The German government has in the last week scrambled to find a way to accommodate a constitutional court ruling which blocked the transfer of unused funds from the pandemic to green investment, blowing a €60 billion ($65 billion) hole in its finances.

‌Government borrowing is a very tricky business in Germany. The nation prided itself on the "black zero" economy that it was able to run in the days of Angela Merkel's government. It was written into the country's constitution that what is known as the "debt break" restricts Germany's structural budget deficit to the equivalent of 0.35 percent of gross domestic product.

‌The now missing $65 billion will have to come out of somewhere. 

Still, neither German Chancellor Olaf Scholz nor any of the other leaders of his increasingly uncomfortable three-way coalition have said precisely what, if anything, will be cut entirely.

Spending freeze

‌"Our goal is to discuss the budget quickly but with due care," said the joint statement from the leaders of the Social Democrats, Green Party and Free Democrats.‌ There is currently a freeze on spending from the Economic Stabilization Fund for the rest of 2023. This is where the money had been borrowed from to aid COVID-19 recovery, which was subsequently repurposed to mitigate the consequences of the energy crisis.

‌Any project without 100 percent approval will now have a question mark over it, including aid for Ukraine. Germany had promised to double the money Berlin gives to Kyiv in 2024 to almost $9 billion. The German Defense Ministry declined to comment on this.

Ramifications beyond Germany

‌Meanwhile, Eurasia Group has warned the recent court ruling will have ramifications beyond Germany.

‌"The political fallout from Germany's constitutional court ruling continues to rock German politics and is now impacting EU politics as well," the political risk consultancy said in a statement. "[It is] even threatening the bloc's €50 billion commitment to fund Ukraine through 2027."

‌So what's next?

‌There are some binary options, but it is unlikely that any of those will be what Europe's biggest economy will end up with. It could cut some of the environmental and social programs that the $65 billion had been allocated to. However, this is wholly unpalatable to the center-left Social Democrat and Green element of the ruling coalition. 

Germany could raise taxation to pay for the projects, which would be just as unacceptable to the fiscally hawkish Free Democrats. The country could borrow more money, but unless the government can show that this is an emergency of the same scale as the COVID-19 pandemic was or a natural disaster and not just poor financial planning, the rules won't allow for it.

Compromise or collapse?

‌Former Federal Finance Minister Peer Steinbruck has said it may be time to change the laws. "There has to be a debt break, but the current one is clearly no longer up to date," said Steinbruck.

However, he is not confident that current Finance Minister Christian Lindner sees it the same way. The FDP leader has repeatedly said the time has come for Germany to cut back on spending.‌ If a compromise is not found between the three parties on a German budget, the only option left would be fresh elections. Recent polls show that none of the incumbent parties would do very well if that was the case.

The current coalition is predicted to win only 34 percent of the vote if voters were to cast ballots today, well short of the more than 50 percent needed to rule.‌ Eventually, someone will either have to compromise, else the coalition will collapse.

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