Reform EU fiscal rules to boost green investment, says ECB

December 8, 2021|Written by David Clarke|Banque de France, Bundesbank, European Central Bank

The European Central Bank (ECB) has said the fiscal rules of the European Union should be adjusted to support greater investment in the green transition.

The EU temporarily suspended the rules during the Covid crisis, and a consultation is now underway looking at how they should be amended once the suspension is lifted next year.

The rules say that national debt should not exceed 60% of member states’ GDP, while annual budget deficits should be kept within 3% of GDP. But climate advocates argue that they excessively constrain spending at a time when significant investment is needed for the transition to a net-zero economy. They also warn that determining the sustainability of public debt is impossible without taking account of climate risks, which could require massive spending in the future.

A letter signed by 142 economists in June this year warned that “cuts to public investment undermine the ​just transition and the fight against environmental breakdown and can lead to a wide array of environment-related financial losses”.

ECB officials have been hawkish on the need for spending cuts in the past. But more recently president Christine Lagarde has been a key proponent of stimulus measures in response to the pandemic.

“Addressing the challenges of the green and digital transitions will require significant private and public investment. Sustained, nationally financed investment will also be needed, and will require either additional sources of revenue or a reprioritisation of expenditure, notably in countries with elevated debt ratios,” said the bank in its submission to the European Commission consultation.

Although some adjustments to the rules may be possible before their likely reinstatement next year, far-reaching changes could take at least two years, as they would require the approval of the European Council and the European Parliament. The push for reform received a potential boost yesterday when the incoming German finance minister signaled that he is open to a new settlement.

Opinion among national central banks in the EU has been mixed. Outgoing Bundesbank president Jens Weidmann said recently that policymakers should avoid the temptation to give fiscal policy a “free rein”, while Banque de France governor Villeroy de Galhau has highlighted the beneficial multiplying effects that public investment can have on a nation’s economic performance.

This page was last updated December 8, 2021

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