German court ruling could hit economic growth next year - source

By Maria Martinez and Andreas Rinke

BERLIN (Reuters) -A German court ruling that wiped billions from the federal budget could drag down growth by as much as half a percentage point next year in Europe's biggest economy, an economy ministry source told Reuters on Friday.

The coalition is scrambling to fix a large hole in its finances after a court ruling blocked the government from transferring 60 billion euros ($65 billion) in unused funds from the pandemic towards green initiatives and industry support.

The assessment of the ruling is an early indication of just how damaging some in Chancellor Olaf Scholz's coalition see it, though Finance Minister Christian Lindner on Thursday had said it was too early to assess the extent of the issue.

The economy and finance ministry declined immediate comment.

"According to initial rough estimates, a loss of investment funds could cause growth in 2024 to be about half a percentage point lower," the source, who is familiar with the economy ministry's forecasts, said.

"So the ruling could have a negative impact on economic growth," the source added.

Last month, the economy ministry predicted 1.3% growth for next year.

The court ruling has increased tensions in Chancellor Olaf Scholz's already fractious government, which has seen support slump as it tackles a series of crises and the economy teeters on the brink of recession.

Although the Greens want additional spending, the Free Democrats (FDP), which head the finance ministry, reject additional debt and higher taxes.

"Some of the expenditure planned for the coming year will now have to be cut, which the governing parties are likely to find difficult to agree on," said Commerzbank chief economist Joerg Kraemer.

The political fallout saw Economy Minister Robert Habeck from the Greens party double down on warnings that the ruling could damage German industry, disrupt climate change goals and see jobs move abroad.

"The climate and transformation fund is a fund to secure value creation and jobs," he told the Frankfurter Allgemeine Sonntagszeitung.

"If that is at risk, jobs and value creation are at risk. The migration of industry is damaging our country and society. Industry means work, production, value creation."

As the upheaval continued on Friday, a parliamentary committee paused deliberations on the 2024 draft budget and saw some decisions postponed until after an extraordinary meeting next week.

The contents of the ministries' budgets were finalised during the committee meeting however, the budget officers said.

The state gas and electricity price brakes, which were due to expire at the end of the year, have been extended until March 31, 2024, the German news agency dpa reported on Friday.

Some specific expenditure allocations, however, will be discussed next Thursday in detail, after a special meeting on Tuesday to discuss the impact of the constitutional court ruling.

Final key budget figures and new debt figures will be made public after the meeting next Thursday, instead of this week as previously expected.

One of the two sections of the budget that could not be finalised contains key projects such as doubling military aid to Ukraine to 8 billion euros in the coming year.

The chief budget officers of the coalition government accused the opposition of refusing to cooperate in budget deliberations.

"We call on the CDU/CSU to deal responsibly with the court ruling and its consequences instead of blocking work in parliament," they said.

Friedrich Merz, whose main opposition Christian Democratic Union party is suing the government, said his party is considering a new lawsuit against the 200 billion euro Economic Stabilisation Fund (ESF).

The ESF was created in 2020 with the objective of supporting companies amid the coronavirus pandemic but since last year it has focused on the energy crisis, and a successful court challenge could threaten fresh turmoil.

There are 29 special funds at the federal level, with a total volume of 869 billion euros, according to the independent auditing institution Bundesrechnungshof.

It is not clear which of these funds are at risk, with the exception of the 100-billion euro special fund for Germany's army, which is covered by a separate constitutional exemption from the debt brake.

"These fears seem overblown," Commerzbank's Kraemer said. "However, there are considerable risks associated with the Economic and Stabilization Fund."

For an EXPLAINER on the impact of the budget ruling, see Full Story

(Reporting by Maria Martinez, Andreas Rinke, Holger Hansen and Madeline Chambers; Writing by Maria Martinez and Matthias Williams; Editing by Clarence Fernandez and Gerry Doyle)