MNI INTERVIEW: German Court Threatens EUR180 Bln Spending Plan

German government plans to repurpose up to EUR180 billion in funds originally earmarked for capping gas prices to the green transition and social transfers could be threatened by an upcoming legal ruling on off-budget spending, one of the country’s leading economists said in an interview.

While the Constitutional Court will probably adopt a “pragmatic” attitude in a few weeks’ time, allowing the government to spend money already allocated from special funds operating outside strict spending rules, Jens Suedekum said some measures announced by Economic Affairs and Climate Action Minister Robert Habeck could be in jeopardy, including the reallocation of most of a barely-used EUR200 billion crisis fund set up to limit a surge in gas prices.

The court is also likely to insist on a more “orderly” approach the next time Germany’s so-called debt brake is suspended, as occurred during Covid and in response to soaring energy costs following the Russian invasion of Ukraine, he said. (See MNI INTERVIEW: Europe Faces Slow Growth- German Gov't Advisor)

GREEN SPENDING AT STAKE

Suedekum spoke to MNI shortly after providing expert evidence to the Constitutional Court, which is considering whether to overturn a previous decision to allow EUR60 billion originally earmarked for Covid relief to be transferred to the climate protection fund.

Although less likely, a complete rollback would mean “really serious trouble” for the government of Social Democrats, Greens and Liberals, whose coalition relations are already an “absolute mess,” Suedekum said.

“There will have to be a plan setting out what happens when you deviate from the normal process. I think this would be acceptable to the current government. But if they do decide to rewind the clock, the government would face serious problems,” he said.

Much of the debt intended to finance the gas cap fund has not yet been issued, said Suedekum, professor of International Economics at Heinrich-Heine-University, Duesseldorf, and a member of the Scientific Advisory Board to Habeck’s ministry.

“Can it be used for any purpose, or will it go unused? That could put in doubt some of the green energy subsidies,” he said, “That’s what’s really at stake here, along with transformation spending, social spending.”

While Germany slipped into technical recession in the first quarter of 2023, Suedekum said energy prices should stay below last winter’s high, limiting the downturn. But medium-term challenges loom larger given the loss of cheap Russian gas. (See MNI INTERVIEW: Losing Russia Gas To Sap German Competitiveness)

“I've talked a lot to representatives from various industries over the past weeks and what they said is, ‘We have basically stopped investment in Germany. We're not relocating businesses yet, but we are increasing investment in the U.S. and decreasing it in Germany,’” he said, calling for a “clear stance” on industrial policy and a response to green subsidies included in the U.S. Inflation Reduction Act.

CAR INDUSTRY THREATENED

Suedekem pointed to the broader lessons of Germany’s car industry, which has been increasingly squeezed into the smaller luxury segment as upstart Chinese manufacturers muscle in on electric and smaller, mass-market vehicles.

“In the longer term, that would mean that the industry will lose in size and employment, for sure. Manufacturers themselves are pretty scared of this. But basically the times of Germany being a mass producer of everyday cars for everybody, those times may be over pretty soon.”

A failure to subsidise energy-intensive sectors through the green transition would ultimately prove costlier than the alternative, he said - though support should be targeted at high value-added sectors, such as with a EUR10 billion subsidy for Intel to set up a factory in eastern Germany.

“It's a gigantic amount of money, yes. But they're not going to produce bread and butter type semiconductors, they're trying to produce high quality pieces for use in electric vehicles. This is the way to go,” he said. “If we don't offer subsidies at all when the U.S. and China do, we run the risk of losing industry altogether. Look at solar: the whole industry moved to China. We lost it entirely.”