* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
European Stability Mechanism can be the blueprint for our financial response to the fight against climate change
Gilles Moec is chief economist, AXA Group
The transition to a decarbonised economy is vital, but it is an illusion to think this will come without costs. An economic transition of this scale requires serious funding.
The European Commission estimates the investment needed to deliver on the targets for CO2 emissions is 1.5% of European GDP annually over the coming decade. Some of this will be funded by the private sector and institutional investors are also keen to play their part. However, in many cases, green projects will only be profitable over a long horizon and we will need significant public funding.
But how can we secure this source of funding efficiently and effectively given how politically sensitive distributing public money is?
Since the transition is a collective European commitment, heralded by European Commission President Ursula von der Leyen’s pledge to turn Europe into the first carbon neutral continent, we believe public support should be offered at the EU level.
However, we do not need to reinvent the wheel with new, complicated and bureaucratic processes – this is an emergency after all. In 2012, the EU launched the European Stability Mechanism (ESM) in response to the eurozone’s deepening debt crisis. This framework can be the blueprint for our financial response to an even more existential emergency: the fight against climate change.
The ESM’s financial structure allows it to provide loans of up to EUR500 billion to eurozone countries or as new capital to banks in difficulty. The funds available through the ESM are secured from capital provided by the eurozone governments. They committed in principle to a total of EUR700 billion, although they actually paid in just EUR80 billion, as the ESM raised the rest of the money by issuing bonds. In the ESM, the right to draw funds from the pooled resources is matched with detailed agreements on the funds’ use, with close monitoring and the threat to suspend future payments if there is misuse. The strict governance of the ESM makes it easy for the core countries to oppose free-riding behaviour from others.
These core aspects of the ESM should be replicated in a new European Climate Emergency Fund (ECEF). Loans would be granted on a project by project basis, assessed by the ECEF according to their compatibility with the EU’s set objectives on CO2 emissions. Since transition projects take many years, they could be regularly monitored, with pay-outs made depending on measurable progress. More generally, member states already produce National Energy and Climate Plans so these could be adapted over time to be more like the annual stability programmes they have been providing to the European Commission as part of the fiscal surveillance framework, which forms the basis of ESM monitoring.
The proposed ECEF would differ from the ESM in two key aspects. First, it would make sense to also make the funds available to companies through loans, not just countries. Second, it should take advantage of the historically low level of interest rates to borrow more now, building a war chest that could be gradually used by transition projects in the coming years and decades. To avoid discouraging other forms of public investment, in addition to the emergency fund, it would make sense to exclude these transition projects from the calculations of country deficits when assessing the member state’s compliance with the rules of the Stability and Growth Pact.
The advantage of using a tried and tested structure like the ESM means that we know it can be implemented quickly, without forcing any major change in the institutional framework of the EU. Moreover, beyond funding the transition to a carbon neutral continent, the ECEF would contribute to enhancing the economic and political integration of Europe.
From a macroeconomic point of view, it could also be the spark that rekindles our current lacklustre European economies, at a time when expectations around future growth remain stubbornly low. From a financial point of view, the increased access to funds available over a long period, could help bring interest rates out of negative territory through a stable mechanism.
Shared fiscal initiatives are often met with reluctance in some segments of European public opinion, but the increasingly shared imperative of fighting climate change could be the key to unlocking another decisive step forward for European integration.