CommentFederal Constitutional Court

Pivotal question unresolved in German fiscal policy

Now tell me, what's your stance on transformation financing? The government coalition in Berlin must ask itself this question again after the ruling of the Federal Constitutional Court.

Pivotal question unresolved in German fiscal policy

Germanys Supreme Court's ruling on the Climate and Transformation Fund (KTF) will bring more clarity and truth to German fiscal policy. It will help to better implement constitutional budget principles both at the federal and state levels. For the first time the judges specify potential exceptions in the debt brake, setting clear boundaries. This is particularly helpful as the current federal government is juggling multiple shadow budgets, including the KTF, the special fund for the Bundeswehr (German armed forces), and the Economic Stabilization Fund.

However, increased transparency and a clearer debt brake do not solve the fundamental question at the heart of the matter: How will the green transformation of the economy be financed? Where will the money for investments come from? In the coming years, the KTF is expected to allocate billions for promoting energy efficiency, expanding solar and wind power, boosting electric mobility, scaling up hydrogen, and advancing the heat transition. The debt-financed fund was the government coalition's response to this question, a compromise that reconciled the conflicting interests of three parties under one coalition roof. This compromise is now obsolete, and it will significantly alter the dynamics within the federal government. The Minister of Economic Affairs, Robert Habeck, is particularly affected, as more than 80% of the projects financed through the KTF fall within his portfolio.

KTF tainted from the start

The so-called "traffic light coalition" is to blame for the current mess, as the transformation of unused Corona loan authorizations was tainted from the start with the perception of financial trickery in the gray area of the debt brake. There is now great bewilderment, and nobody has a Plan B ready. Some recommend prioritization as a way out. However, this is a challenge for the coalition, as demonstrated by the 2024 budget proposal. If prioritization leads to the complete cancellation of crucial investments in the green transformation, it offers little help anyway. Others suggest a reform of the debt brake by increasing the possibilities for structural indebtedness or introducing a golden rule with exceptions for specific investments. However, the necessary majorities for such constitutional changes are currently hard to envision. The ruling from Karlsruhe poses an extremely tough test for the red-yellow-green coalition.