Berlin Gets Honest About What Net Zero Will Cost

"If you had "net zero causing Germany's government to collapse" on your 2023 bingo card, congratulations -- you may end up a winner. 

Chancellor Olaf Scholz's administration is falling apart because it turns out someone will have to pay for decarbonizing the eurozone's largest economy.

This shocking and horrifying revelation is brought to you by Germany's highest constitutional court, which ruled in mid-November that Berlin's favorite budget gimmick violates the balanced-budget amendment. The amendment, known as the debt brake, limits the federal general-budget deficit to 0.35% of gross domestic product in any year unless Parliament declares an emergency.

The amendment was passed in 2009, but budget discipline has been a potent political issue in Germany for decades. Politicians love to promise fiscal restraint and hate to abide by it, so successive (West) German governments devised a workaround even before the amendment forced them to. By establishing special funds -- called Sondervermogen -- with their own revenue streams and borrowing authority, the government could shift a portion of its expenditures off its balance sheet.

A big portion. There now are 29 special funds, with the largest among them allowed to borrow and spend over multiyear periods up to 869 billion euros, all of it backstopped by taxpayers but none of it folded into the general budget, where it would be subject to the debt brake. Before the court ruling, special-fund net borrowing in 2023 was expected to reach 147 billion euros, compared with on-balance-sheet borrowing of 45.6 billion euros. The constitutional court finally has caught on.

The specific target of November's ruling was 60 billion euros in unused borrowing authority left over from the pandemic emergency. Since that money wasn't borrowed and spent for Covid-related purposes three years ago, Mr. Scholz's administration planned to borrow and spend it on the net-zero transition in the future. The court ruled such "emergency" funds can't be repurposed in this way.

At a stroke, 60 billion euros has vanished from the budget. And that might not be the only disappearing cash. Finance Minister Christian Lindner -- never enthusiastic about any of this spending anyway -- believes a separate pot of money slated for energy-price subsidies also may run afoul of the newly articulated constitutional requirement. The size of that fund: 200 billion euros.

It's worth recalling why all this spending is so urgent: Nearly two decades into an epochal energy transformation, the project now known as "net zero" is an enormous flop. Renewable power hasn't been capable of reliably meeting the energy needs of any advanced industrial economy, and certainly hasn't been able to replace the nuclear capacity Berlin took off line starting in 2011. The disruption of cheap imports of Russian fossil fuels since last year's sanctions on Russia has made matters considerably worse.

Industry is fleeing Germany. The new green jobs the net-zero left promised require enormous subsidies. And Berlin must offer generous handouts, probably permanent, to individual households to shield them from the crippling energy-price consequences of sanctions on Russia.

Ameliorating all of this was meant to be paid for on the sly via borrowing concealed in various Sondervermogen. No longer. Germany long ago perfected the art of green virtue signaling. Now it will have to conduct a substantive debate about whether the negligible global benefits of Germany's slashing carbon emissions are worth the costs, especially if money must be diverted from other policy priorities such as social welfare.

Critics on the left will argue this all could be solved easily if only those hidebound Teutons weren't so neurotic about budget balance. This crowd will note that Berlin could simply borrow more on the general budget, which it still can do relatively cheaply, and use the proceeds to sustain the net-zero transition and much other spending. Politico was quick off the mark, calling this a "make-believe debt crisis."

Well, duh. Every budget crisis everywhere is make-believe in the sense that if everyone agreed on an outcome, there wouldn't be a crisis. Mr. Scholz is in political trouble because it was never clear how his center-left Social Democrats could govern in a coalition with Mr. Lindner's free-market Free Democratic Party and the eco-leftist Greens. The special-budget trick was politically essential because it allowed all three parties to skirt the budget bargaining that would expose their deep ideological differences.

Those splits are out in the open now. Berlin is going to have to cut spending (on what?) or raise revenue (from where?) or borrow (how much?) to fill the net-zero funding gap -- or, not impossible, conclude Germans don't care that much about net zero after all. America's budget woes fell only House speakers. In Germany, fiscal battles may bring down a prime minister.

The key point is that Berlin's budget process is no more dysfunctional than any other Western government's. It's merely more honest, at least now that the court has stepped in." [1]

Sanctions on Russia made energy very expensive for Germans. Net zero could allow to stop paying Americans for their expensive liquid natural gas. Otherwise industry is leaving, extreme right political forces are gaining in popularity. So investing in net zero has to be done quickly. Otherwise extreme right German political forces will remove sanctions on Russia that are not working anyway.

1.  Political Economics: Berlin Gets Honest About What Net Zero Will Cost. Sternberg, Joseph C.  Wall Street Journal, Eastern edition; New York, N.Y.. 01 Dec 2023: A.17.