In a decisive move that echoes the end of Europe’s era of massive stimulus, Germany, the continent’s largest economy, has abruptly applied the brakes to government spending. Triggered by a ruling from Germany’s top court, political leaders are in crisis mode, reassessing their budget for the year and rethinking their strategy for public finances.

The legal predicament revolves around the use of special funds, not part of the federal budget, to support large-scale investments. Germany’s “debt brake,” constitutionally limiting government deficits and borrowing, led governments to resort to off-budget funds. However, a ruling in Karlsruhe on Nov. 15 disabled one such fund, raising doubts about the financing of hundreds of billions of euros and challenging Chancellor Olaf Scholz’s coalition’s plan for a climate-friendly economy.

Germany’s Off-Budget Funds

Sources: German Finance Ministry, Federal Court of Audit

This crisis unfolds as European Union fiscal rules, promoting prudent public finances, are set to resume next year. Italy and France, with deficits above the 3% limit, face scrutiny. Germany, planning prolonged energy support, grapples with uncertainty as its government navigates the legal intricacies. Regardless of the outcome, new spending commitments will require substantial political effort.

The country’s budget quandary mirrors a broader fiscal shift in the region. As Europe’s stimulus era winds down, Germany’s judges seem to have extinguished the remaining lights. To read the full Businessweek story, click here.

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