In the absence of a true capital-markets and banking union, the European Union will not be able to mobilize the financing it needs to support its green, digital transformation. Europeans must once again turn a crisis into an impetus for deeper integration.
Jean Monnet, an architect of the European Union, once said
that European unity “will be forged in crises, and will be the sum of
the solutions adopted for those crises.” The past decade and a half has
provided further confirmation of Monnet’s prediction. Contrary to
forecasts by many eminent economists, the EU Economic and Monetary Union
survived the euro debt crisis and is still going strong, thanks to the
European Stability Mechanism. The Juncker Plan helped put the European
economy back on track, and Brexit, far from breaking the EU apart, drew
it closer together.
The EU is again proving its worth in the
COVID-19 pandemic. BioNTech’s outstanding researchers developed a
leading vaccine in record time, and joint purchases made it possible to
distribute vaccines fairly and effectively (despite some initial
difficulties), ensuring relatively high vaccination rates in many EU
member states. The recovery plan and the European Guarantee Fund are now
helping economically weaker states and regions to cope with the
consequences of the pandemic. Since 2000, the EU has repeatedly
demonstrated its capacity to deliver solutions and show solidarity. But
the never-ending search for quick fixes to acute crises has a major
downside: the completion of the European single market has fallen to the
bottom of the political agenda. Such EU-level issues played no role in
this year’s German election campaign, even though a strengthening of the
single market is crucial for confronting increased economic competition
from the United States and China. Europe simply is not realizing its
potential. The EU already has a single market for goods but not a fully
functioning one for services, particularly in the otherwise booming
digital economy. If a Silicon Valley start-up develops a good product,
it has immediate access to a huge domestic market and can grow to the
point where it can hold its own globally. But in Europe, that same
start-up would have to spend its early years dealing with so many
foreign tax lawyers and national regulators that international expansion
would hardly seem worth it. Europe also lacks a capital-markets union
and a true banking union; and because there are significant regulatory
differences between EU countries, European shareholders and corporate
bond investors shy away from offerings beyond their own borders,
potentially forgoing more attractive investment opportunities. This
highlights the need to complete the banking union, which includes common
banking supervision, a banking settlement mechanism, and a shared
deposit guarantee. European governments also must overcome their
skepticism about securitization, which is a key element of the
capital-markets union. It is true that bundled loans triggered the 2008
financial crisis; but that is only because nobody was keeping a watchful
eye on them. With better regulation and monitoring, securitization can
be a powerful tool for banks to unlock additional capital for new
business loans and to finance investments in green technologies.
The European
Commission has done well to draw up an ambitious strategy for a green,
digital transformation of the EU economy, sending an important signal to
the rest of the world. But the absence of a competitive capital market
jeopardizes Europeans’ ambitious climate targets. Massive investments
are needed this decade to transform energy, transportation, large swaths
of industry, and millions of properties, as well as to protect the
people of Europe from the devastating effects of climate change, which
were on full display these past two summers.
These objectives will
be possible only if governments work together with public- and
private-sector banks to bring private investors on board across borders.
Europe needs to bridge a climate action funding gap of
€350 billion
($401 billion) per year over at least the next ten years. We may have
become used to governments and central banks providing vast sums of
money to support the economy, but this will not last forever. Interest
rates will not stay so low in the long term, sovereign debt will reach
its limits, and higher taxes will not be enough to finance this
once-in-a-century transformation. But the EU already has the tool it
needs to close the gap: it just needs to create a true capital-markets
and banking union. We can see what is achievable through common rules if
we look to sustainable financing. With the issue of the first green
bond, the European Investment Bank (EIB) provided an important impetus
to the market for green bonds and sustainability bonds. This has
resulted in a uniform market understanding of what constitutes a green
or sustainable bond. Moreover, with the EU taxonomy, there are now
transparent criteria for determining which economic activities are
already green or can develop in that direction. Investors have a clear
set of rules at hand to use as a guide for sustainable financing. This
transparency at the EU level represents a huge step forward, turning a
once-derided idea into a
€2 trillion market.
Project Syndicate
© Project Syndicate
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article