Greening the European Semester

Crédit photo: European Council

This article comes with a note suggesting how to assess three of the documents that will be included in the Autumn Package of the European Semester 2019/20 to be adopted mid-December 2019 by the European Commission: the Annual Economic Review, the Recommendation on economic policy in the Euro area and the Alert mechanism on macroeconomic imbalances. It can be downloaded here:

« A key message…is the urgency of designing a mitigation-aligned macroeconomic policy framework. Adding climate change mitigation as a goal in macroeconomic policy gives rise to questions about policy assignment and interactions with other policy goals such as financial stability, business cycle stabilization, and price stability. »

Signe Krogstrup and William Oman (IMF Working Paper (2019) WP/19/185)

The European Semester of coordination of economic policies in the European Union is launched by the so-called Autumn Package consisting mainly of the Annual Growth Review, the alert mechanism on macroeconomic imbalances, the recommendation for the Eurozone and the Employment Report. This year, the Autumn Package is expected to be adopted by the European Commission mid-December. The European Semester will end with the adoption by the European Council of country specific recommendations at end-June next year.

Ursula von der Leyen has announced that the European Semester will explicitly integrate the Sustainable Development Goals (SDG) as guiding principles. The European Semester addressed already in previous years fields related to the “social” SDGs but had not taken into account areas related to environmental SDGs. Consideration for all fields covered by the SDGs is a welcome step. In particular, in the context of a procedure coordinating economic policies the climate and energy related SDG will require special attention. It requires a deep transformation of the economic system and the mobilization of the widest range of economic and social policy instruments available. Moreover, meeting the goals is now a matter of urgency.

We recognize the challenge to integrate SDGs, and more particularly climate change into economic analysis and economic policy recommendation is immense. We can rely on the GIEC reports to anticipate the impact of climate change on the physical and biophysical systems of the planet. However, for the first time in history, the challenges posed by the two-way interaction between physical and biophysical systems and a complex, globalized economic system has to be understood and translated into political action. According to a recent literature review by the IMF staff, climate change affects economic outcomes through multiple channels interacting with each other. How to model these interactions is still highly controversial among economists and other social scientists. There is no consensus on a model that could guide political decisions. Discontinuities, tipping points and extreme complexity imply great uncertainty around climate damage estimates. However, the broad consensus is that expected damages caused by unmitigated climate change will be high and the probability of catastrophic events with irreversible damages is non-negligible. 

There is no certainty on the details how bumpy the road will be, how climate change and mitigation will influence the economic and social behavior of people, how the future economic system will look like, which technologies will emerge or which level of private and public consumption per capita will be sustainable, whether GDP will be higher or lower and even whether the measure of  economic activities by GDP will still be relevant. However, the literature review makes clear that “to achieve the required transition and spur the necessary innovation, relative prices of fossil fuels will have to increase”. Furthermore, there is no doubt that “there will have to be massive investments in low-emission infrastructure, buildings, R&D and productive capital to complement and support the necessary relative price changes.” It is obvious, but it is worth being recalled: “Economic agents’ ability to change their behavior in response to changing relative energy prices depends on the availability of alternative choice of energy” and – it needs to be added – on their capacity to finance the investment and to overcome short termism.

This is the time for more public policies and actions involving all social, economic and financial actors to reduce uncertainties and enhance reciprocal information and knowledge. Moreover, the remaining high degree of uncertainty and complexity requires a broader set of means and instruments, and a constant reassessment of public action through feedback loops.

In several sectors market mechanisms massively fails to integrate the negative externalities of greenhouse-gas emission.  The postulate that markets are efficient and self-regulating needs therefore to be revisited for the purposes of policy action addressing climate change. There are numerous examples where more policy action and interaction between policy areas are needed. Increasing taxes on fuel (“green taxation”) need to accompanied by measures of social justice and enhanced mobility. Structural reforms may be needed in some cases to substitute market mechanisms by regulation. In key sectors, building renovation, transport and transition to renewable, public policies needed at large scale do not yet meet the requirement. Employment and social policies are challenged by the uncertainties affecting workers in most affected sectors and regions.  At a time of low or negative interest rates, public choices need to fully integrate the potentially high social return of public expenditures to fight climate change compared to the low cost of new debt. More accessible but selective finance should be granted to SMEs to promote green investments and stop climate damaging activities. Regulation of the financial sector needs to continue to be concerned about risks while at the same time providing the right incentive to reduce “brown” investments and promoting “green” investments. And last but not least public banks with a mandate to fund risky innovative and long term projects have a greater role to play.                 

No policy area can be exempt from fully integrating environmental, in particular climate action, objectives. Thinking and working in separate silos, i.e. simply adding a fourth “green policy silo” to existing silos like “productivity and competitiveness”, “public finance and stability” and “social” does not suffice. That is the reason why we will look at the next European Semester having in mind the required change of paradigm.


This article comes with a note suggesting how to assess three of the documents that will be included in the Autumn Package of the European Semester 2019/20 to be adopted mid-December 2019 by the European Commission: the Annual Economic Review, the Recommendation on economic policy in the Euro area and the Alert mechanism on macroeconomic imbalances. It can be downloaded here:

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