Une version française de la note se trouve sur le site Chroniques de l’anthropocène

Crédits photo : BIS/ Banque de France

Following several discussions with partners and readings of comments by third stakeholders on the proposal for reforming the European economic governance by the European Commission, we deepen and refine our view on the need to fully integrate climate risks into it.

Indeed, the proposed reform of the European economic governance focuses only marginally and with attentional bias on climate risks, as its main focus remains on risks related to the public debt level. The underlying traditional – not to say outdated – macroeconomic approaches ignore the environmental degradation caused by human activities and, conversely, the risks this degradation pose to the economy and wider society.

The climatic, physical and transitional risks incurred in the short, medium and long term are undeniable but unprecedented and therefore largely unpredictable with statistical methods based on past experience. This element of uncertainty requires the application of the precautionary and preventive principles in line with Article 191 TFEU.

Fiscal reform and investment policies both determine the trajectory of the debt, its « financial sustainability », the resilience of the social, economic and financial system and the environmental sustainability of human activities. A holistic and preventive approach to economic governance has therefore become necessary. The new economic governance should therefore include – along with vulnerabilities related to public debt – a monitoring of the vulnerabilities incurred by the economy as a whole – households, firms and financial institutions – as a result of climate change and transition policies.  

Furthermore, the complementarity between economic and fiscal policies on the one hand and prudential regulation of the financial system on the other should be valued. The green transition may pose significant risks to banks and other financial institutions through the devaluation of brown assets. These risks can be reduced both by the quality and consistency of economic and fiscal policies and by banking and financial regulation. This requires early and orderly transition policies on the one hand, and regulation to accelerate the shift of bank financing to carbon neutral activities on the other. A failure of one policy would slow down the implementation of the other and significantly increase the risks of the transition.

The detailed note to be read here is structured as follows:

1. The three pillars of the proposed reform: national economic programme, debt sustainability, surveillance of macroeconomic risks and imbalances 
2. Debt « sustainability »: a very political compass 
3. Climate risks are only in a marginal way considered in the Commission’s proposal
4. The Commission’s proposal does not consider the impact of fiscal policies and reforms on climate risks 
5. Economic governance must better apprehend and above all contribute to prevent climate risks 
6. Five basic principles to be put at the heart of European economic governance 
7. Seven operational proposals for a new European economic governance integrating climate risks 

Une version française de la note se trouve sur le site Chroniques de l’anthropocène