By Andreas Rinke and Christoph Steitz
BERLIN/FRANKFURT (Reuters) – Germany’s coalition hunkered down to fix a budget crisis with Chancellor Olaf Scholz telling party members behind closed doors that the government may lift borrowing limits and steel firms on Thursday warning of a “big loss of confidence” for investment.
Scholz’s three-way coalition is reeling from a court ruling last week that wiped 60 billion euros ($65 billion) from the budget at a stroke and forced it to freeze most new spending commitments, delaying talks on the 2024 budget.
The verdict has sparked warnings that growth in the already shaky economy could get dragged down next year, with the Macroeconomic Policy Institute on Thursday predicting Germany could be headed for a winter recession.
The constitutional court ruling, which blocked the government from repurposing unused pandemic funds for green projects and industry support, has raised fears over the future competitiveness of German firms and the loss of jobs abroad.
The crisis could hobble the wider European economy, according to the Paris-based Organisation for Economic Cooperation and Development (OECD).
“If there is less investment and spending in Germany over the next few years because there is less money available, this will inevitably have an impact on the EU economy,” the head of the OECD’s Germany desk Robert Grundke told Reuters.
“The uncertainty about future fiscal policy is already having a negative impact on companies’ investment activity and the consumer behaviour of households in Germany,” he said, adding the crisis was an opportunity to tackle structural reforms.
LOSS OF CONFIDENCE
Germany’s steel sector added its voice to the growing jitters, warning that the court ruling had put a question mark over more than 40 billion euros in planned investments.
“Politicians must find answers really quickly due to the big loss of confidence in the industry,” said Bernhard Osburg, head of the German steel association and CEO of Thyssenkrupp’s steel division, the country’s top steelmaker.
“But above all also in other countries among suppliers and potential partners in the value chain, as to how this transformation, which is on its way, can be reliably financed.”
His comments highlight major uncertainty within Germany’s industrial firms, which are already struggling with higher inflation and interest rates and are increasingly looking to more favourable markets such as the United States.
Osburg said that meant that money Berlin has pledged to help transform industry towards decarbonisation, a key aspect of Scholz’s political agenda, was no longer there and that it would be tough to plug the hole.
Many companies had started decarbonisation projects in good faith that funding from Berlin’s budget would eventually arrive, creating major uncertainty for firms and their suppliers over the economic viability of projects.
Scholz on Wednesday evening said he expected the parliament to pass the 2024 budget soon but not in haste until it had assessed the impact of the ruling.
“I find it correct that the consequences of the constitutional court ruling … are checked carefully,” Scholz told a news conference.
Achim Post, a lawmaker in Scholz’s Social Democrats (SPD), at a closed door meeting on Wednesday said it was inevitable that the government would suspend a constitutionally enshrined debt brake, a move which the finance minister has so far opposed.
Scholz also described this as conceivable, participants at the meeting told Reuters, adding that the court ruling put the coalition into a difficult situation but it could be resolved.
(Reporting by Andreas Rinke, Christoph Steitz, Holger Hansen, Rene Wagner; writing by Matthias Williams; editing by Christina Fincher)
