Why a German court struck down a €60 billion fund for climate change

The Federal Constitutional Court had been examining accusations from the main opposition CDU party that Chancellor Olaf Scholz's ruling coalition has acted in contravention of the "debt brake".

This key commitment to balanced budgets caps Germany's new borrowing to 0.35 percent of gross domestic product.

The brake was suspended from 2020-2022 to deal with shocks from the coronavirus pandemic and energy crisis, as is permitted during emergencies, but came back into force this year.

The court case centred on a change to accounting rules for funds outside the main budget that was implemented last year by the centre-left-led coalition, giving it more room for deficit spending outside times of crisis.

In particular, it looked at a decision to transfer €60 billion of loan authorisations that had been part of pandemic support programmes to a fund aimed mainly at fighting climate change.

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The court in Karlsruhe, southwest Germany, found this move was "incompatible" with the constitution and overturned it, ruling in favour of a legal complaint lodged by the CDU.

"The court's decision means that the volume of the 'climate and transformation fund' is reduced by €60 billion," it said in a statement.

If the state "has entered into obligations that it can no longer service as a result of this reduction," it must be compensated for "through other means".

Scholz said the judgement would be "carefully examined", and it could have implications for spending at the national and state levels.

Finance Minister Christian Linder immediately froze the current business plan for the climate fund -- worth about €212 billion before the ruling -- affecting projects from 2024 onwards.

'Political disaster'

The fund is aimed in large part at speeding up Germany's shift to an emissions-free economy.

Funds were also earmarked for other measures, however, such as boosting domestic semiconductor production as Europe seeks to reduce reliance on imports from Asia.

"The government will now have to fill a hole of €60 billion," said ING economist Carsten Brzeski, adding it was "bad news" that meant agreement on the 2024 budget could be delayed.

The decision will also likely further strain ties within the coalition, particularly between Scholz's SPD and the Green party on one side, and the pro-market FDP on the other.

The ruling "goes to core disagreements between the coalition partners," analyst Salomon Fiedler of Berenberg Bank told AFP.

"The Greens and large parts of the SPD favour higher deficits and have spoken out against the debt brake in its current form. In contrast, the FDP insists on the debt brake."

The brake was suspended from 2020-2022 to deal with shocks from the coronavirus pandemic and energy crisis, as is permitted during emergencies, but came back into force this year.

In court hearings in June, the government had argued the climate fund also addressed the consequences of the pandemic, which continued to weigh on the economy.

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But in their ruling, the judges said "the programmes financed by the (fund) cannot be deemed suitable for crisis management purposes".

It laid out three main requirements for such a budget manoeuvre to meet constitutional rules, and which the coalition had not stuck to.

There needs to be a clear link between an emergency and spending measures, to permit an exemption to the debt brake.

Budgets have to be annual -- the government cannot roll over debt authorisations granted in one year to later years.

And parliament needs to vote on budget laws before the end of the year to which it applies.