Use of €60bn Covid debt for climate fund unlawful, German top court rules

Germany’s Federal Constitutional Court ruled on Wednesday (15 November) that the German parliament’s 2022 decision to pour €60 billion from the unused debt contracted during the COVID-19 crisis into a new climate fund was unlawful.

With Germany under pressure to deliver on its climate commitments, the government is struggling to find the necessary public financing while staying within the bounds of the constitutionally enshrined “debt brake”, which sets strict limits on federal public debt levels.

Finance Minister Christian Lindner (FDP/Renew Europe) had been criticised in the past for using accounting tricks to circumvent the debt brake, including so-called ‘shadow budgets’, special funds for certain purposes that are not officially part of the federal budget.

Among other things, this has been used in the case of a €100 billion special fund for military spending after the Russian aggression against Ukraine, and a €200 billion “energy shield” during the energy crisis, only parts of which are expected to be used.

On Wednesday, the Federal Constitutional Court ruled against a 2022 decision by the German parliament to utilise debt that had been contracted during the COVID-19 crisis for the “Climate and Transformation Fund”, another shadow budget dedicated to financing green investments.

The ruling will have severe consequences, as the government is now bound to find alternative sources of cash to meet the €60 billion commitments, which could include additional taxes or spending cuts.

In a first reaction to the judgement, Chancellor Olaf Scholz (SPD/S&D) announced that the government will quickly revise the planned spending under the Climate and Transformation Fund.

“The Federal Government will follow this judgement of the Federal Constitutional Court closely,” Scholz said. “Together with the German Bundestag, we will now carefully analyse the judgement and its comprehensive justification as well as its consequences,” he added.

The ongoing negotiations for the 2024 budget would not be affected, however, and would continue as planned, Scholz said.

Speaking after Scholz, Lindner said that the €60 billion of borrowing authorisations will not be used, as stipulated by the Constitutional Court.

Further spending from the fund could only happen after its revision, Lindner said, adding that this would apply for all commitments from the fund for the years as of 2024.

Lindner also defended his initial decision to use the Covid-related debt, saying that the government had considered this to be “constitutionally responsible according to the best professional advice”.

Misuse of funds

While the debt brake strictly limits annual debt levels, using additional debt is allowed in extraordinary crisis situations. This is how the government justified total borrowing of €240 billion in 2021, to respond to the worst effects of the pandemic.

In early 2022, however, when it became clear that €60 billion would remain unused, as they were no longer needed for COVID-related expenses, the parliament decided to transfer the related borrowing authorisations into the climate fund, in order to finance climate investments, such as boosting renewable energy and electric mobility.

This, however, was unconstitutional, Doris König, Vice President of the Federal Constitutional Court explained on Wednesday, as there was no “factual connection” between the emergency of the COVID crisis and the planned expenditure in green investments.

Secondly, the use of borrowed money from one year to finance spending in subsequent years would be against the principle of yearly budgeting, she explained.

Finally, as the decision was taken only in 2022 but affects the 2021 budget, it would be against the principle that the budget must be determined in advance.

Opposition sees position confirmed

The CDU/CSU (EPP) opposition, which had initially brought the case to the Court’s attention, celebrated the outcome of the ruling.

Jens Spahn, former CDU Health minister and deputy head of the CDU/CSU parliamentary group, wrote on X that the approach taken by the ruling three-party coalition of Social Democrats, Greens and Liberals was “obviously unconstitutional”.

“This already fragile coalition now completely lacks any foundation,” he added.

Senior CDU politicians, including the recently re-elected State Prime minister of Hesse, Boris Rhein, had over recent weeks called for the coalition to step down amid bad approval ratings, and trigger snap elections.

[Edited by Théo Bourgery-Gonse/Nathalie Weatherald]

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