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Germany reaches deal on budget crisis, economy still in trouble

IFM_Germany Economy
In 2023, Germany faced a recession of 0.5%. In 2024, its GDP will fall by as much as in 2024

On December 13, 2023, the German government reached a deal to solve a budget crisis following a month of tense negotiations after a court ruling threw Chancellor Olaf Scholz’s government’s finances into chaos.

The court annulled a decision to repurpose 60 billion euros (USD 64.7 billion) originally meant to cushion the COVID-19 fallout for measures to help combat climate change and modernise the country.

What Does It Mean?

The government-level deal will ensure some breathing space for companies operating in Europe’s largest economy. However, analysts believe that Germany’s long-term financial plans will continue to face uncertainties.

The court ruling forced the Scholz government to suspend a “debt brake” for the 2023 budget. Talking about 2024, the country faces the immediate challenge of plugging a 17-billion-euro hole estimated in the 2024 budget.

Leading up to the deal, Scholz, Vice Chancellor Robert Habeck and Finance Minister Christian Lindner had intense discussions, where the need for reimposing the “debt brake” became a hot topic. The break restricts Germany’s public deficit to 0.35% of its GDP.

The two-year-old coalition government has been known for its infighting, which has resulted in its poll ratings slumping further.

Lindner’s pro-business Free Democrats, on the other hand, have portrayed themselves as guarantors of solid finances, while adhering to Germany’s self-imposed limits on running up debt, and advocating spending cuts.

The lower house of Parliament, the Bundestag, may not be able to manage to finalise the 2024 budget this year, despite the deal’s conclusion, as per the media reports.

From January 1, there will be a provisional management of the budget, with Lindner playing a greater role in this by authorising expenditures.

Knowing The Bigger Picture

Lindner, who earlier estimated Germany facing a funding gap of around 17 billion euros (USD 18.27 billion), has ruled out tax hikes and suggested welfare cuts, with Chancellor Scholz firmly backing his finance minister.

Lindner doesn’t want another suspension of “debt brake” in 2024, going against Scholz and the Greens. A section of the German conservative politicians also wants a reform of the brake.

Talking about the budget gap, the coalition government agreed in December 2021 to make the most of a temporary, pandemic-related suspension of borrowing limits in the constitution.

It also decided that the funds should count in deficit calculation in the year the money was borrowed, giving it more budget leeway in 2023 and 2024. The move would have allowed Europe’s largest economy to conform with the debt limit in 2023. However, the top German court rejected such accounting and argued that spending the funds later would still break the constitutional debt limit.

The whole incident now brings back the memories of the 2018 episode, where the budget for the year was passed on July 5 after extended negotiations among the new coalition partners following the elections in September 2017.

Trouble Ahead

In 2023, Germany faced a recession of 0.5%. In 2024, its GDP will fall by as much as in 2024, as per the predictions of the German Economic Institute (IW).

“For the German economy, 2024 could have been the year of recovery. However, general conditions remain poor as the government’s ongoing budget dispute is leading to investment freezes by the private sector,” IW stated further.

Germany will also be affected by geopolitical uncertainties in 2024. As global trade is expected to grow by 1% in the next few months, Europe’s largest economy will still be in the ‘stagnation’ mode.

In the first 10 months of 2023, German exports already fell by 0.8% to around 1.3 trillion euros, according to the Federal Statistical Office (Destatis).

The country’s construction sector is also undergoing a crisis due to high-interest rates and operational costs. Despite its growing housing shortage, Germany has been mostly behind its construction targets in 2023.

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