German cabinet tries to solve ‘no-debt’ crisis after court outlaws budget

You know it's a crisis when Germany's Green vice-chancellor cancels attending a climate summit.

Robert Habeck, who's also economy minister, was supposed to be at the COP28 summit this week in Dubai.

Instead, he is in Berlin, wrangling with coalition partners over an emergency agreement for next year's budget. 

The crisis exploded on 15 November, when Germany's constitutional court declared that the government's budget was illegal for breaking German laws against taking on new debt.

That left a hole of tens of billions of euros.

Now the government has just a few days to come up with a solution, if it wants to pass the 2024 national budget before 1 January without emergency sittings.

On Wednesday Germany's cabinet meets for the last time this year. A revised budget would have to be put to parliament in next week's final sessions before Christmas, so ministers should agree this week on how to balance next year's budget, while sticking to the law.

This is not so much a debt crisis, as an anti-debt crisis. A German law, known as the "debt brake", limits the amount of new borrowing the government is allowed to take on.

The law is enshrined in the constitution since Chancellor Angela Merkel introduced it in 2009 and is a matter of faith for conservatives, who brought the case to the courts.

So it was a coup for the conservative opposition when three weeks ago judges ruled that Olaf Scholz's left-leaning government was breaking this law.

Balancing Germany's budget is a feature of German politics, and is known as the schwarze Null, or black zero. It limits a government's budget deficit to 0.35% of economic output.

Exceptions are allowed in national emergencies, such as the Covid pandemic. The government had planned to use emergency debt left over from the pandemic, to spend on Germany's shift to green energy instead. Germany's constitutional court has declared this wheeze illegal.

That leaves an estimated shortfall of €60bn (£51bn; $65bn) for 2023, and €17bn for 2024.

For the current year the government has decided to get round the "debt brake" by declaring 2023 an emergency year, because of the energy crisis sparked by Russia's invasion of Ukraine, although this may also be challenged in the courts.

But so far, it's not clear what Mr Scholz is proposing for 2024.

A much-anticipated parliamentary speech by the German chancellor last week did nothing to clarify that. His main message was: Trust me, we have a plan. He also repeated his mantra in German-accented English that "you'll never walk alone".

Behind the scenes the three coalition parties have spent the last few days in late-night meetings scrambling to reach an agreement. German commentators can only guess at who is negotiating what, based on which government building has the lights on late at night.

Broadly speaking the only solutions are tax rises, spending cuts or more debt. But these are three very different parties, with conflicting views over borrowing and spending.

The business-friendly small-state liberal FDP, which runs the finance ministry and holds the purse strings, is ideologically opposed to higher taxes and obsessed with keeping the "debt brake".

Chancellor Scholz's centre-left SPD meanwhile refuses to roll back a promised increase on social spending, and the Greens are determined to boost investment in Germany's transition to renewables.

An uncomfortable coalition at the best of times, and these are not the best of times.

Until now the cracks have been papered over by throwing money at causes important for each party.

But all three are doing badly in the polls and have been punished in recent regional elections, making party members unruly and party leaders less open to compromise. The main reason that a compromise looks possible is that poor poll numbers mean there's no appetite within the government for fresh elections.

Green ambitions to soften the "debt brake" will be difficult to agree in parliament because this needs a two-thirds majority.

Opposition conservatives smell blood, so are in no mood to compromise, and even liberal coalition partners may not agree. But Robert Habeck is rumoured to be planning to get round borrowing rules by arguing for an exemption for crucial future infrastructure.

Either way, the coalition may still find a way to spend money on what's important to each party, just less of it.