In New Setback For EU, Germany Freezes Spending --- Move hurts recovery, rearmament plans as region confronts geopolitical threats.

 

"BERLIN -- Germany froze public spending for the rest of the year after a court declared the government's spending plans unconstitutional, dealing a blow to Europe's recovery and efforts to beef up its defenses and reduce carbon emissions.

The court decision is likely to widen the economic speed gap between Europe, whose economy has stagnated for more than a year, and the U.S., which grew at an annualized 5% in the three months through September, turbocharged by massive fiscal stimulus.

Germany's economy, Europe's largest, is contracting as surging energy prices and trade tensions cast doubt on its export-oriented business model. Chancellor Olaf Scholz's government was counting on bold spending on green-energy projects and technology to revive the model.

Energy prices are expected to remain permanently above pre-Ukraine events levels, which may squeeze energy-intensive manufacturing, while an aging population and a labor force that is projected to shrink likely would constrain potential growth.

Berlin's decision came after the court defunded the government's 60-billion-euro, or more than $65 billion, green-transition project. The court said Berlin couldn't repurpose unspent credits initially earmarked to tackle the Covid-19 pandemic to fund environmental and energy projects. It said Berlin was bound by the country's constitutionally enshrined fiscal rules that limit budget deficits to 0.35% of gross domestic product in normal times.

Berlin faces a choice of finding equivalent budget cuts or raising taxes -- or both -- if it goes ahead with the plan, which includes, among other items, multibillion-euro subsidies to build chip-making plants.

The judgment raises questions about the use of off-budget special funds to finance public investments, including a 100 billion euros plan to revamp Germany's underfunded military that was announced after events in Ukraine.

While some German economists welcomed the ruling, which they said would impose needed fiscal discipline amid high interest rates, others think it could prevent Scholz and his successors from retooling an economy that has been losing competitiveness.

In the short term, the government must decide to which policy areas -- from boosting Europe's collective defenses to supporting Ukraine or cushioning the impact of surging energy prices and inflation on businesses and households -- it should give priority. Berlin also must review all debt-financed expenditures in the last eight years to ensure it was compliant with the new ruling.

German officials in Brussels told European Union counterparts on Friday that they would continue supporting a 50 billion euros four-year EU budget package for Ukraine, which is set to take effect next year, two people briefed on discussions said. However, Berlin made it clear it wouldn't back an additional 50 billion euros spending request from the European Commission on migration and other Brussels priorities. Germany pays about a quarter of EU spending." [1]

Germany is in a vicious spiral. Germany's economy is dying without government support. Because of the weakening economy the government looses chances to support the economy. Therefore promises of big money packages to Ukraine are empty promises. 

1. World News: In New Setback For EU, Germany Freezes Spending --- Move hurts recovery, rearmament plans as region confronts geopolitical threats. Pancevski, Bojan.  Wall Street Journal, Eastern edition; New York, N.Y.. 22 Nov 2023: A.7.