Germany Freezes Public Spending After Court Ruling

Berlin has imposed a freeze on virtually all new federal spending commitments for the rest of the year, or the next 40 days.

(Photo by European Union 2023 EP under CC BY 4.0)

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Germany is officially Scrooge.

This week, Berlin imposed a freeze on virtually all new federal spending commitments for the rest of the year — 40 days — a week after a court ruled the government’s spending plans unconstitutional. This complicates a deepening budget crisis facing not just Germany but all of Europe.

Runny Nose, Sneezing, Congestion

Germany was referred to as “The Sick Man of Europe” as recently as the 1990s. But a series of reforms turned the nation into a 21st-century economic superstar and industrial powerhouse. But recently, it seems Germany has caught another cold. Russia’s continued war with Ukraine has sent electricity and gas prices skyrocketing, ravaging the manufacturing industry. It’s so bad that more than a few German businesses are considering cutting their domestic investments and searching for production alternatives abroad.

The government has been trying to revitalize its struggling manufacturing-and-exports-focused economy — while also trying to reach its climate goals — by flushing funds into green tech, battery, and microchip production. But now, thanks to last week’s ruling from Germany’s constitutional court, it looks like the only cure for the Teutonic nation is bed rest:

  • Chancellor Olaf Scholz wanted to reallocate €60 billion of unused debt from the pandemic era to a green-transition project, but the court found the move to be illegal, saying it would violate fiscal rules that limit the country’s budget deficits to 0.35% of gross domestic product in normal times.
  • While some economists feel the ruling is exactly the kind of tough love Berlin needs to learn fiscal discipline during rough times, others are worried, The Wall Street Journal reported. They feel the ruling may limit the government’s ability to draw money from a variety of special funds that have been established to circumvent the country’s debt brake.

Brother, We Can’t Spare a Dime: All of this is important because Berlin is responsible for about 25% of European Union spending. While Germany still supports a four-year, €50 billion EU budget package for Ukraine, the WSJ reported, it’s downright cold on an additional €50 billion to cover common debt, migration spending, and salary increases for EU officials. And the belt tightens.