Climate crisis calls for U-turn in EU’s economic governance

It is now clear that extreme weather events will have a massive impact on our economies if we don’t transform them. Times have changed and the rules governing the coordination of national economic policies in the EU must adapt, argues Isabelle Brachet.

Isabelle Brachet is a fiscal reform policy coordinator at Climate Action Network (CAN) Europe, an NGO coalition.

This summer, heatwaves, wildfires, defiance and anger at politicians’ inaction on climate change is in each and every conversation. But the need to challenge rich countries’ greenhouse gas emissions and overconsumption is not new.

Already 50 years ago, Dutch politician Sicco Mansholt, who was at the time the European Commissioner for Agriculture, wrote to the President of the European Commission a legacy letter, in light of the findings of the Club of Rome “Limits to growth” report.

He wrote that a fundamentally different policy needs to be pursued to prevent the world from ‘breaking down’ and that the economy should no longer be aiming at maximising GDP growth per capita.

He called for giving priority to food production; reducing material goods, compensated for by increasing immaterial goods (education, intellectual development, use of free time, access to culture); prolonging the life-span of ‘capital goods’ (which we today call ending programmed obsolescence, ensuring goods and products can be repaired, re-used, then recycled in a circular economy); avoiding the production of ‘non-essential’ products (today, private jets and SUVs are on the spotlight for their huge environmental impact and their uselessness); and combating pollution and the depletion of natural resources.

Such an agenda, he added, would require planning at national and European levels, a different tax policy, and distribution of raw materials in view of their limited availability.

Politicians and industry violently rejected Mansholt’s proposals back in 1972, and our governments drove the EU in the exact opposite direction, despite the adverse environmental and climate impacts we witness today and a background of huge inequalities.

Reading the Mansholt letter generates despair. But also hope: What vested interests were able to defeat 50 years ago is more relevant than ever today! Mansholt shows us a way forward to transform our economy to make it fit with the imperative of the 1.5°C temperature increase limit and to make it fairer.

The reform of the EU fiscal rules is an immediate opportunity to concretise Sicco Mansholt’s roadmap, by making sure the rules do not continue to encourage GDP growth per se, but rather encourage public investments in the transformation of our economy to make it fit within planetary boundaries.

Investments and reforms committed by Member States should not be “growth-enhancing” but should strengthen the resilience of their economy to shocks, in particular climate shocks.

And arbitrary ratios based on GDP to define what is an acceptable debt and deficit should be replaced with a proper analysis of the sustainability of public debts, taking into account diverse factors including climate-related fiscal risks.

The excellent news is that the reform of the current EU fiscal rules capping national debt and deficit at 60% and 3% of the GDP respectively (called the Stability and Growth Pact) is on the agenda of the European Parliament and the Council.

However, these arbitrary numerical ratios based on GDP do neither guarantee that a debt is sustainable, nor that the economy is robust. Conversely, they heavily constrain the capacity of national governments to make public investments.

The European Parliament and national governments should respectively work hard after the summer to agree on how to reform the EU economic governance framework and come to a final deal before the next European election in the spring of 2024.

It is now clear that extreme weather events will have a massive impact on our economies if we don’t transform them.

In a sizeable part of Europe, factories will burn or be destroyed by floods, agriculture yields will collapse, the tourism industry will shrink, and infrastructure for energy and transport will be damaged.

Investors will refrain from putting their savings in certain countries or regions, making access to finance more difficult for countries most exposed to extreme weather events.

And Europeans may ultimately have to leave their homes and move towards regions of Europe less exposed to climate change in search for opportunities. Times have changed and the rules governing the coordination of national economic policies in the EU must adapt.

If the EU fiscal rules are not deeply changed, only countries that have sufficient national resources will be able to invest to reduce their greenhouse gas emissions and adapt to climate change.

But as recently stressed by Mario Draghi, no single country can curb climate change on its own: “Just as the euro cannot be stable if large parts of the monetary union are failing, climate change cannot be solved by Germany reducing its carbon emissions faster than Italy.”

In a common market, with a shared currency for Eurozone countries, it is in the interest of all member states to make sure all national economies are equally prepared for future shocks and do not rely anymore on fossil fuels. The EU economic governance framework is an important piece of the puzzle to make this happen.

The reform of the EU economic governance is a very divisive file, with some member states calling to keep very strict rules capping debt and deficit – even if it means austerity and a damaging spiral of underinvestment in the economy in half of the member states.

Today, thirteen EU countries out of the 27 have a debt above the sacrosanct 60% debt-to-GDP EU limit. Among them, six countries – Greece, Italy, Portugal, Spain, France and Belgium – have a debt-to-GDP ratio above 100%.

Some of these countries are among the most exposed to climate change and need massive investments. The reformed rules should make sure every Member State is able and incentivised to invest sufficiently in socially just climate mitigation and adaptation.

This implies the need to:

(1) Include the ‘Do No Significant Harm to climate and environment’ principle as an assessment criterion for investments and reforms committed by member states.

(2) Include an obligation for national governments to integrate a socially just and time-bound reduction of fossil fuel subsidies in their fiscal-structural plans.

(3) Require Member States to use Green Budgeting tools when presenting their national budgets to the EU.

(4) Require that national fiscal-structural plans include an assessment of the national investment gap to achieve climate, environment and social goals, and make sure that debt and deficit reduction does not jeopardise their realization.

And of course (5) Make sure the rules don’t prioritise growth at the expense of climate and environment.