To address the climate emergency, fiscal policies in developed countries must navigate between two pitfalls: fiscal conservatism at the risk of austerity and an increase in public spending and investment activities that would not be aligned with the objectives of the Paris Agreement. The reform of the Stability Pact that will guide European fiscal policies for the coming years must provide the right compass to avoid both. The main orientation of medium-term budgetary planning and reforms must cease to be « growth-enhancing ». It must be to foster « just transition ». To move between the two pitfalls, policy makers will need capacity to assess the climate and environmental effectiveness of public policies. It is necessary that the reinforcement of these capacities be part of the reform of the stability pact in the same way as the new balance that will have to be found between debt and financing of the transition.

Fiscal policies on a narrow path

The IPCC’s report WPIII (chapter 15.6.3) finding is clear: to tackle the climate urgency, fiscal policies in developed countries must navigate through two pitfalls – not spending enough, and not spending where it matters.

• On the one side, the conservatism of finance ministries and Treasuries which will be tempted to return to austerity after the « whatever it takes » moment of the pandemic.
• On the other, an increase of public expenditure and investment activities that would not be aligned with the objectives of the Paris Agreement.

Missing the pass between both pitfalls would soon or later send the European economy into a disorderly transition, i.e. a sudden, broad and un- or poorly anticipated restructuring of economic activities. This would result in corresponding adjustments in the value of financial assets and major risks for financial stability. Such a transition would in both cases have a high social and economic cost. Neither austerity nor undifferentiated support for growth are compatible with what is essential: the rapid and programmed restructuring of transport and energy infrastructures as well as of private and public consumption and production patterns.

For a renewed Stability pact: reorienting budgetary programs and reforms

The reform of the Stability Pact that will guide European budgetary policies for the next few years must provide the right compass to pass the strait. The success of the transition of each country is in the common interest of all. It is a condition for an orderly transition. Each national failure calls into question the credibility of the European Union’s international commitment and could lead to a cascade of defections. The assessment of fiscal policies must take into account the risks that would result from a late or insufficient transition alongside those potentially resulting from public deficit and debt levels. Failure to do so would lead European economies into turmoil.   

What transpires from the current discussions on the reform of the Stability Pact, unfortunately, does not allow for optimism. While it is recognised, but often paid with lip service, that the budgetary framework will have to take account of the investment effort needed to honour the commitments made for the transition, the main concern is that the medium-term budgetary programme and the reforms should be « growth-friendly », as can be read, for example, in a note from the Spanish and Dutch governments or in successive Commission policy documents. How long will it take to read that budgetary planning and reforms must be « »friendly to a just transition »? 

Effectively taking into account what is needed for the transition

Let us be clear. No matter how much investment in support of transition is brandished as a totem, the proof is in the pudding. But the recipe for the pudding is not simple. It is not just a trade-off between investment and consumption, or even between green, neutral or brown investments, as a macroeconomic approach would suggest. The IPCC report shows that the success of the energy transition will be the result of sectoral policies to which public budgets will have to contribute in combination with legal, administrative, fiscal and social justice measures. These policies will determine the budgetary needs. And the quality of these policies cannot be measured by the monetary value of the means implemented but by material results linked to the transition, and in particular to the reduction of greenhouse gas emissions.

Passing the strait will require a navigator with a clear view of the dangers that threaten the sustainability of the economy and therefore the sustainability of debts. It will need to steer clear of fiscal conservatism and stay strictly on course for greenhouse gas emission reduction and just transition targets. To do this, it needs the capacity to assess the climate and environmental effectiveness of public policies These capacities, however, are still in their infancy in too many EU countries. It is necessary that their reinforcement is part of the reform of the Stability Pact as much as the new balance that will have to be found between debt and financing the transition.

Greentervention has proposed a ten-point reform of the Stability Pact to meet the challenge.