Share

Germany: Government will ask Parliament to suspend debt brake again. Bunds rising, spreads falling

The measure, adopted for the fourth consecutive year, now serves to fill the hole in the 2023 budget after the Constitutional Court ruling. Fixed income reacts with an increase in Bund and BTP yields but the spread narrows

Germany: Government will ask Parliament to suspend debt brake again. Bunds rising, spreads falling

For extreme evils, extreme remedies: this even applies to Germany, which is also struggling with public finances and squaring the circle. As in Italy, although with different numbers. The Berlin government, finding itself with a hole of 60 billion after one sentence of the Constitutional Court German, has decided to ask parliament for a additional budget and therefore suspend for this year the constitutional provision of debt brake.

The announcement prompted the I raise yields of the ten-year Bund and BTP, but that of the German bond rose more, bringing the effect of a narrowing of the differential between the two: in late morning the Italian ten-year bond was at 4,412 (+1,24%), the German one was at 2,657 (+2,28%) and the spread was at 175 bps (-0,50).

Will the Federal Parliament approve it?

As is known, the Federal Constitutional Court (Bverfg) has branded as unconstitutional the government's decision to revert 60 billion euros of debt from the Pandemic Fund to the Climate and Transformation Fund (Ktf). The government must therefore quickly try to compensate in some other way.

The extra budget and the suspension of the debt brake that will be requested from the Bundestag, if approved, will increase the deficit, but it will still remain below the 3% indicated by Maastricht. The so-called Schuldenbremse tolerates an overshoot equal to a deficit of 0,35% of GDP. To convince the chamber, the yellow-green-red coalition will have to appeal to the arrival of "aextraordinary emergency”, another, as had already been done in the years 2020, 2021 and 2022, for Covid, the war in Ukraine and the energy crisis. But this time the emergency arises from the fact that Berlin must remedy the hole in the 2023 budget caused by Karlsruhe.

A spokesperson for Finance Minister Christian Lindner confirmed yesterday that the government will ask Parliament to suspend the debt brake due to the onset of an "extraordinary emergency" and to approve a supplementary budget. Meanwhile, to get ahead, State Secretary Werner Gatzer, in charge of the German budget for 18 years, Lindner's most important man, has imposed a large immediate budget freeze to avoid further damage to the state budget this year.

What could happen in the next few years?

But it may not stop there. The basis of the sentence of the German Council is the will to put an end to repeated use over the years of public funds allocated to deal with an emergency, such as a natural catastrophe or an extraordinary event. But climate change is not considered a sudden emergency and for this reason Karlsruhe declared the transfer of these 60 billion from Covid to Climate unconstitutional.

The problem could last longer next financial years. Starting with the 2024 budget which will be discussed next week and we need to see if the social democrats, greens and liberals will find a solution. Minister Lindner is a firm supporter of budget discipline and the reduction of high public debts and does not get along with the SPD and Greens who aim to spend and find extra funds by increasing taxes.

In Germany there are 29 special funds. Who are most at risk?

And even more, we need to look to the future. There is a lot at stake. They exist in total 29 special federal funds , the oldest of which dates back to 1953, the miners' housing trust fund. And one wonders how many of them are now in danger.

In addition to the KTF (the climate fund that the constitutional judges have criticized), there is also the Economic Stabilization Fund (FSM), financially strong, writes the German press. The objective of this fund was to support companies in times of pandemic. After the outbreak of war in Ukraine, his work was expanded to cushion the consequences of the energy crisis. And so in 2022 the FSM was authorized to raise loans of up to 200 billion euros on the capital market. Even then the federal government declared it state of emergency to be able to derogate from the debt brake.

But given that the FSM relies entirely on emergency loans, now based on the latest ruling of the Court he finds himself running a huge risk. “Loans must be counted towards the debt brake in the year in which they are taken out and issued,” economist Armin Steinbach explained to the German newspaper Stern. For 2023, this could mean the budget will miss more than 30 billion euros that the state spent from the WSF on lower energy and electricity prices.

comments