Opinion

Berlin will make or break the European Green Deal

€1 trillion isn't enough for the European Green Deal and the EU's fiscal framework is constraining public investment. "Mrs Merkel, tear down this rule".

By: , and Date: February 3, 2020 Topic: Green economy

This opinion piece was originally published in Le Monde and Il Sole 24 Ore

Le Monde logo

€1 trillion: this is the ‘green investment wave’ the European Commission seeks to mobilise over ten years with its newly-launched European Green Deal Investment Plan.

In doing so, the EU executive arm seeks to unleash the public and private financing required to reach its ambitious decarbonisation targets, as well as to provide support to territories facing serious socio-economic challenges deriving from this transition.

We have our doubts.

In order to achieve the European Green Deal targets, additional investments of €300 billion a year will have to be made in Europe by 2030, notably in energy efficiency in buildings, clean cars and wind and solar electricity production. Even if the European Commission succeeds in mobilising €1 trillion of investments over ten years, this would only represent a third of the additional investment needs associated with the European Green Deal.

To be fair, it would have been difficult for the European Commission to do much more, given the limited size of the EU budget. But this clearly outlines that other tools are needed to unleash green investments in Europe.

The two most important tools are a reformed EU fiscal framework and a reformed European Investment Bank (EIB).

The main instrument is the EU fiscal framework, which should be reformed to authorise deficit-financed green investment. That is, EU fiscal rules should be changed to deter countries from slashing public investment when they consolidate their public finances and to ensure that they are able to take advantage of favourable interest rates to invest in public goods. One way to do that would be to include some form of ‘golden rule’ in the European fiscal framework to allow the financing of investments through the issuing of debt. And yet, if an agreement cannot be found to change the European fiscal rules and make them more investment-friendly,  reform focused on authorising deficit-financed green investment during the transition should be a central part of the European Green Deal.

One way to put in place a form of ‘green golden rule’ would be to revise the investment clause of the European fiscal framework to make it much more flexible in order to exempt from the fiscal rules public investment that mitigates or adapts to climate change. Of course, clear accounting rules would be needed to separate investment in the low-carbon transition from other expenditures. The recent adoption of an EU taxonomy for sustainable finance provides a first sensible answer to this challenge.

A second tool is the EIB, which should be reformed to adapt its mission and truly transform it into the EU’s climate bank. The EIB should be able to do more to finance the green transition. Its volume of new lending disbursed has gone down every year since 2015, and its total outstanding amount of loans has fallen as well. The EIB has clearly some margin of manoeuvre to act more forcefully. Its capital ratio has gone up in recent years, its leverage has been going down since 2012, and according to its statutes, it can lend as much as two and a half times its level of subscribed capital, plus reserves and profits, which means its portfolio of loans could reach around €600 billion, compared to about €450 billion today. The EIB currently benefits from very favourable rates for its borrowing from capital markets and it would be a shame not to use this opportunity to finance worthwhile projects that can contribute to the fight against climate change.

If EU countries are (unduly) afraid for the EIB’s rating, the Commission should propose a new capital increase, similar to that which was done at the beginning of 2013 to increase the EIB’s firepower to fulfil its enhanced mission as the EU’s climate bank.

German politicians have consistently warned Brussels against any attempt to loosen the EU fiscal rules in a bid to free up spending on green projects, and they have also dismissed the idea of increasing the EIB’s capital to unleash climate funding. This clearly outlines how Berlin – and not Brussels – will ultimately make or break the European Green Deal.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More by this author
 

Opinion

European governance

Can the EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read article
 

Opinion

COP26: why carbon pricing is crucial to China’s climate change pledges

China’s emissions trading scheme is a welcome but to reach its full potential, it needs to cover more of China’s emissions, go beyond the electricity sector and let prices reflect the true cost of carbon.

By: Alicia García-Herrero and Junyu Tan Topic: Global economy and trade, Green economy Date: October 22, 2021
Read about event More on this topic
 

Past Event

Past Event

The contribution of hydrogen to European decarbonisation

What role will hydrogen play in Europe's decarbonisation?

Speakers: Alison Conboy, Matthias Deutsch, Ruud Kempener, Ben McWilliams and Andrea Pisano Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 21, 2021
Read about event More on this topic
 

Upcoming Event

Oct
27
12:00

Can COP26 save the planet?

In this episode of the Sound of Economics Live Italy's Minister for Ecological Transition, Roberto Cingolani outlines his priorities for the upcoming COP Summit.

Speakers: Roberto Cingolani and Guntram B. Wolff Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Oct
28
14:00

Can climate change be tackled without ditching economic growth?

What will be necessary to achieve climate goals and keep growing?

Speakers: Francesco Starace, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article
 

Opinion

Xi’s pledge on financing coal plants overseas misses point

China’s domestic installation of coal-fired power plants continues at great pace.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 7, 2021
Read article More on this topic
 

Opinion

The only quick-fix to Europe’s energy price crisis is saving energy

The only thing Europe can quickly do to prevent a potentially difficult winter is to actively promote energy conservation in both the residential and industrial sectors.

By: Simone Tagliapietra and Georg Zachmann Topic: Green economy Date: October 7, 2021
Read article
 

Opinion

Will China use climate change as a bargaining chip?

Beijing shows signs of changing tactics ahead of the COP26 conference.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 6, 2021
Read about event More on this topic
 

Past Event

Past Event

What is the link between biodiversity loss and financial instability?

Biodiversity loss impacts financial stability. How big is the risk of biodiversity loss for financial institutions?

Speakers: Sylvie Goulard, Romain Svartzman, Guntram B. Wolff and Michael Wilkins Topic: Banking and capital markets Date: October 5, 2021
Load more posts