Germany in unintended inflation fight
On the 15th of November, the German Federal Constitutional Court made a dramatic ruling that immediately caused a severe freeze in public spending, a situation that the country has never explored before in modern history.
The verdict is not just a verdict of some sort because it blocks EUR 60 billion (USD 65 billion) in public spending which is a significant amount. The background is slightly technical combined with hopeless German politics.
Understanding the ruling
In 2009, the parliament decided to introduce a so-called “public debt blocker” (Schuldenbremse in German). It was not just an ordinary law; it was even built into the country’s constitution. The idea behind the new rule was that it was then made impossible to exceed a certain public deficit threshold under normal economic conditions.
Though under extraordinary critical circumstances, like a crisis, the rule about public debt blocking can be waived. This happened during the Covid-19 crisis when the German parliament approved an extraordinarily huge EUR 210 billion rescue package for the country.
Out of this package, EUR 150 billion was utilised as crisis help and economic compensation during the Covid-19 crisis.
The German government decided to roll over the remaining EUR 60 billion to another funding vehicle – a fund that is aimed at climate investments and climate improvements, though defined very broadly. For example, the fund can also invest in manufacturing semiconductors. It is a bit of an everything fund supporting the areas where Germany is lacking behind its peers globally.
That arrangement was too creative for the leading opposition party in the parliament, as they argue that the allocation of the EUR 60 billion should have been seen as a new economic crisis package. This bill would never have qualified as there was no extraordinary economic crisis that would have justified another breach of the debt ceiling, the opposition party argued. Following the opposition party simply brought the case to the Constitutional Court and won the lawsuit.
Impact on the economy
The straightforward thinking is that, as a consequence, the funds must be routed back to the government budget. However, when it comes to spending money, politicians are faster than the speed of light. The money is already earmarked for different projects from 2024 and onwards. The key is that it’s actually not money in a pot but a debt that should have been issued. The issue of debt is what the Constitutional Court, in reality, banned.
As the expenditures already are earmarked but they can’t get financed via the planned debt issue, the EUR 60 billion all of a sudden is a hole in the government budget. The immediate reaction was a sort of expense stop, though the government payments for this year aren’t really in danger.
Somehow it showcases the endless problems of the German government, but the challenges are homemade, so to speak. It is precisely because the government doesn’t create bearing and sustainable solutions but instead tries to survive on quick fixes. This alone, once again, underlines why we fundamentally stay sceptically about Germany, Europe’s largest economy, as an investment destination.
Right now, it is likely that the hole in the budget will lead to spending cuts in 2024. Further, companies in the affected business segments are already re-considering their investment plans. There is no doubt that currently the Constitutional Court ruling will have a negative impact on economic growth. So far this year, the GDP growth has moved intractable around zero (Graph one), and now the economy risks a hit from the Constitutional Court. German consumers are also reacting, though unfortunately, towards being hesitant to hand out money (Graph two).
We are uncertain if the financial markets have priced this risk in, and it is a factor that could weigh on the German stock market. In the bond markets, it, on the contrary, might be received with cheer. In particular, during the Covid-19 crisis, the European governments spent way too much money which led to the famous high inflation. Following that, the German government and other European governments have not been consequential in scaling back public spending. This situation has kept inflation at an unsatisfactory high level.
The inflation is moving lower but ironically it might be the German Constitutional Court that forces the inflation lower in a somewhat harsher way than the European Central Bank has managed to succeed with.
