MNI INTERVIEW: German Budget Faces "Severe" Cuts-Gov't Advisor

Political opposition to circumventing Germany’s debt-brake means will mean “severe” cuts to next year’s federal budget, the chair of the advisory board to the Federal Ministry of Finance told MNI in an interview, with uncertainty over the fiscal outlook set to worsen the outlook for growth.

Following a recent Constitutional Court Ruling, any attempt by chancellor Olaf Scholz’s coalition government to suspend strict deficit and spending rules beyond 2023 will be met with strong opposition and legal threats, Joerg Rocholl said in an interview. (See MNI BRIEF: German Court Rules Against EUR60 Bln Fund Transfer)

“The opposition has already made it very clear that if the government should try to use again the emergency exit, there could be another lawsuit in the Constitutional Court,” he said, adding that any potential compromise deal would see Friedrich Merz’s opposition Christian Democrats and their parliamentary allies demand a say on what could be financed.

“It will certainly have a severe impact on at least the composition of the household spending,” Rocholl said, “and it will question some of the projects that different parties have brought to the fore.”

The decision by a panel of judges to invalidate moves to transfer EUR60 billion of Covid-19-related borrowing to an energy and climate transition fund is “a detrimental input into an already pretty weak growth forecast,” Rocholl said. (See MNI INTERVIEW: Court Ruling Shaves 0.5% From German GDP-Demary)

MONETARY TIGHTENING

It came as European Central Bank interest rate hikes are already hitting growth, he continued, with further monetary tightening in the pipeline. (See MNI BRIEF: Inflation To Climb Above 3% Then Fall Back - Nagel)

“Certainly the question of side effects, and of economic downturn, are particularly relevant when it comes to Germany. Also the locomotive function of Germany for many other countries, for Central and Eastern Europe and others that are heavily dependent on the economic development of Germany, may be another argument for the central bank to be rather cautious, and to wait for additional steps.”

German households will adjust their spending in light of the added uncertainty, said Rocholl, also president of Berlin’s European School of Management and Technology, while lack of clarity over future public spending commitments may prompt firms to trim their own financial commitments.

“My concern is a gradual shift of investments away from Germany, maybe away from Europe, into growth markets or markets that are subsidised, including the United States. But not a massive, abrupt exodus,” he said.

Demographic changes mean labour markets will likely remain tight, though while further pay hikes are expected, these are less likely to drive inflation than previously feared, Rocholl said. (See MNI INTERVIEW: Wages Set To Refuel German Inflation-ZEW ChiefChief).

Germany faces persistent structural constraints, with the fact that members of its labour force work fewer hours on average than counterparts in neighbouring countries undermining competitiveness, he said.