The worst-performing major economy is also facing a budget crisis. Germany’s leader pledges reforms, but how?

FRANKFURT, Germany – German Chancellor Olaf Scholz pledged Tuesday that his government would work “as quickly as possible” to resolve the budget crisis, but offered few details on how he would achieve his goals of promoting clean energy and modernizing the faltering economy after a court ruling reversed billions in spending. Scheme.

Schulz and his ruling coalition must decide what to cut next year after Germany’s Supreme Court ruled that 60 billion euros ($65 billion) to finance renewable energy projects and relief consumers and businesses from high energy prices caused by Russia’s invasion of Ukraine violated debt. Limits stipulated in the Constitution.

The cuts that must be made next year could further slow the world’s worst-performing major economy.

Schulz said in a speech before parliament that Germans “need clarity in uncertain times.” He promised that the government would not abandon its goals of sharply reducing carbon emissions from fossil fuels and protecting social spending.

Addressing bouts of sarcastic laughter from opposition members, Schulz said it would be a “grave and unforgivable mistake…to neglect the modernization of our country.”

As for where to cut spending, he said caps on consumers’ utility bills were no longer necessary because energy prices had fallen, although the government would act if they rose again. “You’ll Never Walk Alone,” Schultz said, citing the song’s English title.

The now-blocked spending was aimed at some of the long-term problems plaguing growth in Europe’s largest economy, such as the need to invest in new affordable renewable energy sources such as wind, solar and hydrogen and to support the production of batteries and computer chips.

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This has led to calls from some to ease debt limits because they constrain the government’s response to new challenges.

But Schulz’s coalition of the Social Democrats, Greens and pro-business Free Democrats does not have the two-thirds majority to do so without the conservative opposition, the Christian Democrats, who brought the legal challenge in the first place.

Opposition leader Friedrich Merz criticized Schulz as a “know-it-all” who was unwilling to change course and “lacks any idea of ​​how the country will develop in the coming years.” He pledged to adhere to debt limits.

Economists say cutting spending will only increase the challenges facing Germany after Russia cut supplies of cheap natural gas that fueled its factories, putting pressure on companies and raising the cost of living for families who pay more for energy.

The constitution limits the deficit to 0.35% of economic output, although the government can exceed that if there is an emergency it did not cause, such as a pandemic.

Germany’s Constitutional Court said the government cannot divert unused emergency funding earmarked for coronavirus relief to boost wind and solar projects, help with energy bills and encourage investment in computer chip production.

Some of the prohibited spending has already been used. In compliance with the ruling, the government is changing the 2023 budget by declaring a state of emergency, citing the cut off of natural gas to Russia.

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The question now is next year’s budget. The government will have to strive to cover a deficit of about 30 billion to 40 billion euros – plus 20 billion to 30 billion euros for 2025 – compared to previous plans, according to Holger Schmieding, chief economist at Berenberg Bank.

Some spending could be moved to public-private partnerships or captured by the country’s development bank. But that crap will only go so far.

Ultimately, spending could be cut by as much as 0.5% of annual economic output over the next two budget years, Schmieding said.

The debt limits were enacted in 2009 after the government accumulated debt to rebuild the former East Germany following German reunification at the end of the Cold War and when tax revenues declined during the 2007-2009 global financial crisis and Great Recession.

For years afterward, Germany managed to balance its budget or even run small surpluses, as its economy relied heavily on cheap Russian natural gas and booming exports of luxury cars and industrial machinery, with fast-growing China serving as a major market. Economists say the government has underinvested in infrastructure, renewable energy and digital transformation, gaps it is now trying to fill.

The fallout has left Germany expected to be the worst-performing major economy this year, shrinking 0.5%, according to the International Monetary Fund.

Next year’s prospects are only slightly better. The industry is struggling with energy prices and a shortage of skilled workers, while Chinese carmakers are challenging Germany’s Volkswagen, BMW and Mercedes-Benz and have plans to expand their sales across Europe.

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The budget debate is ironic because Germany has the smallest pile of long-term debt of any of the G7 advanced democracies, at 66% of GDP. This compares to 102% in Britain, 121% in the United States, 144% in Italy, and 260% in Japan.

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