Germany will again limit state borrowing

Germany plans to return to limiting net new borrowing next year, Chancellor Olaf Scholz said yesterday, after the parties in the ruling coalition reached an agreement on the budget after a month of difficult negotiations, reports Reuters.

Berlin's spending plans were overturned by a decision last month by the Constitutional Court, which prevented the German Executive from transferring unspent funds worth 60 billion euros dedicated to combating the pandemic to green initiatives.

Scholz explained that the so-called "debt brake" could be suspended again if Ukraine, which is facing the invasion of Russia, needs more financing than the eight billion euros already provided for in the budget.

In 2009, to curb the accumulation of new debts, a special paragraph was included in the German Constitution. According to this amendment, known as the debt brake, "debt break", the Federal Government can contract new debts up to the equivalent of 0.35% of the Gross Domestic Product, notes Agerpres. However, Berlin can exceed this threshold if Germany is hit by a natural disaster or in "exceptional emergency situations", which are beyond the state's control and significantly affect the country's financial situation.

"The government maintains its objectives", declared Scholz, the representative of the Social Democrats (SPD), at a press conference with the Minister of Finance, Christian Lindner, from the Free Democratic Party (FDP, liberal) and the Minister of Economy, Robert Habeck, from Green.

Announcing cuts of 17 billion euros in the 2024 budget, Scholz explained that the decision of the Constitutional Court means that the Executive must achieve its objectives with less money.

"We will do this by canceling certain subsidies, slightly reducing the expenses of individual departments and federal subsidies," the chancellor said. He added that the Climate and Transformation Fund, designed to help companies in Europe's largest economy during the green transition and prevent jobs from moving abroad, will be cut by 12 billion euros in 2024 and by 45 billion euros within the framework of financial planning until 2027. The fund will have an amount of 160 billion euros allocated, Scholz said, assuring that he will continue the support for Ukraine.

The German government has pledged to double support for Ukraine next year to eight billion euros. There will be an additional six billion euros allocated for Ukrainian refugees.

Reinstating the "debt brake" in 2024 is a victory for Lindner, who pushed for the measure during budget negotiations.

IW: Germany's GDP to fall by 0.5% in 2024

The German economy will contract by 0.5% in 2024 due to the uncertainty caused by the budget crisis, the German institute of economic studies IW estimated yesterday, according to Reuters.

"The German government played a decisive role in this crisis. Now, the coalition must demonstrate its capacity for action in terms of fiscal policy", said the director of the IW Institute, Michael Huether.

According to IW's calculations, government spending worth more than 20 billion euros will have to be cut as a result of the Constitutional Court's decision, which will lead to a contraction of GDP by 0.5%. In the worst-case scenario, it is even possible that Germany's Gross Domestic Product will decline by one percentage point next year, IW points out.

Normally, the next year should have been one of recovery for the German economy, after a 0.5% decline expected this year.

The IW Institute states that in the past 70 years, Germany's GDP has declined for two consecutive years only once, in 2002 and 2003. While the German economy is contracting, other major world economies are expected to grow, such as Italy, which will register an advance of 0.5%, France - of 0.8%, the USA - of 1.3%, while the global economy would advance by 2.5%, IW estimates.

However, even without the budget crisis, the research institute is of the opinion that the German economic model based on exports is under pressure. Global trade is expected to register an advance of only 1% in 2024, after a contraction of 1.5% in 2023. It will also be a difficult year for the construction sector due to high interest rates, IW estimates. Only the service sector would register a slight increase, adds the economic studies institute.