTL/ntv poll, 44% of Germans believe the government should fill budgetary holes by making cuts elsewhere, while 38% think it should largely abandon projects planned in the 60 billion fund euros.

The CDU said on Tuesday that the 2024 budget, as presented, was not fit for purpose due to the court verdict.

However, there are signs that the CDU’s decision to sue the government could spill over into the states where the party runs local government.

Hendrik Wuest, Prime Minister of the CDU government of North Rhine-Westphalia, said the federal government must ensure that money continues to flow to industry, especially energy-intensive companies, in his state, in order to protect jobs.

($1 = 0.9168 euros)

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Riham Alkousaa is Reuters’ energy and climate change correspondent in Germany, covering Europe’s largest economy’s green transition and Europe’s energy crisis. Alkousaa is a graduate of Columbia University’s journalism school and has 10 years of experience as a journalist covering the European refugee crisis and the Syrian civil war for publications including Der Spiegel Magazine, USA Today and the Washington Times. Alkousaa was part of two teams that won the Reuters Journalist of the Year award in 2022 for their coverage of Europe’s energy crisis and the war in Ukraine. She also won the Foreign Press Association Award in 2017 in New York and the White House Correspondent Association Fellowship that year.