Corona crisis gives new direction to European climate and environmental policy

Economic opinion

At first sight, the Covid-19 virus clashes with the green ambitions of the European Commission. After all, the EU member states are eagerly awaiting the EU budget to absorb part of the economic costs of the corona crisis. This makes it unlikely that the planned shift in spending within the new EU multi-annual budget, to accelerate the greening of the European economy, can be realized. Nevertheless, an effective climate and environmental policy and an economic recovery policy after the corona crisis are not necessarily irreconcilable. A strong climate and environmental policy can reduce Europe’s vulnerability to future epidemics, stimulate European public health initiatives and strengthen the European economy through innovation and investment.

Budget discussions paused

When Charles Michel took office as President of the European Council, he immediately had a difficult job on his plate: finding an agreement between the 27 EU Member States on the new EU multi-annual budget. These budget negotiations have traditionally caused a lot of political lobbying and flat nationalism, which is then eventually covered by a prestigious European programme to conceal the division among EU governments. This makes the European budget an important instrument for shaping new European policy and giving it visibility. For a long time, European partners gathered around the common agricultural policy. The emphasis slowly shifted to cohesion and financial solidarity with disadvantaged countries and regions. The expiring multi-annual budget 2014-2020 is already quite green, but often more in words than deeds, and also pays more attention to innovation and employment in order to structurally support the recovery after the financial crisis and the European debt crisis. 

The European Commission, under the leadership of Ursula von der Leyen, launched the European Green Deal when it took office as a guide for its new policy initiatives. This focus on a far-reaching greening of the European economy in the fight against climate and environmental challenges also translated into a greening of the proposed EU budget. The first negotiations, however, went anything but smoothly. The major stumbling block was not so much the new, green perspective, but the net payments or net receipts for the EU member states. Moreover, after Brexit, financial resources are even more scarce. In other words, national interests thwart European ambitions as so often is the case. Because of the outbreak of the corona crisis, European leaders are taking a welcome break from negotiations on the new multi-annual budget.

Call for European money

In the meantime, the corona crisis is affecting many EU Member States, but Southern Europe in particular. Due to the scale and international dimension of the crisis, many eyes are on the EU to provide financial assistance. The financial room for manoeuvre within the 2020 annual budget is virtually non-existent because expenditure is committed in advance. However, the Council and the European Parliament approved a limited increase of the 2020 budget from EUR 168.7 billion to EUR 172.3 billion (commitment appropriations) to finance some additional Covid-19 expenditure. More importantly, the EU does not have the necessary policy instruments at its disposal to achieve large financial flows between EU countries, except in a structural manner through cohesion policy for long-term income convergence. A possible compensation for this would be structural support to the most affected countries through the new EU multi-annual budget. The disappointment at a lack of European solidarity during the corona crisis is great in Southern Europe. Previous ideas, such as corona bonds to support countries, clash with vetoes in the richer EU countries. In order to combat the déjà-vu feeling that Europe is again reacting too little and too late in this crisis, there is a chance that the new EU budget will not turn green, but corona. This would put at risk an ambitious European climate and environment policy, as there is little enthusiasm among the EU member states to increase the EU budget. 

Major reconciliation

In order to save the European Commission’s climate and environmental ambitions, the future European budget must therefore reconcile climate and economic recovery after the corona crisis. This is not impossible. European integration grows and flourishes in periods of crisis. The corona crisis could even give climate policy a boost, and even more so, give it a concrete colour. After all, the corona crisis makes it painfully clear that Europe cooperates little in the field of health care and prevention. Nationalist reflexes are causing the European internal market for medical equipment to sputter, for example.

Through the European Green Deal, and the corresponding funding in the EU budget, Europe can focus primarily on combating the cause of new epidemics. Preserving and strengthening biodiversity and respecting the distance between humans and animals seem crucial conditions to reduce the risk of a new epidemic. There are also some suggestions that higher levels of pollution make Covid-19 more lethal, and indeed we know that pollution can contribute in general to respiratory problems and other underlying conditions that will also likely make people more susceptible to future disease outbreaks. This is, of course, an international fight, but Europe can take the lead.

Secondly, increased public concern about health can help accelerate the move towards climate-neutral modes of transport, as outlined in the European Green Deal. Energy use will also be more efficient through accelerated digitisation of production and sales processes that received an unprecedented boost during the lockdowns. These measures will give new impetus to the European economy, provided that the ecological transition is gradual.

Thirdly, the greening of the European economy can also help strengthen European growth and thus economic recovery after the corona crisis. Through green innovation, European companies can grow into global players as the need for economic greening becomes clear elsewhere in the world. Innovation and entrepreneurship around Covid-19 detection, screening tools, medical testing or vaccination can fit perfectly into an EU green policy plan. The European Commission is already attaching green conditions to particular coronavirus state aid programmes, i.e. companies that are struggling now and accept state aid will need to agree to a more circular economy model after the crisis or to lower emissions. This has the benefit of both pushing the Green Deal agenda and theoretically making companies stronger in the longer run.

However, there are also dangers in reconciling European climate policy with economic recovery policy. Making state aid conditional on ecological transition may increase bureaucratic costs in the short term and particularly during the height of the crisis. Furthermore, this might imply that some currently strongly affected sectors would receive less aid if their businesses are simply incompatible with the EU climate agenda, which could also be a risk for the recovery. Moreover, international value chains are distorted. An increase in the production of medical equipment or medicines on the European market seems a logical reaction after the recent supply problems. Such policy initiatives are perfectly justifiable from the point of view of climate protection (less transport) as well as from the point of view of economic self-interest (European jobs and investments). But at the same time, they reinforce globally increasing protectionism. In the long term, this will lead to a loss of economic efficiency and prosperity.

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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