New EU rules limiting government borrowing would prevent all but four European countries from investing enough to meet their Paris climate commitments and limit global warming to 1.5 degrees Celsius, according to a New Economics Foundation study. (NEF), released today. These countries are equivalent to barely 10% of the bloc’s GDP.
To meet the EU’s more restrictive climate targets of cutting emissions 55% by 2030, the proposed lending rules would leave 13 countries, accounting for half of the bloc’s GDP, unable to invest enough.
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The NEF report argues that without changes to EU lending rules or new funds at the EU level to support member states with higher debt and deficits, green industrial policies are likely to lead to greater economic inequality between countries. He also argues that this will prevent a large proportion of member states from being able to invest enough to keep up with other major global economies such as the US and China.
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The research finds that under the new rules, the EU will see a wider gap between countries that have the fiscal space to increase climate investment and those that do not. The report finds that only Ireland, Sweden, Latvia and Denmark could practically increase public investment by 3% of GDP and stay within EU spending limits, allowing them to meet the Paris climate commitments. However, countries like France, Italy, Spain and Belgium could not achieve even modest increases in investment without a significant cut in other public spending or a significant increase in taxes to trigger the necessary climate spending.
The Commission’s proposals
The authors of the report report that this week, the European Commission proposed legislation to introduce new lending rules. The legislative proposal is close to what the Commission announced in November, but includes several additional borrowing restrictions and proposals to reduce debt. Since March 2020, EU lending rules have been suspended in response to the Covid-19 pandemic and the Russian invasion of Ukraine. The suspension will be lifted at the end of the year. Despite individualized debt reduction paths for each member state, the proposed new rules still require member states to significantly reduce their debt over the medium term and place a hard cap on deficit spending. In response to the recent US law, the European Commission proposed in February the Green Deal Program, which includes targets for green production, a temporary relaxation of state aid rules and the redefinition of funds for common European sovereign wealth funds. .
The report concludes that the European Commission should follow the US example by setting binding conditions for companies that receive public money. This should include demands to decarbonise supply chains, cap dividend payouts and executive pay, and reinvest profits to tackle the climate crisis. Governments must maintain an equity stake in companies that receive public money to recoup their investment and influence companies to reduce carbon emissions.
The report also finds that the Commission should uphold the bloc’s climate goals by excluding climate-related spending from EU lending rules and establishing a new joint EU loan for inclusive climate policy.
The NEF report finds that under the proposed EU lending rules:
Only four countries, representing just 10% of EU GDP, could spend nearly enough to meet the more ambitious targets set out in the Paris climate agreement to limit global warming to 1.5°C: Sweden, Ireland, Denmark and Latvia.
Five countries could increase spending at least enough to meet the more limited agreed EU climate targets, but not the spending needed to meet the Paris climate agreement: Luxembourg, Bulgaria, Lithuania, Slovenia and Estonia.
Five more countries could increase spending enough to meet EU climate targets, but are currently classified by the Commission as medium debt risk countries and may face spending constraints: Germany, Austria, Slovenia, Cyprus and Malta.
13 countries, representing 50% of EU GDP, could not invest enough to meet even limited EU climate targets without exceeding debt or deficit limits. These countries are: France, Italy, Spain, the Netherlands, Poland, Belgium, Finland, the Czech Republic, Portugal, Greece, Hungary, Romania and Croatia.
“The EU has an opportunity to develop an industrial strategy that paves the way towards a fair and green economy in which everyone in Europe can benefit. But the EU has been hampered in two ways. First, with its own strict lending rules , which limit their potential and can increase economic inequality between member states. And second, to propose a green industrial strategy without climate or social demands on companies that receive public money,” said Sebastian Mang, an analyst at the New Economics Foundation (NEF). adding: “The European Commission should follow America’s example and allow more lending for climate action, along with tough conditions for companies that benefit from government support.”