European Green Deal: no goose with a golden egg

Economic opinion

This week, the European Commission launched the European Green Deal, a comprehensive and ambitious climate change action plan for the European Union. It aims to catapult Europe as a global leader in the fight against climate change by making the EU CO2-neutral by 2050. A mixture of financial incentives and legal obligations should speed up the ecological transition in the European economy. In particular, the Commission hopes that European businesses will embrace its plans as many new business opportunities will be created and Europe’s international competitiveness will be improved. Despite the ambitions and many creative ideas, it remains to be seen whether this new European policy initiative will be successful. The reality check will mainly be determined by the affordability of the plans and the political willingness among EU member states to support these good intentions. We expect that ambitions will have to be lowered. Moreover, there is a serious risk that these climate change policies will be abused, launching costly and inefficient subsidy mechanisms that will remain active for too long. Consequently, the growth enhancing impact of the European Green Deal is likely to be very limited.


Impressive roadmap


After less than two weeks in office, the new European Commission President Ursula von der Leyen immediately put her mark on European policy making. The announced European Green Deal is an impressive roadmap with a clear goal in mind: climate neutrality by 2050. Acknowledging that real progress can only be achieved if the ‘greening’ of Europe is well embedded in all policy domains and through all existing as well as new legislation, the road map contains proposals that should contribute to this ultimate goal (note that the European Commission holds the initiation right for new European policy). The list of key actions is impressive, with most efforts planned for 2020-2021, hence relatively soon.


The proposals cover a wide spectrum of climate-related issues, ranging from general climate ambitions, clean energy security, industrial policy, sustainable and smart mobility, and a greening of common agricultural policy, to biodiversity and a toxin free environment. The proposed Green Deal is not only ambitious in terms of its coverage and timing, but also in its institutional approach. The Commission calls upon the EU member states and other EU institutions to jointly develop and implement these ideas. The Green Deal also fits with the Commission’s ambitions to play a larger geopolitical role by launching a green diplomacy.


Those who claim that Europe is an inert machinery unable to develop decisive action should definitely rethink their opinion after this initiative. Although climate activists are likely to consider these proposals as insufficient, the extent and speed by which this new European Commission proposes a radical policy shift is unprecedented. It will trigger major opposition, not only from climate change disbelievers, but also from many vested interests that are afraid of upcoming changes.


Ambition versus reality


Ambition is one thing; reality is another. The Commission can make proposals, but ultimately it is the European Parliament and the EU member states that make the decisions. In particular the EU member states are likely to object to many of these proposals. The first signs of opposition showed up at this week’s European Council meeting, the first one presided over by newly appointed European ‘President’ Charles Michel. In particular, Central and Eastern European governments are not very eager to step into a radical ecological transition process that may hurt their competitiveness. Competitiveness is at least the official argument. In practice, many EU member states will start calculating the financial impact of these proposals. And although details still have to be decided upon, the direction of the proposals makes it clear that substantial financial changes can be expected.


The European Green Deal cannot be judged separately from the new EU multi-annual financial framework for the period 2021-2027. Negotiations on that framework will start shortly, now that the European Commission and European top positions have been filled. The Green Deal will be costly thanks to two main reasons. First, Europe will have to step up its efforts to boost innovation in green technologies. Ecological innovations are required to solve structural climate change challenges. This may, however, be the easy part of the game. Innovation is a top priority for many European governments, but obviously one has to find the money to boost technological progress in the green area beyond its current speed. Second, Europe will have to design compensation mechanisms to smooth the ecological transition. The ecological transition should not lead to economic disruption. Greening various policies like industrial policy, energy policy and agricultural policy will be extremely costly. There are obviously economic arguments in favour of these policy incentives, as it is unlikely that companies and individuals will adapt their strategies and behaviours under normal market circumstances. Hence, one could motivate European policy initiatives by claiming that a combination of subsidies and stricter regulation would speed up the ecological transition process. Financing the ecological transition could be very expensive as it requires a fundamental change in many economic sectors, products and services. As the EU budget is very limited (less than 1% of European GDP), it will be impossible to finance the Green Deal proposals unless the EU budget is substantially increased. It is, however, clear that there is no willingness at all in the capital cities to do so. It is also questionable whether national budgets can cover some of the financing.


A possible alternative financing plan would be through substantial debt creation which could be done through the European Investment Bank by labelling greening costs as investment projects. However, many costs are expenses rather than investments. So, it would be crucial to generate a growth-enhancing impact from the Green Deal initiatives, which is far from obvious. Developing green products and services could ultimately support Europe’s competitiveness on international markets, but the net return from this first mover advantage is very uncertain. Even assuming that the EU will find financial means to pay for these climate change costs, there is a risk that some will try to take advantage of the ecological transition. Smoothing the ecological transition via subsidies and other compensating mechanisms makes sense, but these initiatives should be limited in time. Unfortunately, many European policy areas seem to be built upon subsidy mechanisms that had been launched with the best intentions, but which grew into bureaucratic and money-swallowing permanent features. That should be avoided at all costs.


To summarize, the European Green Deal is an impressive policy initiative for an urgent problem that can only be solved through international cooperation. The reality check, however, makes one far less optimistic about the Green Deal’s success.

Disclaimer:

All opinions expressed in this publication represent the personal opinions of the author(s) at the date stated therein and are subject to change without notice. KBC Groep NV makes no warranties as to the extent to which the scenarios, risks and forecasts proposed reflect market expectations, nor as to the extent to which they will actually materialise. All forecasts are indicative. The data in this publication are general and purely informative. The information cannot be considered as an offer to sell or buy financial instruments. Nor can it be considered as investment advice, investment recommendation or "investment research" within the meaning of the law and regulations on the markets in financial instruments. Save the express prior and written consent of KBC Groep NV, any transfer, sale, distribution or reproduction of the information, publication and data is prohibited, regardless of form or means. KBC Groep NV cannot be held liable for the accuracy or completeness of the information or for the direct or indirect damage that would result from the use of this document.

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