The German Constitutional Court has repeatedly shown that it is ready to annoy politicians who want to do something.
It has long been used as a weapon by opponents of the European Central Bank: in 2020, it usurped the European Court of Justice's authority to interpret European law, over quantitative easing.
Last Wednesday it was domestic economic policy that was torpedoed by the country's highest court.
The judges in Karlsruhe blocked a 60 billion euro budget maneuver carried out at the beginning of the coalition government formed by Social Democrats, Liberals and Greens.
Due to the pandemic, strict budget rules limiting public borrowing were still suspended in 2021.
When the government took office at the end of that year, it used a supplementary budget – for 2021 although approved in 2022 – to move unused loans authorization from the main budget into a separate multi-year off-budget fund for green investments.
The Court now found that this violated the Constitution's strict rules against deficit financing.
The abolition of this budget maneuver represents an immediate economic challenge.
Even Europe's largest economy will not be able to pull another 60 billion euros (more than 1.5% of annual gross domestic product) out of its sleeve without effort.
If the state has already allocated part of the money, then there will not be much to do: the court says that "it must compensate it with other means".
This is not insurmountable: the 60 billion euros had to be spent over several years.
You can change calculations, make technical changes, maximize safety margins and reserves to find more money.
Conversely, the ruling also threatens other off-budget funds, both at the federal and state levels.
The alternative of not supporting climate spending would be disastrous after two decades of underinvestment in an economy that urgently needs to be equipped to reach net zero and in a geopolitically precarious world.
Berlin will undoubtedly have to put a lot of effort into raising taxes.
The political consequences could be greater than the economic consequences.
The original maneuver played a key role in making the coalition possible: it could satisfy the Greens' climate ambitions while reassuring the liberals' fiscally conservative voters that the fairness of the German budget was being respected.
But now the court has made it clear that you can't have it both ways.
The strict legal limits on deficit financing, which Berlin introduced in the global financial crisis and forcefully imposed on the rest of Europe, make it extremely difficult to pursue the economic policy that many now believe is essential for both industrial recovery and planetary survival .
Germany has been hoisted on its own ordoliberal petard.
This will also matter in EU politics.
Finance ministers are trying to agree by the end of the year on a replacement for the bloc's fiscal rules, the main contribution of which must be to make fiscal sustainability compatible with more investment.
Late in the talks, Christian Lindner, the Liberals' finance minister, called for tougher annual deficit limits that not even Germany's most frugal friends have called for.
It's not a good idea to lecture others about fiscal discipline and the need for stricter rules while the Supreme Court slaps you for accounting tricks designed to circumvent yours.
If Berlin resorts to new budget maneuvers rather than tough economic choices, it will not help Lindner with his EU counterparts.
Conversely, if the German government responds with serious tax increases or spending cuts to support all its investment ambitions, it will be able to say it practices what it preaches.
But don't expect too much: Those who most strongly oppose government borrowing are usually also the strongest opponents of tax increases, while few politicians prefer to cut spending.
In any case, the next few days of budget talks in Berlin will be important for those in Brussels.
Something good could come of this, if the Karlsruhe ruling triggers a serious debate in Germany about how best to do economic policy – and economic organisation.
Because the belief in rigid rules reflects the desire to exclude politics from economic management.
This betrays politicians' lack of trust in each other, but above all in their own righteousness.
This is the root of the German ordoliberal economic philosophy, for historical reasons, but it can be found in much of Europe.
This is, however, an illusion.
Economic policy is at the same time political; the question is how to make it so responsibly.
If this unexpected legal move elicits responses, in Germany and the EU, it will surely be worth it.
© The Financial Times Limited [2023].
All Rights Reserved.
Not to be redistributed, copied or modified in any way.
Money.it is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation.
The Resurgence of the 'PIIGS' Once criticized for their fiscal management and sluggish growth, Portugal,… Read More
Current Challenges for Russia The current situation for Russia is undoubtedly challenging.The focus, of course,… Read More
```html Service Commencement for the 2024/2025 School Year The service commencement for the 2024/2025 school… Read More