Germany Faces the Green Fiscal Truth

 Things have gone from bad to worse in Germany this week after a court ruling that’s forcing the government to do something truly shocking: level with voters about how much the net-zero energy transition will cost. Please pass the smelling salts.

The country’s highest constitutional court ruled this month that one of the coalition government’s main gimmicks for funding green projects violates Germany’s version of a balanced-budget amendment. That amendment, known as the debt brake, caps the government’s fiscal deficit at 0.35% of gross domestic product per year except in emergencies (as defined by special legislation passed with a majority in the Bundestag).

Chancellor Olaf Scholz’s administration had planned to devote €60 billion in emergency borrowing approved (but not spent) during the pandemic to subsidize green projects such as battery production and decarbonized steel. The point was to conceal the true cost of these plans by averting new legislative votes. The judges saw through this when they ruled that emergency authorization to borrow in the past can’t be re-purposed for entirely different projects in the future.

This fiscal moment of truth has exploded into a political crisis in Berlin. It’s becoming clearer that the unwieldy coalition of Mr. Scholz’s Social Democrats (SPD), the eco-leftist Greens and the free-market Free Democrats (FDP) of Finance Minister Christian Lindner can’t agree on any other method of funding green priorities.

Meanwhile, Mr. Lindner’s ministry says it believes a separate fund worth up to €200 billion may also be unconstitutional under the same principle. Berlin planned to use this pot of money for energy subsidies as German households and businesses struggle to cope with skyrocketing prices created by Russia’s invasion of Ukraine and Berlin’s enthusiasm for costly and unreliable renewable energy.

At least the €100 billion special budget Berlin is devoting to defense is safe, since Mr. Scholz secured a constitutional amendment allowing that spending. But that might be the only new money Berlin can spend. Negotiations over the 2024 budget collapsed this week as politicians grapple with the fallout from the court ruling. The Bundestag is unlikely to approve either a new or retroactive “emergency” declaration to allow this spending.

That leaves tax increases that Mr. Lindner would oppose, social-welfare cuts Mr. Scholz would hate, or an end to ambitious green spending in an embarrassment to Robert Habeck, the Green Party minister for economic affairs and climate action. In other words, the government might have to make hard fiscal choices.

The political shell game around net zero is to claim that someone other than taxpayers will foot the bill. Germans are discovering otherwise, and the political uproar is a warning to other governments. If only the U.S. had such a mechanism to stop green boondoggles like the Inflation Reduction Act.

Germany Faces the Green Fiscal Truth - WSJ

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