Ruling of the Federal Constitutional Court: Austerity measures threaten to plunge Germany into recession

What are the consequences? the judgment of the Federal Constitutional Court for the economy? Possibly significant. The billions in spending that are now prohibited should not only protect the climate, but also support companies and households. If the money doesn’t flow, it will have an impact on the economy. The trade union-affiliated Institute for Macroeconomics and Business Cycle Research (IMK) has now made an initial assessment. The results are available to ZEIT ONLINE. If government spending were cut, it would “cost almost half a percent of growth in the coming year alone,” says IMK boss Sebastian Dullien.

Even before the verdict, Deutsche Bank expected growth of 0.3 percent for 2024. If the IMK forecast comes true, the economy would shrink again next year. “With the Constitutional Court ruling, Germany threatens to be forced to adopt a financial policy that practically all macroeconomic textbooks warn against,” says Dullien.

The calculations are based on the assumption that around 18 billion euros will have to be saved next year as a result of the ruling. In total, the court declared loan authorizations amounting to 60 billion euros for the federal government’s climate fund to be unlawful, but only part of this is for 2024. The fund also has other financial sources. The federal government comes to similar dimensions internally.

If government spending is reduced, economic growth will also be reduced in current economic models. The IMK has assumed that the so-called multiplier is approximately 1. This means that one euro less in spending means one euro less in economic output.

Solution variant: declare an emergency?

The results are likely to increase the pressure on the coalition again. So far, the ruling has been discussed primarily with a view to possible cuts in climate protection, for which the Greens in particular feel responsible. Accordingly, leading FDP politicians welcomed the verdict in their initial reactions.

But if the decision also results in burdens for the economy, then the SPD and FDP would also have to think more about alternative financing concepts. Michael Hüther, head of the employer-related Institute of the German Economy, warned today of “great concerns” in the sectors affected by possible cuts with regard to the “framework conditions for transformation subsidies”.

If the money is not to be cut, it would have to come either through savings elsewhere or through higher taxes. The big disadvantage: This also puts a strain on the already weakened German economy. A third variant would be to declare an economic emergency and to suspend the debt brake again, as was the case during the Corona crisis. From a purely legal point of view, this would be possible, but it would probably be sued again, which is why the decision of the Constitutional Court would again depend. According to information from government circles, this approach is being seriously examined in the coalition. Then no savings would be necessary. One argument for this: According to the government’s assessment, the economic stabilization fund, which, among other things, financed the gas price brake (following a similar pattern to the climate fund), is also unconstitutional. The gap to be closed would therefore be even larger.

In order to raise money at least in the short term, payments from the climate fund planned for later years could also be brought forward. Hard cuts could then be avoided in the short term, but the budget holes would be even larger in the future. But the next federal government would have to deal with that. And based on the current survey situation, this would be led by the Union.