(Bloomberg) -- The German government’s shouldn’t try to evade the debt brake by tapping loopholes, according to the Bundesbank.

“Fiscal rules shouldn’t be circumvented,” the central bank said in its monthly report published Monday. “A reform would require a majority to amend the constitution, and if the debt brake is seen as too restrictive, this would be the right way to go.”

While the Bundesbank said it would be justifiable to moderately expand the regular credit line as long as the debt ratio is below the Maastricht reference value of 60% of economic output, officials insist the country’s coalition shouldn’t try to sidestep the rules. 

“Attempts to soften the debt brake during implementation are not suitable,” it said.

Germany’s top court last week delivered a major blow to the government, ruling that the use of €60 billion ($65.6 billion) of pandemic aid to finance climate protection contravenes the constitution. The decision has called into question some €770 billion of state funding for Europe’s largest economy. 

The coalition in Berlin is now required to adapt planning accordingly, also in order to limit uncertainties, though there’s no easy fix. 

Whatever the government decides will also impact how Germany develops in the coming years, the Bundesbank said. 

German Vice Chancellor Robert Habeck said earlier on Monday that the court’s decision will provide a hit to the economy and could lead to higher power costs for households and companies.

“The answer is not easy to find,” he said in an interview with Deutschlandfunk radio. “Things could get really difficult.” 

German’s central bank isn’t afraid of broadcasting advice to the government. In September it urged officials to address a range of deep-seated challenges to the country’s business model if they’re to boost the longer-term outlook.

Bundesbank also said:

  • Germany is set for another quarterly contraction in the three months through December, pushing the economy into recession
    • It will grow again in the first quarter of 2024, with the Bundesbank seeing “tentative signs of hesitant improvement” in incoming orders and foreign demand potentially having bottomed out
    • Construction has yet to see an uptick. Financing and building costs are weighing heavily on demand and another fall in production is expected
  • Consumers are expected to support the economy due to high wage increases and easing price pressures
  • Inflation is set to fluctuate around its current value. Food is likely to dampen consumer price growth while services are likely to remain a driver. Base effects will also turn energy into a driver again

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