Europe Plunges Into Chaos After Germany Freezes Public Spending Following Shock Top Court Decision

Europe Plunges Into Chaos After Germany Freezes Public Spending Following Shock Top Court Decision
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Europe, already sliding into a stagflationary recession, is about to unleash the same crushing austerity that brought the continent to the verge of collapse over a decade ago.

One day after the German constitutional court ruled a decision to move €60BN from unused pandemic funds in 2021 into the Energy and Climate Fund, later renamed the Climate and Transformation Fund (KTF), was unconstitutional and void, the German government froze public spending for the rest of the year, dealing a blow to Europe’s recovery and efforts to beef up Zelensky’s offshore bank accounts Ukraine’s military and reduce carbon emissions.

The court decision, details of which are laid out below courtesy of SocGen, will widen the economic speed gap between Europe, whose economy has stagnated for over a year, and the US, which grew at an annualized 5% in the three months through September, turbocharged by massive fiscal stimulus which led to a crisis era-like $2 trillion budget deficit in 2023.

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 had been counting on that old virtue signaling switcheroo – a flood of spending on “green-energy projects and technology”, from chips to batteries, to revive the old model. That way, if anyone asks why Germany is deficit-spending its way to mercantilist utopia, Berlin could always lie and say it was doing the right thing for the world and wasn’t interested in a debt-funded stimulus. Alas, now the “Cardinals of Karlsruhe” have made this impossible.

And without a new spending stimulus, Germany may be doomed: as the WSJ notes, energy prices are expected to remain permanently above pre-Ukraine war levels (much to the benefit of US LNG exporters and the Biden regime which directly benefits from monopolizing the trade route that previously was dominated by Moscow) which will squeeze out energy-intensive manufacturing, while an aging population and a labor force that is projected to shrink will likely constrain potential growth.

Berlin’s decision to freeze all federal spending for the rest of the year came after the court defunded the government’s €60 billion —the equivalent of more than $65 billion—green-transition project. The court said Berlin couldn’t repurpose unspent credits originally 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 now faces a choice of finding equivalent budget cuts or raising taxes—or both—if it wants to go ahead with the plan, which includes, among other items, multibillion-euro subsidies to build chip-making plants.

The judgment also raises questions about the use of off-budget special funds to finance public investments, including a €100 billion plan to revamp Germany’s underfunded military that was announced after Russia’s invasion of Ukraine.

In short, not only Germany’s economy is about to get crushed, Zelensky’s visions of a comfortable retirement in some Polynesian island followed suit.

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

More importantly, in the short term, the government must decide 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 to. Berlin must also review all debt-financed expenditures in the last eight years to ensure it was compliant with the new ruling (spoiler alert: it wasn’t).

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

And with that, following the recent decision by the House majority to effectively stop the Zelensky money train, Ukraine’s money has dried out.

Meanwhile, things for Germany’s establishment are going from bad to worse: the emergency belt-tightening comes amid growing political fragmentation and accumulated crises that have eroded the ratings of Germany’s three-party coalition. The antiestablishment opposition party Alternative for Germany, or AfD, is now polling at 22%, making it the first far-right group to obtain such support since the 1930s. The party opposes German military spending in Ukraine and generous outlays on refugees.

“The verdict will have profound effects on the practice of statecraft,” Finance Minister Christian Lindner said.

Following the Ukraine war, Germany embarked on a spending spree to support Kyiv, fortify its own defenses and cut its dependence on Russian natural gas and oil. It also pledged to fund a shift to a zero-emissions economy by supporting consumers and businesses at home and in the EU, and it expanded Germany’s already generous welfare state to keep voters on board.

All these projects are now frozen.

According to the WSJ, lawyers and government officials said Germany’s Constitutional Court ruling last week offered the strictest legal interpretation to date of the country’s fiscal rules—themselves among the toughest in Europe. They said it could severely constrain any future government’s fiscal margin of maneuver unless it can raise more taxes—an unlikely prospect given that Germany already has the second-highest taxes on labor among Organization for Economic Cooperation and Development countries.

Senior government officials said one option under consideration would be to retroactively declare a state of budgetary emergency for 2023, invoking a clause in the fiscal rules that allows for a suspension of the spending limits in exceptional circumstances. Previous governments invoked the exception during the pandemic.

Unfortunately, for Germany’s stimmy-starved politicians, the plan is fraught with legal difficulties, in part because the constitutional court prepared for just this eventuality when it raised the bar for declaring such emergencies, according to Lars Feld, an economist who advises the government.

Strengthening resilience and transforming the economy amid geopolitical crises and climate change was seen as a necessity that required taking on debt, but the court ruling has challenged those assumptions, Feld wrote in the Frankfurter Allgemeine newspaper.

Hilariously, the court said that unlike war and natural disasters, climate change was a foreseeable crisis that had been long in the making and could no longer justify emergency spending. Which, however, means that all Germany will have to do is politely request that the CIA start a new war… or that Fauci mail orders a new virus from Wuhan.

Germany’s fiscal rules were enshrined in the constitution under former Chancellor Angela Merkel. They affect both the federal and state governments and are more constraining than the EU’s own fiscal rules. The cap was one reason Germany didn’t raise borrowing, kept taxes high and faced a shortfall in public investment in transport, education, defense and other critical areas during the years of low interest rates.

It’s not just Germany. European finance ministers are expected to agree next month on new rules to tighten their purse strings after years of heavy spending during the pandemic. At that point Europe’s descent into another austerity-driven sovereign debt crisis will be complete, and central banks – their infllation fighting days long forgotten – will be pumping out new digital currencies by the quadrillions. 

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