When the euro crisis was in its infancy, some of us believed that a broad program of public investment in green energy was necessary to save Europe from economic stagnation and the extreme right, which would only benefit from that stagnation. That is why I made an estimate in 2017: to channel up to 5% of Europe's total income to investment in green energy and sustainable technologies. Since we knew then, as we know now, that neither the member states of the European Union nor the Union budget could afford that sum, I proposed a new way of financing through bonds of the European Investment Bank (EIB), which would be guaranteed by the European Central Bank (ECB).
When I presented this idea to a committee of European finance ministers and central bank governors in 2015, the proposal was not rejected because it was never considered. Not giving up, in 2019 I ran for the European Parliament in support of the Green New Deal for Europe (DiEM25), arguing that the 5% green energy investment campaign would be "to progressives what immigration and racism are to the right. " Instead, the new European Commission, under the leadership of Ursula von der Leyen, adopted the underfunded so-called The Green Deal, which was macroeconomically irrelevant and, as I warned, environmentally ambivalent.
Then came covid-19. European leaders responded with a recovery fund, formally known as NextGenerationEU. As I predicted, the fund was not just another macroeconomically irrelevant program, but also a death sentence for any possibility of establishing a European fiscal union, which would finance the investments necessary for Europe's future. EU officials, insisting that NextGenerationEU is all Europe needs, dismissed my proposal for public investment of 5% of European income as "fiscally irresponsible" and "politically unfeasible".
Earlier this month, Mario Draghi, former president of the European Central Bank and former Italian prime minister, delivered the long-awaited report to von der Leyen, who is now starting her second term as Commission president. What is the topic of the report? If Europe does not take certain steps, "it will lose the reason for its existence."
According to Dragi, what steps should Europe take? The central pillar of his report is a proposal to use 5% of Europe's total income to finance a public program of green investments, with new joint borrowing. Journalists from all over Europe immediately started calling me and asking how I was feeling. "I feel defeated," I replied. "But," insisted one of them, "isn't it better late than never?"
No, it's not, because it's not just late for Europe, it's too late. The reason goes further than the (at least) 3 trillion euros of investment in green technologies that Europe has not implemented since 2019, which is why it lags significantly behind China and the USA. Simply put, a missed opportunity to invest 5% of European income in green projects, even at this late stage. She disappeared, evaporated. While Europe was waiting, it moved from deflationary to inflationary dynamics, and this closed the possibilities that were open until 2020. Let me explain.
My 2019 proposal called for the Council of the EU to give the European Investment Bank the green light to issue around half a trillion euros of its own bonds over 30 years, to finance green investments across Europe. At the time, the European Central Bank was already buying bonds to combat the deflation that was hurting Germany (cutting, for example, interest rates on savings to zero and below).
All the ECB had to do was announce that it would buy those new EIB bonds (instead of German government bonds). This would mean cheap loans worth 5% of the total European income for investments, without burdening the budgets of the member states or the EU. By now, productivity would be much higher, German industry would not be in its current poor state, and increased economic activity would supplement revenues through rising taxes.
Today is too late for such measures. After years of negligible investment, supply in Europe has decreased. As a result, inflation, triggered by the pandemic, forced the ECB to sell bonds, and the space for large EIB bond issues with ECB guarantees is - closed.
The European Commission also cannot issue its own bonds worth 5% of European income, as it did to finance NextGenerationEU, because investors, as well as member state governments, do not trust these bonds. Investors know that the Commission cannot provide an increase in own revenues or member states' contributions to the EU budget, while member state governments see the bonds as an announcement of pressure to increase their contributions to future EU budgets.
The only alternative to finance the necessary investment program would be a full federation with a democratically elected federal government and a federal budget at least 30 times larger than the current EU budget, with borrowing and taxation powers. Unfortunately, it was precisely the inadequate management of the euro crisis and the pandemic that made this solution politically impossible.
In short, Dragi's report will be accepted at his word, but will not be implemented in practice. The commission will formally divert unused funds from the recovery fund, but in reality it will bury the report's main recommendation even deeper. Doesn't Dear know this?
I doubt he doesn't know. His report sounds like a swan song and an attempt to abdicate personal responsibility for turning Europe into a museum of dead industries and excellent reports that were praised to the heavens before being shelved and forgotten.
Copyright: Project Syndicate, 2024 (translation: NR)
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