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German court ruling threatens to unravel Europe’s green and industrial ambitions

Philipp Lausberg

Date: 29/11/0023
Europe was hit like a bombshell following the German constitutional court ruling on 17 November. The decision to designate the financing of Berlin’s €60 billion climate and transition fund as unlawful upends Berlin’s green transition agenda and puts into question industrial policy initiatives such as subsidies for chips plants by Intel and TSMC and energy price subsidies for German industry. Black clouds are gathering not only on the country’s economic outlook and on its floundering industrial base. The court ruling is also bad news for the EU’s triple green, digital and economic security transition goals and the bloc’s overall competitiveness.

As Germany is the EU’s largest economy, the sudden contraction of its fiscal space pulls down the EU as a whole. The ambitious goals of the Green Deal and the green energy transition can only be achieved if Germany leads from the front. Similarly, should the withdrawal of German subsidies affect multinational projects, such as Important Projects of Common European Interest (IPCEI) for chips or hydrogen, it would be a significant setback. Moreover, the EU depends on Germany’s fiscal prowess for much needed additional EU-level financing, which is now more in doubt than ever. Berlin has already rejected a €100bn top-up to the EU common budget, citing its budget turmoil as a reason.

The basis for the Karlsruhe constitutional court ruling is Germany’s debt break, which limits a government structural budget deficit to only 0.35% of GDP. Put in place in 2009, it has resulted in German under-investment of around 300 billion euros over the past decade vis-a-vis other AAA-rating economies. Germany’s failure to invest in infrastructure, renewables and digitalisation has contributed to the country’s current stagnation. With one of the lowest growth rates in the Eurozone and declining competitiveness, Berlin now serves as a prime example of the ruinous consequences of withholding strategic investments.

At the other end of the spectrum, China and the US have invested on a massive scale in their green, technological, and industrial futures. Over the past decade, China has taken over entire international value chains such as solar power and rare earths and is set to do the same in other green industries such as windmills and batteries. The US is picking up this challenge with IRA subsidies currently luring swaths of Europe’s clean tech industry from the EU to the US.

If the EU wants to stay competitive and build green industries and new technologies at scale, large amounts of capital are needed fast. Europe’s underdeveloped capital markets are not deep and risk- averse enough to provide it. Public funding has a critical role in leading the way.

What is the way forward for Germany and Europe? Could Germany find a way around its debt break, an instrument of another era, to make room for the strategic investment needed to tackle today’s growing challenges? This would be desirable, but constitutional reform is very much in doubt under current political circumstances. What is sure is that Berlin must find a way to support strategic investments on the EU level. Only this will enable an effective industrial policy that will not undermine the Single Market from which Germany has been profiting disproportionally. If there is a silver lining in this crisis, it must be that. What is at stake is not only Germany’s economic future but that of the European Union.

Philipp Lausberg is a Policy Analyst in the Europe's Political Economy Programme at the European Policy Centre.

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