23 January 2020

Project Syndicate: Who pays for the Green Deal?

As laudable as they are, the European Commission's proposals for addressing climate change rely overwhelmingly on forms of financing that violate EU rules, writes Hans-Werner Sinn.

Because the Commission is barred from assuming debt, the EIB will do so on its behalf, and the ECB will ultimately be left holding the bag.

Under President Ursula von der Leyen, the new European Commission has big plans to address climate change. With a €1 trillion ($1.1 trillion) investment package, it hopes to transform Europe into a carbon-neutral economy by 2050.

But much of that €1 trillion for the Commission’s proposed Green Deal would be generated through financial-leverage effects. In 2020, the European Union will formally allocate for such purposes only around €40 billion, most of which is already included in the budget from previous years; arguably, only €7.5 billion of additional funding under the plan would actually be new.

As with the previous Commission’s 2015 Juncker Plan, the trick, once again, will be to muster the lion’s share of the quoted sum through a shadow budget administered by the EIB. The Commission, after all, isn’t allowed to incur debt; but the EU’s intergovernmental rescue and investment funds are.

In essence, the EU is doing what the major banks did before the 2008 financial crisis, when they circumvented regulation by shifting part of their business to off-balance-sheet conduits and special-purpose vehicles. 

In practice, of course, this most likely means that the ECB would buy up the “green” bonds now being devised by the EIB. Those purchases will then reduce the interest rates at which the EIB can take on debt, ultimately leading to activation of the printing press to provide the money for spending on climate policy.

Full article on Project Syndicate

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