They were called the “bazooka”, the “ka-boom” and the “double ka-boom” — the unprecedented crisis-fighting spending programmes of recent years that Olaf Scholz hoped would seal his place in Germany’s postwar history.
But now the chancellor risks entering the annals for another reason altogether: an accounting trick that the German top court has struck down as illegal — opening a €60bn hole in the country’s public finances.
“It may have been invented by Scholz’s officials, but ultimately he’s responsible,” said Carsten Linnemann, general secretary of the opposition Christian Democrats. “He’s the chancellor. The buck stops with him.”
Germany has been stuck in a budgetary crisis ever since the constitutional court’s bombshell judgment of November 15, which has left all the government’s spending plans for this year and 2024 in tatters.
The court in Karlsruhe ruled that ministers broke the law by transferring €60bn of unused borrowing capacity from their pandemic budget to a “climate and transformation fund” (KTF) that finances projects to modernise German industry and fight climate change.
The idea behind the transfer dates back to when Scholz was finance minister but was implemented shortly after he became chancellor in 2021. The plan was a classic compromise that allowed the partners in Scholz’s cumbersome coalition — Social Democrats (SPD), Greens and the liberal FDP — to paper over their disagreements on fiscal policy and fulfil their campaign pledges.
Spending would be increased, but without excessive borrowing. The SPD and Greens secured the funds they needed to make German industry carbon neutral, while the fiscally hawkish FDP won a promise that the “debt brake” — the constitutional curb on new borrowing suspended during the pandemic — would be restored in 2023. Now, the whole construct has been declared unconstitutional.
Social Democrats have rejected attempts to hold Scholz solely responsible for the debacle. “We can’t turn one person . . . into the scapegoat,” said Rolf Mützenich, head of the SPD parliamentary group.
“It’s not as if just one person made a mistake,” he said. Rather, the blame was shared by all coalition parties who wanted the German state to shell out on multiple crises while abiding by its constitutional limits on deficit spending, he argued.
But Scholz’s problem is that the court’s verdict upends the financial system he helped design. It dismantles and discredits that system with a rigour that has shocked both his allies and adversaries.
“The constitutional court ruled that Scholz’s government broke the law twice: once by repurposing loans raised to fight the pandemic and a second time by spending the money in subsequent years, rather than in the year the credit lines were authorised,” said Linnemann. “That’s pretty shocking.”
Scholz started off as a classic German finance minister, strictly observing the debt brake and keeping new borrowing to a minimum. That changed with the pandemic, when he pushed through a supplementary budget financed with €156bn of new debt and unveiled a “bazooka” of unlimited liquidity assistance to German companies facing lockdown.
Three months later he unveiled a €130bn stimulus package aimed at bringing Germany out of the Covid-19 pandemic with a “ka-boom”.
Then last year, Russia invaded Ukraine and drastically reduced its supplies of gas to Europe, plunging the German economy into crisis. Scholz, by then chancellor, launched his newest programme — dubbed the “double ka-boom”.
It involved taking a fund created during the pandemic to bail out struggling companies, the Economic Stabilisation Fund (WSF), endowing it with €200bn in credit lines and using it to subsidise electricity and gas prices for companies and consumers.
Yet only €30bn was actually disbursed from the WSF last year, with the rest pushed into 2023. This violated a basic principle, according to the top court’s ruling, that borrowing capacity has to be used in the year it was approved for. On Monday the government confirmed that it was now planning to wind down the WSF by the end of the year, rather than roll over the funds into 2024.
“The Scholz system rested on all of these off-budget vehicles and now they’ve all collapsed like a house of cards,” said one official who has worked under the chancellor.
Many see the court’s verdict as a turning point — it “calls time on a form of housekeeping that accommodated ever more spending . . . and just got out of control”, an editorial in the Süddeutsche Zeitung newspaper said last week.
“Muddling through with the help of accounting tricks struck such deep roots that in Berlin it was considered a customary right,” it added. “Olaf Scholz has been instrumental in that.”
Stern magazine was more terse: “The Scholz principle is history,” it wrote on Monday.
For the chancellor, the court’s verdict was a deeply humiliating setback.
Scholz has often been mocked for a lack of charisma, dull speeches and his somewhat aloof north German demeanour. But his champions argued that he made up for those weaknesses with a calm competence that voters appreciated. They pointed to his deft handling of the energy crisis, his creation of a new €100bn investment fund for the armed forces and his steady cranking-up of military and financial aid to Ukraine.
Now that reputation for quiet professionalism has taken a substantial knock. However, pollsters say Scholz has long been a disappointment for voters. “They had a poor opinion of him even before the budget crisis and it’s just made it even worse,” said Manfred Güllner, head of polling agency Forsa.
When voters were asked who they would choose in a hypothetical direct election for chancellor, only 20 per cent picked Scholz, while about 60 per cent still picked Angela Merkel, said Güllner.
Merkel was often praised for her crisis management skills. Many recall her simple pledge during the global financial meltdown of 2008-09 that Germans’ savings were safe. Güllner said that, unlike Merkel, Scholz had failed to communicate with voters desperate for guidance and consolation.
In last year’s energy crisis, “people kept hoping he would give the country a sense of direction, a sense of security, and he never did”, Güllner added. “He just doesn’t show leadership.”
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