“Where there is danger, the rescue grows as well” says the German poet Hölderlin in his famous evocation of the Greek island of Patmos. Should we read it as a message of hope for the European Union in 2015? This year is indeed perilous in many respects for the bloc’s economy, but it is also rich in new opportunities, write Michel Aglietta, Étienne Espagne and Vincent Aussilloux.
Michel Aglietta is a Scientific advisor at CEPII and France Stratégie, Étienne Espagne is an Economist at the Economy and Finance Department, France Stratégie and Vincent Aussilloux is chief of the economy and finance department at France Stratégie.
Dangers first. The reawakening of the Greek crisis as early as January reflects once more the institutional weaknesses of the Eurozone. The long-lasting stagnation (the Eurozone has not yet recovered back to its 2007 GDP level) and above all the catastrophic depression in Greece (its GDP is 25% below where it was in 2008) have created an unbearable social situation. Acknowledging the strategy followed since 2010, the hope lies in the opportunity to change the way we think.
What this means, first and foremost, is denouncing the current process which prolongs the slump by stifling all hopes of a better future. Productive investment has declined continuously since 2007, particularly in Germany. The question of a sustained increase in new investments has recently become a topic of European debate, with the European Commission proposing the Juncker Plan as its answer. More recently, the announcement by the ECB of a program of massive asset purchases, amounting to €60 billion each month on the secondary market, is an attempt to counteract the deflationary trend resulting from the current slump in demand.
Europe should renew with its former, lofty ambitions through a targeted investment programme. The challenge is immense. It should set its sights on three objectives. First, choosing sectors where a rapid effect could be felt on the demand side, while sending a signal to economic agents on growth quality in the long term. Next, ensuring that all Member States benefit from the investment boost, and finally, integrating the program into a coherent strategy towards productivity, innovation and competitiveness in the European Union. An energy transition policy could achieve this triple objective. The energy supply sector in particular, along with urban transportation, building weatherproofing, and electricity distribution networks, all fit into these criteria.
The Paris Conference at the end of 2015 is a major opportunity to give a boost to European commitment on climate policies. A low carbon investment strategy should, however, avoid the two major pitfalls that have so far prevented it from taking hold. On the one hand, public budget constraints do not allow for subsidies in favour of the energy transition. On the other hand, political constraints preclude any attempt to put a price on carbon, at least at a level sufficient to drive investment decisions and change behaviours. The current price of carbon is too low to make any kind of difference. It is an illusion to think that it could be raised significantly in the short term, because this would be at the expense of the powerful lobbies representing energy intensive industries and significantly affect the way of life of a large share of the population.
It is however possible to distinguish the actual price of carbon, based on carbon emission allowances, from the “true” social value of carbon, which should guide and make new investments profitable. There are financial instruments that can serve as powerful tools for achieving this transition between short term and long term objectives. In a recent note by France Stratégie, we suggest that society should decide what the social value of carbon is in order for new investments to be generated at levels that would actually allow us to meet our objectives for emission reductions. This is already happening in many countries but the social value of carbon, defined for instance by the EPA in the US, generally only applies to public investments. In addition, this value should be backed by a strong public guarantee, in order to mitigate the risks taken by entrepreneurs and to make low-carbon projects more attractive for banks and investment funds. An independent control body would deliver carbon certificates to project developers based on a reliable and trustworthy assessment of the emission reductions. Several agencies are already producing such robust assessments. These certificates would be accepted by banks as repayment for low-carbon loans, since they could refinance them at the ECB on the basis of their social value. This innovative financing instrument would bolster low carbon investment returns while temporarily sparing installed capital in existing carbon intensive industries. This would buy policy makers time to gradually raise the effective price of carbon.
The ECB could thus direct its Quantitative Easing policy towards the purchase of low-carbon assets in order to provide adequate funding for this type of investment, which the governments would eventually guarantee in terms of their emissions reduction potential. This would provide public authorities with a strong incentive to gradually implement a carbon price at the level required for the desired emissions reductions, and thus generate the incomes to honour their guarantee.
Climate change mitigation and adaptation is a field in which the European Union has a strong historical legitimacy and a responsibility to lead by example. This would be an excellent way to mobilise citizens around an enthusiastic European project and to recover growth by means of new climate-friendly investments that would restore competitiveness.