Source: European Commission, Scope Ratings. Note: AAA-rated countries include Austria, Denmark, Luxembourg, the Netherlands, Norway, Sweden, Switzerland.
Decision Could Impact Domestic and European Fiscal Rules
The court’s ruling will likely reignite discussions around reforming the debt brake rule to address investment needs required to meet Germany’s ambitious green transition targets. Fundamental reform of the debt brake requires a two-thirds majority in parliament, and hence support from the opposition CDU/CSU party, which is unlikely in the near term. Tensions are therefore likely to increase between the coalition partners, in particular the Green Party and the more fiscally conservative Liberal Democrats, as spending priorities now need to be reassessed.
The ruling is also likely to affect the final negotiations of the forthcoming EU fiscal rules as it highlights the trade-off between enforcing strict fiscal rules and maintaining budgetary flexibility to address emergencies as well as investment needs.
Scope expects general government debt as a share of GDP to fall below 60% by 2027. This implies that Germany has some fiscal space to increase investments. With the country’s rapidly ageing population and shrinking growth potential, policymakers will need to focus more on enhancing the country’s future competitiveness to avoid storing up long-term fiscal imbalances.
*First, the court found that the government did not demonstrate a sufficiently strong link between the emergency response to the pandemic and the new uses of the credit authorisations. Secondly, the planned use of credit authorisations was due to happen too long after the pandemic had ended. Finally, the second supplementary budget was passed only in early 2022, making retrospective adjustments to the 2021 budget a violation of budgetary principles.
For a look at all of today’s economic events, check out our economic calendar.
Eiko Sievert is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.