German constitutional court strikes down €60bn climate fund

The CDU has argued that using unused money from the 2021 Covid-19 funds was illegal and violates Germany's constitutionally enshrined debt brake.

This limits government deficit spending to 0.35 percent of the annual gross domestic product. But debt rules were suspended under an emergency 'escape clause' in a situation similar to what happened with the EU fiscal rules.

The government had wanted to use the funds to shore up the budget, but Wednesday's decision means it will have to find other ways of financing the "climate and transformation fund."

'Pulling out the floor from under' energy transition

As part of a wider €212bn off-balance sheet debt vehicle, the government had planned to use the €60bn fund to finance a wide range of investments, ranging from semiconductors and heat pumps for households to renovating buildings.

This will likely put further pressure on the already troubled 'traffic light' coalition led by chancellor Olaf Scholz, Greens vice-chancellor, climate minister Robert Habeck, and finance minister Christian Lindner's pro-business Free Democratic Party (FDP).

Last July, Habeck told members of the Bundestag that an unfavourable ruling by the court "would pull the floor from under" the energy transition.

But Lindner has fiercely defended the so-called 'Schuldenbremse', which is also part of why these outside pots exist.

In 2022, the German government also proposed funding a €100bn defence fund and a €200bn fund for the energy crisis with off-balance sheet cash.

The judgment also leaves Germany in an awkward position as it would be in breach of its own debt rules at a time when Lindner is calling on other EU countries to agree on stricter debt rules.

Scholz said on Wednesday that the ruling would be far-reaching for the climate fund but pledged to find alternative funding sources.

"We will now quickly revise the economic plan, incorporate the necessary changes and adopt new ones," he said on X.

But increasingly, academics are calling on decision-makers to reform the rules or scrap them altogether.

"We need reform. We need clear fiscal rules. It needs to be clear that there will be enough money to invest in the green transition and not use off-balance sheet tricks," said Jakob Hafele, who is the executive director of ZOE, a think tank headquartered in Cologne, Germany.

It is estimated that Germany needs €240bn in additional climate investment until 2045 and "25 percent of that will never have a business case," said Hafele.

"My position is: we need to scrap the debt brake. We already have European fiscal rules and do not need separate German rules," he added.

Because the debt-brake is constitutionally enshrined, this would necessitate a treaty change for which a two-thirds majority is needed.