German economy plunged into crisis after ruling against $65bn debt reallocation

The German government is scrambling to find a fiscal solution to its budget woes after a court ruling plunged the country's finances into chaos.

Germany's constitutional court ruled on November 15 that the decision of Chancellor Olaf Scholz government's to reallocate €60 billion ($65.8bn) of unused debt from the COVID-19 pandemic era to its climate and transformation fund was unconstitutional.

Germany has strict spending rules enshrined into law designed to prevent Europe's biggest economy from accumulating high debts. The constitutional "debt brake" limits the federal government's structural budget deficit to 0.35 percent of gross domestic product.

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Scholz has sought to reassure Germany's parliament and the public that he can find a solution to fill the budget blackhole left by the court ruling. The judgement wiped out billions of spending commitments largely targeted towards renewable energy projects and financial relief for consumers and businesses affected by high energy costs.

Reassuring the public

Speaking in parliament, Scholz said high spending was required after a series of unexpected challenges including the pandemic and the conflict in Ukraine.

"In the past two years, Germany has been shaken by serious, unforeseeable external crises," he said. "That presented us with challenges that our republic has perhaps never before experienced in such concentration and severity."

"Citizens can rest assured that the state will stick to the promises it made. We will not abandon anyone with the challenges we currently face," he added.

Late night talks to thrash out a deal

As leaders of his three-party coalition prepare to meet late on Friday to find ways to plug the €60 billion ($65.8bn) blackhole, some lawmakers from Scholz's Social Democrat Party (SPD) have argued for suspending the debt brake.

"The SPD is convinced that a justification can be found" to declare an emergency situation, said SPD MP Katja Mast.

The German government must fill a "high double-digit billion" gap in the 2024 budget, she added.

Political pressure builds

The deficit dust-up has added to the political pressure facing Scholz, whose party is languishing in the polls in fourth place.

Conservative opposition leader Friedrich Merz has leapt on the budget crisis, blasting the Chancellor before fellow lawmakers in the Bundestag.

“This is the government of the world’s fourth largest economy. It's simply embarrassing what we are seeing and hearing from you here," he told Scholz directly from the chamber lectern.

"Compared to Willy Brandt, compared to Helmut Schmidt and even compared to Gerhard Schroeder, at the latest now, after this government declaration, it must be concluded: you are incompetent," he added, referencing former chancellors from Scholz's party.

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