Will the Covid-19 crisis undermine the EU Green Deal? A view from Europe's periphery

Photo by Can Esenbel
Photo by Can Esenbel

On March 26th, the European Council issued a joint statement stressing the objective of a ‘green transition’: "The urgency is presently on fighting the Coronavirus pandemic and its immediate consequences. We should however start to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis".

Since then a number of governments, business leaders, academics, MEPs, supra-national organizations, investors, and NGOs have equally called for post-emergency recovery packages (fiscal and monetary expansion to prop up our economies) to be aligned with the vision and targets of the EU Green Deal.

Unlike the post-2008 response, when (according to the ILO) only a small fraction of fiscal and monetary stimuli were oriented towards a green transition, there is seemingly a far broader consensus on the need for a transformative green recovery strategy in the EU, after the emergency stage of the epidemic is over (to understand what a green recovery strategy could entail in practice see here).

Talks of a “green Marshall plan” are now commonplace in EU institutions and this is no accident: after all (as we’ve known for a long time) there are strong connections and parallels between the COVID-19 epidemic and the urgent challenges of climate change and global biodiversity loss. Most notably, the epidemic laid bare in a spectacular fashion the vulnerability of Europe’s society and economy to new global challenges, and the chimera of economic systems detached from wider natural systems and processes is now defunct.

At the same time, decarbonising and reducing the environmental footprint of the EU’s economic system require huge investments across the economy while shrinking unsustainable activities (such as fossil-fuel related infrastructures and production). 

On paper, one could argue that the stage is set for a green recovery, a green fiscal expansion that steers public and private investment towards an environmentally resilient economic model; while creating green jobs across the EU by directing fiscal packages towards a green transition.  

And yet, dig behind the rhetoric and the dissonance between discourse and reality becomes more than obvious. Particularly on the funding front - absent a strong European response – there are several reasons why the economic implications of the COVID-19 epidemic are likely to undermine, rather than catalyze, the EU Green Deal particularly in the Eurozone’s southern countries.  

In short, in the same way that the COVID-19 crisis risks a widening of the EU’s core-periphery economic divergence, it may also likely lead to a greater divergence of public and private sector capabilities for implementing the EU Green Deal and drive economy recovery packages aligned with it.

Under this scenario the idea of a green recovery would consist in little more than wishful thinking.   

The funding architecture of the EU Green Deal 

To understand why this is the case, it is first crucial to grasp the funding design of the EU Green Deal, and how this current crisis may undermine it.   

The Green Deal is the cornerstone of the EU’s strategy for an ecological transition. Beyond its aim to reduce emissions in the energy, transport, industrial and agricultural sectors, it also entails circular economy objectives as well as biodiversity and ecosystem protection and restoration. In the words of the European Commission, the Green Deal “is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.”

Part and parcel of this systemic strategy to transform the EU’s economic model has been the design of financial tools to drive this transition, namely the EU Green Deal investment plan, a mechanism for increasing investments in decarbonisation, circular economy and biodiversity protection, across the EU. But unlike what is often assumed, this investment plan consists, in reality, of very limited EU funds – it is fiscally insignificant compared to the task at hand.

Concretely, the EU budget dedicated to the Green Deal amounts to no more than 0.3% of annual EU GDP for the period 2021-2030, and the overwhelming majority of these funds are not “new money” but a reshuffling of EU budget lines. The philosophy behind the plan is for these funds to leverage additional investment spending through the European Investment Bank and InvestEU mechanism (formerly “Juncker fund”), institutions that will in turn crowd in additional funding via national budgets and private investors.

Even if accepting the Commission’s debatable assumptions on actual leveraging potential and the real additionality of its investments, the final investment package (including leveraged funds) would amount to no more than 0.6% of EU GDP annually, to 2030 (1 trillion in total for the period 2021-2030).

It is important to put these figures into perspective: as many observers have already noted, these funds represent about 1/3 of additional investment needs for EU climate mitigation alone to 2030, while the EU Green Deal entails, in theory, much broader targets including not least circular economy and nature restoration and protection.    

The implicit assumption is that, beyond the crowding-in embedded in the EU’s investment plan, the substantial funding gaps that remain will be covered in two ways: 

First through national fiscal policy (public expenditures). For example, the Commission is already discussing a relaxation of State Aid rules for supporting green investments and sectors in member-States. While this is certainly welcome, it also relies on an assumption of sufficient (one could add, symmetrical) fiscal space in respective member-States. This space is far from obvious for many countries of Europe’s periphery, which due to the Eurozone’s monetary structure are already relying on primary fiscal surpluses (i.e. permanent austerity) for bringing their public debt levels down.  

