After a shock court ruling, Europe has suddenly found itself facing a question crucial to its prosperity and its ability to combat climate change: Can Germany, the region’s largest economy, meet the scale of public investment required to both revive growth and support the green transition?
Hopefully the country’s fractious ruling coalition could muster the will to say “yes.”
For Germany, ramping up public investment should be a no-brainer. A major transformation of its outdated physical and digital infrastructure is required for greener energy and industry to flourish. With some of the lowest sovereign debt burdens in Europe, it has the financial wherewithal. Yet policymakers are fettered: A constitutional “debt brake” limits deficit spending, no matter how beneficial, except in narrowly defined emergencies.
The government has sought to muddle through, finding ways to circumvent this constraint. In his former role as finance minister, German Chancellor Olaf Scholz reallocated about 60 billion euros (US$65.4 billion) of pandemic-response money to an extrabudgetary fund for future investment in areas such as renewable energy, hydrogen and charging infrastructure — significant, but still small compared with the hundreds of billions of euros in total annual (public and private) investment needed to reach net zero carbon emissions by 2050.
Now, even this modest commitment is in jeopardy. Germany’s Constitutional Court has ruled that Scholz’s fund transfer was unlawful. The decision might also undermine other special funds aimed at fulfilling policy goals such as stabilizing the economy after last year’s energy crisis. All told, hundreds of billions of euros in public spending are at stake.
Despite the chaos it creates, the court’s ruling is welcome. Ideally, it would force Germany’s leaders to deal with the country’s fiscal priorities squarely. Finding common ground is not going to be easy, given the starkly divergent positions of the three parties in the coalition government. Whatever commitments emerge, though, would at least be more credible than a collection of extrabudgetary funds.
The best outcome for Germany, Europe and the global climate is clear: Reform the debt brake — which has now been “temporarily” suspended for the fourth consecutive year — to make way for much-needed investment in everything from the power grid to broadband capacity. The country’s storied fiscal restraint has become an impediment to progress. Germany could lead Europe into a better and greener future.
The Editorial Board publishes the views of the editors across a range of national and global affairs.
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