Michael VINCENT

Financial stability expert, President of Greentervention (for the green and social transition)

The 2018/19 European Semester, which coordinates the member states’ economic policies every year, has just been launched. This provides an opportunity to question the contribution of the mix of monetary and budgetary policies to the ecological transition. Paradoxically, it appears it is the ECB that is most advanced in this reflection.

A recent speech by Benoît Cœuré, a member of the Executive Board of the European Central Bank, indeed reports on a quiet revolution in the conduct of monetary policy. According to Cœuré, monetary policy is apparently affected by global warming in three ways. Firstly, new kinds of shock on the economy are emerging whose identification and understanding pose serious problems. In addition, there is uncertainty as to the economic effects of regulations adopted to mitigate and adapt to climate change. Secondly, climate change increases the frequency of natural disasters whose impact may require monetary policies outside the norm. Thirdly, climate change leads to major and lasting changes in physical and human conditions, notably migration flows, whose effects on economic activity and prices will be difficult to determine.

The Central Bank’s primary mandate is monetary stability. It is not on the front line to fight against global warming. However, Cœuré suggests that while pursuing its main objective, the Central Bank can make an important contribution through its policy of directing certain green financing towards “green” investments. By identifying climate change as a major risk for the eurozone, Benoît Cœuré is drawing a new responsibility for the ECB that is clearly of a political nature. The ECB’s consideration of this issue is welcome. But, as highlighted in his speech, this new responsibility without new accountability can arouse criticism. To whom, for example, is the Bank accountable when it decides to favour the fight against climate change over safeguarding jobs in the automotive industry? At a time when the ECB’s political role in crisis resolution is welcomed by some, but regularly contested by others, whether in Germany or Italy, the central banker’s approach to the ecological issue will undoubtedly be questioned.

With his speech, Benoît Cœuré particularly lays the responsibility on politicians who have budgetary and regulatory tools at their disposal. In the absence of a substantial European budget, the combination of national budgetary policies is crucial. The Commission has just adopted the “Annual Growth Survey” which sets out general priorities for the whole EU, and a “recommendation for the euro area”. This year, the climate emergency is taken much better into account in the Annual Growth Survey than in previous years. It is to be hoped that this will ultimately be reflected in the country-specific recommendations. The climate emergency does not feature, however, in the recommendation for the euro area, which continues to be dominated by the so-called excessive budget deficit and excessive macroeconomic imbalances procedures. These procedures, codified after the 2008 crises and from the start of the decade, focus on financial and debt indicators, and completely ignore the impact of the risks posed by global warming on economic and financial stability.

The climate emergency does not feature, however, in the recommendation for the euro area, which continues to be dominated by the so-called excessive budget deficit and excessive macroeconomic imbalances procedures.

The “excessive macroeconomic imbalances procedure” is triggered in the event of financial imbalances or external (current accounts, competitiveness) or internal relative prices (private and public debt, price of certain assets). The analysis “takes account” of the employment situation but disregards the progress to be made towards the energy transition. This is all the more harmful given that all public policies, including those that can have a direct or indirect impact on the energy transition, are likely to be called to the rescue in the event of excessive imbalances. Yet the assessment of a country, for example, with a current account surplus above 6% of GDP (one of the only alert thresholds) and a balanced budget – and the economic policy recomendations thus made to it – should not be the same all the ways. It should depend, for example, on whether it is experiencing growing wage inequality and/or whether it is on a path that will enable it to achieve the 2030 carbon goals, or not. Or the assessment of private sector credit growth exceeding the alert threshold and the recommendations should be different depending on whether it involves the assessment of consumer credit, or financing for investments in the energy efficiency of housing linked to public aid in a country lagging behind on the energy transition goals. The five-yearly report on the implementation of this procedure, which is due out in 2019, will be an opportunity to start thinking about the integration of the climate emergency into this procedure.

It should depend, for example, on whether it is experiencing growing wage inequality and/or whether it is on a path that will enable it to achieve the 2030 carbon goals, or not.

The “excessive budget deficits procedure” does not take account of the challenges of energy transition either. Only the main budgetary aggregates are at issue here. Yet in the long term, better resilience to climate shocks reduces the risks that would be linked to the debt level. By focusing exclusively on debt reduction, the procedure does not encourage arbitrating in the short term in favour of support for public or private investment that would strengthen this resilience and have a beneficial effect on public finance in the long term. For sure, margins of flexibility exist within the procedure that enable certain investments to be deducted before comparing the deficit to the benchmark. But the definition of these margins should be revised to favour investments and spending that have a verifiable impact on the greening of the economy.

The procedures set up after the financial crisis to coordinate the economic policies of the European Union’s member states are no longer adapted to the urgency of the climate change challenge. It is urgent to review the way this works. Before becoming technical, the debate will have to be political and brought during the electoral campaign in order to be picked up by the next Parliament and next Commission.

Author :

Ollivier Bodin est économiste.

Michael Vincent est expert en régulation financière et membre de l’observatoire de l’économie de la Fondation Jean-Jaurès.