Can the EU fiscal rules jump on the green bandwagon? | View – Euronews

The economy of the European Union is emerging from the worst recession since World War II and growth forecasts have been revised upwards for 2021 and 2022. As the economy recovers, the strategy for withdrawing the massive fiscal support injected during the pandemic will be crucial to ensure sustainable public finances.

For this reason, the European Commission has now kicked off the review of the blocs rules, which have so far compelled member states to keep their public deficit under 3% and debt under 60% of GDP. Should they stay the same?

One important aspect of the consultation concerns the investment needs. The Commission is already warning that substantial investments in digital and green infrastructure, as well as regulatory and tax measures, will be needed to meet the blocs medium- and long-term objectives.

Just the goal to cut greenhouse gas emissions by at least 55% before the end of the decade will demand 520 billion annually in extra contributions compared to the numbers seen in the previous decade , with 390 billion for the transport and energy sectors alone, Brussels says.

A significant portion of this fresh expenditure will have to be financed by the public sector, with the public-private sector ratio estimated to be 1 for every 4 in private capital. Given that some of the investments required are public goods, government spending must be increased by around 100 billion per year. This means a great effort waiting to be bankrolled.

The main political challenge for European finance ministries in the coming years will be to decrease deficits while simultaneously increasing green investment. In the midst of the euro crisis, budget consolidation in the EU took place very quickly, prompting a new recession in 2012. Most countries chose to embrace austerity policies and cut down public expenses. This scenario must be avoided in the post-Covid years.

However, a general relaxation of fiscal rules like Madrid, Rome and Paris are pushing for would not provide direct incentives to boost green investment and it would instead risk excessive deficits in good times. It is therefore not a suitable approach to pursue a far-reaching reform of the current rules. But, on the other hand, if member states agree to exempt their green projects from the deficit requirements, they would create incentives to keep money flowing into environmental action over the coming decade, even during the consolidation phase.

This is why I believe the EU should put in place a green fiscal pact based on a green golden rule that would exclude net public contributions in climate protection from deficit and debt calculations under the new fiscal rules. Without the possibility of deficit financing, the EU will not achieve its goal of carbon neutrality. Due to political and economic constraints, budget consolidation would come at the expense of investments.

Still, I do advise against a general relaxation of fiscal rules: debt sustainability concerns need to be taken seriously and global warming in itself may reduce growth.

While the idea of exempting investments from deficits has been rejected in the past, there are now good reasons to justify deficit financing for environmental projects. The restructuring of the energy system and the transport infrastructure is a huge effort, which, in view of the political and economic constraints, simply cannot be financed from current budgets. The need for injecting money into the climate transition is so colossal that it inevitably acquires a macroeconomic dimension.

The key to a successful green golden rule lies in a clear system that determines and controls what is actual green investment and what is just greenwashing. This requires careful definitions and institutional oversight. By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

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Guntram Wolff is a German economist and current director of Bruegel, a Brussels-based think tank.

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Can the EU fiscal rules jump on the green bandwagon? | View - Euronews