Johannes Müller* (European University Institute)
In 2009, in an amendment to the German Basic Law (Grundgesetz), the so-called debt brake (Schuldenbremse) was introduced. This should prevent the German State from taking on excessive debt. As it is a constitutional provision, the German Federal Constitutional Court has the final say over its interpretation and application. Since 2009, however, there was no case in which the Court decided on this provision. This changed last week, with the first ruling of the Court on this constitutional provision, in which it struck down the 2021 Second Supplemental Budget Act.
The debt brake
In its articles 109 (3) and 115, the Basic Law establishes a debt ceiling for the Federal budget. This ceiling depends on the economic cycle. In “good” economic times the ceiling is lower, in “bad” times it is higher (Art. 115 (2) sentence 2 of the Basic Law). This is called the “breathing” (Atmen) of the debt brake.
The only exception, however, in which the rules don’t limit the issuing of debt is laid out in Art. 115 (2) sentence 6 of the Basic Law: In the case of an extraordinary emergency that goes beyond the control of the state and has a major impact on the state’s finances, the German parliament can decide to exceed the debt ceiling.
This happened in 2021 when, in response to the COVID-19 pandemic, the German Parliament declared an extraordinary emergency and authorized borrowing up to a ceiling of EUR 240 billion. As the authorization for EUR 60 billion was not used in 2021, the Parliament then retroactively transferred this amount to the Climate and Transition Fund in the Second Supplemental Budget Act, passed in February 2022. This fund is intended to be a major source of finance for the Green Transition of Germany with planned investments of EUR 212 billion until 2027 into the decarbonization of industry, energy-efficient building renovation, renewable energy, and the German train network. The fund also partly co-finances investments included in the German National Recovery and Resilience Plan – for example for the decarbonization of industry. Its size shrinks, however, the EUR 28 billion available to Germany under the NGEU instrument.
The reasoning of the Court
The Court found that this, at first glance rather technical, Second Supplemental Budget Act violates the debt brake provisions of the Basic Law. This means that the volume of the Climate and Transition Fund is reduced by 60 billion EUR. Any obligation that the government already made regarding this money has now to be met with other means.
The Court based its decision on three reasons. First, the Parliament didn’t provide a sufficient link between the emergency (the pandemic) and the use of the money raised with the emergency argument. In other words, the use of the authorized debt through the Climate and Transformation Fund is not closely enough linked to measures made necessary by the pandemic. Secondly, the chronological decoupling of the funds from the declaration of emergency is unconstitutional: under the Second Supplemental Budget Act, the 60 billion € of debt would be considered debt of the year 2021 – the year it was authorized – and not as debt of the year that the money would be used. This was considered an illicit circumvention of the debt brake as it is to be applied to the debt of each individual year. Finally, the retroactivity of the Act violated article 110 (2) of the Basic Law according to which the budget must be determined in advance. While this third argument appears to be specific to this case, the first and second reasons might have further implications for the legality of other debt-financed funds set up by the Federal Government or the Federal States (Bundesländer), for which the same rules apply according to Article 109 (3) of the Basic Law.
The ruling is a strict but coherent interpretation of the constitutional provisions on the raising of financial means through debt. The Court arguably applied the fiscal rules as they were intended by the two-thirds majority that voted them into the German Basic Law. There is also an important broader argument behind the debt brake, as it aims to protect the financial and budgetary possibilities of the future German Parliament, which could be limited if it had to pre-assign large amounts of the budget to serve debt inherited from former majorities.
On the other hand, the safeguarding of future freedom that the Court stressed in another high-profile case on the lack of climate action of the Government might only be possible through large investments today. Investments are possible under the current debt brake. They can be part of the normal budget, which must respect the debt ceiling imposed by the constitutional fiscal rules. The question of whether the climate crisis itself presents an extraordinary emergency that allows for more flexible rules is also highly debated. Finally, as proposed here, a simple majority might change the law that sets the factors that define the “good” and “bad” economic situation that allow for a “breathing” of the debt ceiling to include more normative goals. The government could also tweak the interpretation of those factors to include similar goals. In the end, however, all these approaches have to deal with the debt break as it exists in the Basic Law.
Thus, from a broader point of view, last week’s ruling puts the discussion about the relationship between constitutional fiscal provisions and the possibility of the current democratically elected majority to decide freely over the budget back on the front page. Here it seems useful to recall the danger of something that, borrowing from an observation Dieter Grimm formulated vis-à-vis the economic provisions in the European treaties, could be called “overconstitutionalisation” (Überkonstitutionalisierung). The provisions of a Constitution are beyond the reach of the normal legislator and watched over by the Constitutional Court. This is intended, as they form a framework for the political players to act and for the larger political process to develop. The Players shouldn’t be able to change the rules of the game too easily. Yet, this constitutional idea reaches its limits when political choices are enshrined into the Constitution and therefore are out of reach for subsequent (simple) parliamentary majorities. Then, the benefits of the Constitution – that it can’t be easily changed – risk becoming a detriment for the implementation of the democratically legitimated political will to act.
*Johannes Müller is a Masters student in Law at the European University Institute. He passed the First State Examination (Erstes Staatsexamen) at LMU Munich and holds a Bachelor’s (Licence) and Master’s degree in EU Law from Université Paris Panthéon-Assas.
I would like to thank Prof. Michael Müller (Mannheim University) for his valuable comments.
The views expressed in this blog reflect the position of the author and not necessarily that of the Brexit Institute Blog.