The German government has reached a deal to solve a budget crisis following a month of tense negotiations after a court ruling threw its finances into disarray, a government spokesperson said on Wednesday.

The leaders of Chancellor Olaf Scholz's fractious three-party coalition had been wrangling over money since Germany's highest court annulled a decision to repurpose 60 billion euros ($64.7 billion) originally meant to cushion the fallout from the COVID-19 pandemic for measures to help combat climate change and modernize the country.

The breakthrough could also provide some reassurance for businesses in Europe's largest economy after the crisis forced the government to freeze major spending pledges focused on green initiatives and industry support, although uncertainty over Germany's long-term financial plans remains.

The court ruling forced Scholz's government to suspend a constitutionally enshrined "debt brake" for the 2023 budget and to rethink its 2024 plans.

The immediate challenge was to plug a 17-billion-euro hole estimated in 2024 budget of around 450 billion euros. Scholz, Vice Chancellor Robert Habeck and Finance Minister Christian Lindner had met repeatedly seeking to resolve the impasse before the end of the year.

During the negotiations, Lindner insisted on reimposing the debt brake for 2024, which restricts Germany's public deficit to 0.35% of gross domestic product (GDP).

But Scholz and Habeck sought another suspension in 2024, for the fifth year in a row, to avoid spending cuts that could affect welfare benefits and investment in the transition to the green economy.

Details on the content of the compromise and how the three leaders agreed to solve the budget crisis after negotiating all night were expected to be presented later Wednesday at a press conference by the three leaders, the chancellery said in a statement.

The issue has added to tensions in the two-year-old coalition, which has become notorious for infighting and has seen its poll ratings slump. The alliance brings together Scholz's Social Democrats and Habeck's environmentalist Greens, who both traditionally lean to the left and had said there would be no dismantling of the country's welfare state in order to save money.

Lindner's pro-business Free Democrats have portrayed themselves as guarantors of solid finances and adherence to Germany's strict self-imposed limits on running up debt – the rules at the center of last month's court ruling – and have advocated spending cuts.

Regardless of Wednesday's agreement, it is already clear that the lower house of parliament, the Bundestag, will not manage to finalize the 2024 budget this year.

From Jan. 1, there will be a provisional management of the budget. Lindner will have a greater role in this because he will have to authorize certain expenditures.

Such provisional budget management means that in contrast to the situation in the United States, the lack of an agreed budget does not lead to a spending freeze in the coming year.

Economy to shrink due to crisis

Separately, the country's Economic Institute (IW) on Wednesday said Germany's economy would contract by 0.5% in 2024 because of uncertainty caused by the budget crisis.

Last month's court ruling upset the government's financing plans and caused much uncertainty, said researchers at the institute.

"The German government has played a decisive role in this crisis," IW Director Michael Huether said. "The coalition must now demonstrate its ability to act in terms of fiscal policy."

The dispute over the federal budget is unsettling companies, with many postponing their investment decisions for the time being, the economic institute said.

The IfW institute also predicted on Wednesday that expected consolidation measures as a result of the budget ruling would alone drag 2024 economic growth down by 0.3 percentage points.

"There is just as much uncertainty about the exact form of the savings as there is about their economic impact," the researchers said.

The IfW now sees economic growth of 0.9% next year instead of the 1.3% it had predicted in September.

According to the IW calculations, government spending totaling more than 20 billion euros will be cut because of the court ruling, dragging GDP down 0.5%.

In the worst-case scenario, a decline of one percentage point was possible, the institute said.

Following a 0.5% GDP decline expected this year, next year should have seen a recovery, IW said. The institute said that in the last 70 years, real gross domestic product fell for only two consecutive years, in 2002 and 2003.

While the German economy shrinks, other large economies were expected to grow, with Italy posting 0.5% growth, France 0.8%, the U.S. 1.3% and the global economy 2.5%, it said.

Even without the budget crisis, the IW said the German economic model based on exports was under pressure.

Global trade was expected to grow by 1% in 2024, following a 1.5% contraction in 2023, and it would also be a challenging year for the construction sector because of high interest rates, it said.

Only the service sector would see a slight upturn, according to the IW.