Berenberg Weigh In On The German Court Ruling On COVID Spending & Fiscal Situation

In light of the German constitutional court decision which deemed that the federal government violated the constitutional “debt brake,” Berenberg note that “Berlin will probably be able to cover the KTF debt already incurred in 2023 - perhaps around €15bn - by using a certain buffer, namely by booking it against the debt brake’s “control account” for “unexpected” excess deficits.”

• “But beyond that, the government either needs to cut its deficit spending plans substantially - perhaps by up to €30-40bn for 2024 and a lower amount in the years thereafter - or find new ways around the debt brake.”
• They believe that “the verdict will likely trigger significant soul-searching within the SPD-Green-FDP coalition.”
• Noting that “our first take is that the result could be a combination of lower government spending than planned so far, no room for any further fiscal initiatives and some creative ways to still keep as much as possible of the spending plans on track.”
• “As the verdict constrains the borrowing of the KTF fund, potential adjustments would likely focus on borrowing for and spending on energy transition plans.”
• “According to media reports, chancellor Olaf Scholz (SPD), economics minister Robert Habeck (Greens) and finance minister Christian Lindner (FDP) will react to the verdict in a joint press conference later today.”