The reform of the Stability Pact, the Green Pact for Europe and the just transition

The Transition needs a motor and a rudder

On 10^th and 11^th March, the Heads of State and government of the European Union will meet in France. They will discuss a reform of the Stability Pact whose origin lies in the Maastricht Treaty signed 30 years ago. Will this reform be consistent with the objectives of the Green Pact for Europe and a just transition? Will it make it possible to mobilise the necessary financial resources? And will it allow them to be well directed? Or will it leave Europe’s economies like a boat with neither engine nor rudder?

Despite decades of scientific warnings, economic and fiscal policy makers have continued to focus on short-term priorities. It is only the European Commission under Ursula von der Leyen that has taken decisive action with the adoption of the European Green Deal. But while the European Union can provide a framework for coordination and cooperation, the economic and fiscal policies of individual states will make the difference. Yet, the policies announced by member states are insufficient to ensure that global and European greenhouse gas emissions meet the commitments of the Paris Agreement and the European Green Pact. Biodiversity continues to decline. The European economy, far from being circular, is still a throw-away economy with little recovery.

The reform of the Stability Pact must place the imperative of a just transition at the center of the new governance. This requires a rebalancing of priorities. Trade-offs between debt and investment in transition will have to be facilitated. Procrastination is not an option; neither for investing in adaptation to climate change, whether to protect against the damage of increased extreme weather events or slower changes such as rising sea levels or agricultural changes; nor for the investments in mitigation that will sooner or later have to be made but whose delay would increase the risk of a more abrupt and costlier transition.

No one doubts that the transition will require substantial budgetary resources. Yet, there are still no detailed estimates of these needs. Nor does anyone doubt that structural transformation of an unprecedented nature and scale are necessary to achieve the objectives of the Green Pact for Europe, and that innovative public policies must be implemented to ensure social justice throughout the transformation. Yet, once again, even simple methods of « green budgeting » or « environmental impact assessment », which are necessary but not sufficient, are still absent in a very large majority of Member States.

The reform of the Stability Pact will be incomplete if it does not contribute to solving two questions at the same time: that of the quantity of budgetary means freed up for the benefit of transition, and that of their use. We recommend designing the approach through the lens of public actions and sector policies. This approach will require, in all countries, a close and balanced coordination between the ministries of finance and the ministries in charge of transition. It is the only approach capable of providing a best possible estimate of budgetary needs given the uncertainties surrounding a transition of the scale envisaged. It is the only one that can take into account the acceptability of policy measures. It also provides a framework for feedback and drawing lessons from experience. It differs from the estimates of investment needs which are often used at present. The latter only provide very incomplete indications of budgetary needs. And they neither differentiate between private and public investment, nor actually cover all the public expenditure necessary for a just transition.

We propose five criteria to identify the budgetary expenditures that are necessary for the transition and which should benefit from a privileged regime under the Stability Pact:

The first is that the value of the public expenditure should be measured by its contribution to public actions or sector policies. Effectiveness and acceptability of those policies are ensured by complementary regulatory, administrative and fiscal measures. Such measures are necessary to guide the behavior of households and businesses. The public expenditures necessary for the success of such a public action or policy include public investment, private subsidies (e.g. building insulation, purchase of low-carbon vehicles), vocational training programs for employees in carbon-intensive sectors, and social transfers to help the most vulnerable cope with increases in the price of carbon-based energy.    

The second is that the public actions should serve a specific objective agreed at the European level and that they contribute to a European public good. Their contribution to a specific climate, environmental or social objective agreed at European level must be established.

The third is that effectiveness should be assessed based on performance indicators that are clearly linked to the specific objective.

The fourth is that the budgetary expenditure should be part of a medium/long term programming.

The fifth is that the expansion of ‘green’ expenditure should be accompanied by a programmed reduction in ‘brown’ expenditure, which is harmful to the objectives identified as priorities.

This approach makes it possible to reconcile the pursuit of shared European objectives with the freedom to choose the transition path that best corresponds to national constraints and preferences. It is the condition for the European Union to succeed in the transition to an economy that respects the limits of the planet while strengthening its cohesion and regaining energy sovereignty.