ECB seeks input on green fiscal rules

The European Central Bank (ECB) has published a call for papers on fiscal policy and climate change in advance of a workshop later this year.

Among the topics on which the ECB is seeking input is green fiscal rules – the idea that the European Union framework governing member states’ borrowing and spending should be adjusted to allow for higher debt-financed green investment.

“The purpose of this workshop is to discuss how fiscal policy can effectively mitigate climate change, to examine how climate change is impacting public finances, and to investigate the role of interactions between monetary and fiscal policies in this context,” says the document. The deadline for responses is 20 June.

Although currently suspended due to the coronavirus pandemic and Russia’s invasion of Ukraine, the EU’s existing fiscal rules stipulate that national debt should not exceed 60% of member states’ GDP, while annual budget deficits should be kept within 3% of GDP. Climate advocates have argued these rules excessively constrain spending at a time when significant investment is needed for the transition to a net-zero economy.

Various proposals have been floated as to how the rules could be revised. A report published earlier this year by the Centre for European Reform proposes a country-by-country review process that would allow some green investment to be exempted. Researchers at Finance Watch have suggested that the debt-to-GDP rule should be abolished altogether and replaced with pathways based on analyses of each country’s debt sustainability.

A key argument put forward by advocates for reform of the rules is that they are based on an understanding of debt sustainability that does not account for the impacts of climate change – given that the effects of unchecked warming could necessitate massive spending in the future, and would leave future generations worse off.

This issue is mentioned in the call for papers, which asks for input on the impact of climate risks on the long-term sustainability assessment of public finances, and on the inclusion of measures, damages and risks related to climate change in fiscal projections.

The ECB has offered some support for the idea of a climate-friendly overhaul of the EU’s fiscal arrangements. Speaking last year, board member Philip Lane argued that a future framework must take into account that Europe cannot ignore or delay the necessity of the green transition. He said this implies considerable public investment efforts even beyond the horizon of the recovery and resilience facility – a mechanism established to support green investment by EU governments in the aftermath of the pandemic.

The call for papers also includes a question on the interlinkages between fiscal policy, monetary policy and climate change considerations. It comes at a time when the central bank appears increasingly open to the idea of greater fiscal and monetary coordination, including on climate action. Christine Lagarde said last week that she hopes the ECB can introduce a green targeted lending facility.

Further topics featured in the ECB document include the role of green public bonds and the use of green budgeting to achieve climate goals.