Incoming chancellor Scholz could face legal challenges over €50bn investment plan

Olaf Scholz says 'The free movement of labour is part of the EU'

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Heralding the 2020’s as “a decade of future investment” the coalition is seeking to pump more funding into areas such as climate change, infrastructure and digitalisation. However, as the coalition agreement itself acknowledges, the budgetary position is going to prove very demanding. A research briefing from Oxford Economics notes: “The deal is short on details on how to pay for all the greening and digitalisation efforts.” Speaking to Express.co.uk, the author of the briefing, Chief German Economist Oliver Rakau explained the money could come from moving unused borrowing from this year’s budget into an off-budget vehicle to be used in 2022.

Such a move would help navigate Germany’s debt brake which places strict limits on government debt.

However, Mr Rakau added he “wouldn’t be surprised if there were legal challenges”.

Carsten Brzeski, global head of Macro for ING Research, agreed there could be “legal hurdles”.

He warned it could also bring Mr Scholz into conflict with coalition partner the Free Democratic Party which has previously set out a strong agenda of fiscal discipline.

Mr Brzeski added: “Fiscal policy will remain an explosive policy area for this government.”

Mr Rakau believes the coalition may look at “several different levers to circumvent the public debt brake”.

Such levers could include pushing back repayment of pandemic-related debt from 2023 to 2028, as well as stretching out repayment plans.

Germany’s debt brake was enshrined in the country’s constitution in 2009 following the global financial crisis and limits annual government borrowing to 0.35 percent of GDP.

It was temporarily suspended in 2020 under clauses which allow it to be dropped at times of crisis – in response to the pandemic.

So far, Mr Scholz has maintained support for the debt limits, telling reporters: “This new coalition will need to make massive investments while adhering to national debt brake.”

However, the Green Party, which forms part of the coalition, has previously been much less supportive, arguing the rules should be changed to allow greater investment.

Assessing the coalition’s outlook, Mr Rakau said: “Overall there seems to be greater willingness to loosen fiscal policy and ease constraints on the national public debt brake.”

Mr Brzeski predicted Germany would see a short term growth in debt and greater fiscal stimulus in the next year with a gradual return to austerity from 2023.

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Comparing the plans to Mr Scholz’s predecessor Angela Merkel, he described it as “a big change”, pointing out keeping debt down was a trademark of Ms Merkel who was never about “big visionary announcements.”

However, he also noted the coalition plans were light on detail of exact figures and spelling out how they would actually pay for it.

Mr Scholz will be inheriting an economy with an increasingly bleak immediate outlook.

GDP figures on Thursday came in lower than expected.

Some analysts have predicted GDP could end up stagnating or even contracting going forwards.

Meanwhile, fears over the spread of Covid and supply chain issues have seen consumer and business confidence falling, according to latest data.

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