Second, through private finance. This is where the Commission’s Action Plan on Sustainable Finance comes in: it includes among others the development of a public EU taxonomy (a sector-by-sector classification system that determines which investments can be considered “green” by EU regulators), and the development of an EU Green Bond standard. Although this is a globally cutting-edge initiative designed among others to curb “greenwashing”, it is still a voluntary scheme in the sense that financial institutions are not required to dedicate a specific amount of their portfolios in green investment, via regulation. Similarly, the incentives (monetary or supervisory) to reduce investments in “brown” activities and increase those in “green” ones are simply absent, to this date. In short, the assumption is that financial players and corporates will sizeably increase green investments (based in the EU taxonomy) in a voluntary way, or under market pressure alone.  

The core-periphery dichotomy is equally important in assessing the green lending capacities of respective financial sectors (already fragile in the periphery) or indeed in assessing demand-side borrowing capacities. To take the example of Greece, it is far from obvious that existing arrangements would have led to any form of private-led “investment boom” in the green economy (or indeed in broader sectors) to cover the financing gap, even before the COVID-19 crisis.

The impacts of the COVID-19 crisis

As the world is experiencing its largest economic shock since WW2, all forecasts concur that the macroeconomic impacts of the COVID-19 are likely to be particularly dramatic in southern member-States, not least due to their economic makeup. The IMF expects a sizeable increase in deficits and debt/GDP ratios, posing questions of debt sustainability in the near-future, while available EU tools (such as the ECB’s PEPP or the ESM) are precisely relying on fresh national-level borrowing for responding to the crisis, as such pushing debt levels up. This approach is already creating a massive divergence of fiscal responses for immediate economic support across the EU, with richer countries being able to afford a much larger protection of their economic sectors during the pandemic. 

The problem with the current crisis management approach vis-à-vis the EU Green Deal, and the possibilities of a green recovery package, should be obvious.     

First, as aforementioned, the Green Deal’s financial architecture crucially relies on additional national fiscal expenditures and private finance. Because the COVID-19 crisis response depends on national-level additional borrowing and an uneven protection of national economic sectors throughout the pandemic, the fiscal space of vulnerable member-States for contributing towards Green Deal objectives will be further reduced. And the willingness and capacity of their respective private financial systems for contributing towards Green Deal targets could be strongly undermined if balance sheets are severely damaged from this crisis, as is expected.

Unlike what is often assumed, this is not a short-term problem, and it could well undermine the Green Deal’s funding throughout the 2020s. As a former adviser to (then economy minister) Emmanuel Macron recently put it, under the current setup many EU member states could “spend the next generation in austerity and depression to try and pay down the debt”. One could add: instead of focusing on delivering the transformative investments urgently needed to address the challenges of climate change and global biodiversity loss, and enhance the resilience of the EU’s society for tackling future challenges.     

Second, expecting any serious “green recovery package” (i.e. post-emergency green fiscal expansion) aligned with the EU Green Deal to be delivered via national spending through additional member-State borrowing (be it via EU sponsored lending), is pure fantasy. By the time the EU exits the emergency support stage of the pandemic, crisis response packages to protect member-State economies will have already pushed debt levels of weaker States way beyond safe spaces while private sector balance sheets will be severely damaged. It is highly unlikely that these member-States will be able or willing to put together additional spending packages without risking being pushed towards insolvency. This is precisely why a powerful common European instrument, catalyzing necessary investments in countries with little or no fiscal space, is a sine qua non for delivering any substantial EU-wide recovery package in general, and green recovery in particular.   

It will take more than grand declarations to show that EU leaders are serious about walking the talk of a green recovery, and of ring-fencing the EU Green Deal from the current crisis.  

*Olivier Vardakoulias is an environmental and macro economist currently working for WWF Greece. Prior to that, he lived and worked in the UK as a senior economist at NEF Consulting and the New Economics Foundation (2011-2016), before joining HM Revenue and Customs (HMRC) as an economic advisor in the Knowledge, Analysis and Intelligence division (2017-2018). His interests lie, among others, in the economics and politics of the transition to an environmentally sustainable economic model.

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