Germany Confronts A Tough Climate Choice: Will They Decide To Pay For Their Tough Talk On Carbon, After All?

We have been reasonably critical of Germany in this newsletter. We have taken Europe's largest country to task over their wooly headed approach to climate as well as incredibly foolish move of relying on Putin's Russia for their energy security. Finally, we also criticized them having their economic model be: sell high tech manufactured goods to China.

What is particularly unfortunate is how these bad decisions and policies have worked in combination. The only thing worse than deciding to be strategically dependent on Russian natural gas is to simultaneously turn off your nuclear power plants etc.

However, while Germany may still be in a precarious place - economically and strategically - right now it would seem as if the Germans are nonetheless starting to work through their problems.

This might be surprising since a lot of the headlines around Germany is that the country is in a deepening recession, the government is in crisis and the country's institutions are dysfunctional.

This came to a head last month when the country's highest court ruled that a budgetary gimmick was illegal. Overnight, the entire German political system and climate transition were in crisis.

Why?

The ruling suddenly raised a question mark about tens of billions of dollars investment needed to improve German infrastructure and especially fund its net zero goals.

The basics are complex but not terribly: the Germany coalition government wanted to use some €60 billion Euros that had been set aside early on the pandemic and never used.

Essentially, they had budgeted these funds for pandemic relief and then never used them. These fiscal resources were passed by the Bundestag (the German Parliament) but never formally borrowed or spent.

The high court in Karlsruhe took a lot at all of this and swiftly ruled: nice try but no dice.

The reason this occurred is that, during the pandamic Germans had set aside their normally very strict rules about spending and debt during the extraordinary situation of Covid-19.

They were therefore able to borrow MORE than Germany is typically able. And then the state had not used all the capital allocated in their budget.

This suddenly provided a very convenient opportunity.

The hope of the current coalition was that they could use the funds to invest the green transition and therefore avoid having to "find" the extra funds via either cutting spending or raising taxes.

The high court dashed these hopes and created a mini crisis. Not even a rich country like Germany has 1.5% of GDP just sitting around easily waiting to be spent.

The issue isn't just that either of those two options are difficult but also that different elements of the governing coalition were dead set against either option because of their own principles and promises made to their voters.

The FDP (the neo liberals) couldn't raise taxes and the Social Democrats couldn't cut social programs etc etc. The Greens' priorities were self-explanatory......

So, there was a political gridlock as well as a financial hole blown through the budget. No Bueno.

The previous maneuver had seemed like an elegant if cynical solution. We fund the green transition that is broadly popular and we do so with this weird pocket of funds that we have technically "spent" under a previous exceptional time. So, we don't have to raise taxes or cut spending elsewhere.

Very neat and tidy.

And yes, of course, the German government will no doubt figure out more accounting maneuvering to help smooth things over. We are hardly an expert on German budgetary procedure but if there is one thing we have learned it is that, just about anywhere, money can always be moved around, calculations tweaked, and all sorts sleight of hand employed to make things work.

All of this is perfectly true but it still won't be enough. The overarching outcome is now Germany has to have a necessary and very important conversation:

How are we going to pay for the green transition?!

This is tough to be a tough conversation! But is also essential and not just for Germany.

Previously the German government was trying to have it both ways. They wanted to preach hard fiscal discipline on the one hand while on the other use some very creative accounting to pay for the net zero energy transition.

Now that the government will be forced to figure out how to properly pay for a policy that both the government and their own populace considers essential for both the German economy's and the planet's future.

Huzzah!

The broader context is equally important. That is because Germany is in the EU and not just that but they that body's largest and richest country and the one with very strict feelings about fiscal discipline.

But it would be simply impossible to preach fiscal rectitude when your own country's court system are striking down policies because of accounting mismanagement. So something has to give domestically in Germany and then that will hopefully create a new set of parameters and approaches that could act as a blueprint for wider Europe and beyond.

If Germany was able to have their cake and eat it too when it came to the climate transition then they could hardly act as a model for other countries to follow.

Not just that however. There is the broader European context as well.

Perhaps the biggest positive overall is that the German government is going to have to compromise on their principles on debt or spending. That could allow them - force them! - to do the same with their approach to European policy and what is possible fiscally across the continent. This could therefore open the door for a serious and over due conversation about how best to properly pay for a huge priority.

The climate transition is going to be expensive and won't pay for itself. these truths were true before the court in Karlsruhe made life difficult for the German coalition but at least they are now going to be forced to grapple with them.

That is an important step on a long and very difficult road to saving the climate.

Here is to hoping!

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