A few weeks ago I attended a webinar by Olivier Blanchard, former chief economist at the International Monetary Fund IMF. Blanchard is one of the most cited economists in the world, so I was very much looking forward to hearing his views on how the pandemic has affected public finances globally.
Professor emeritus Blanchard is one of the economists who do not reflexively recoil at the thought of massive public debt. His long-proclaimed thesis is that additional public debt can be justified if the growth created with this debt surpasses its costs. The government’s ability to repay its debts then grows faster than the interest expenses.
The point driven by Blanchard is to focus on what the debt is used for; whether it is used to cover public expenditure, to make structural reforms, or to make investments. Living off debt does not increase economic growth potential a single bit and may even delay necessary structural reforms. Investments should focus on market gaps, which is to say the flow of capital should be steered where it does not find its way on market terms.
Billions of euros are being funnelled into restoring economies also in Europe. The ECB has already launched and expanded its fiscal stimulus programme that pumps capital into the eurozone, and the Commission’s proposal for a massive recovery fund will be the hottest topic discussed in the European Council’s conference on 19 June.
Consensus on fiscal stimulus and how it is financed (direct grants vs. loans) or how it will some day be repaid will hardly be reached this weekend. Not only do member states hold conflicting views, but there are also national restrictions limiting the decisions. However, EU decision-makers are not newcomers to difficult negotiations, so we should be able to expect some kind of solution in the next few months.
Blanchard’s point is worth keeping in mind also when it comes to European recovery measures – especially when the resources belong to European taxpayers and repayment periods are long.
It is essential that the EU policymakers reach agreement on the use of the funds. Not on the details, of course, but on the big picture; the EU should not run the show telling member states how they should allocate the assistance. Nonetheless, one thing should be clear: what this shared debt must not and cannot be used for. Living off debt should be firmly prohibited, whereas reforms and targeted investments should be encouraged.
Overcoming the coronavirus recession should not be the only EU goal supported with the hundreds of billions of euros. If we direct the leverage to support structural reforms and investments in sustainable targets, the coronavirus recovery measures allow us to hit two targets with one arrow.
It has been estimated that making the ‘green transition’ to carbon-neutral society in the EU will require annual investments of at least €200 billion. At the same time it is important to financially disconnect the national economy from targets that are questionable in terms of climate and sustainability issues. There is generally no point in steering public funds into activities that the EU is planning to give up in the next decades.
After the coronavirus crisis, we simply cannot afford a climate crisis. If we fail at stabilising the climate, an immense amount of capital is at risk of becoming worthless. Mark Carney, United Nations special envoy for climate action and former governor of the Bank of England, has for quite some time warned major investors that they could be left high and dry because they have been too slow to curb their investment in fossil fuels.
Chair of the FFI Board Timo Ritakallio demands that Covid stimulus should be conditional, hinging upon the company’s climate responsibility. This is in line with the Commission’s publicly stated goals. The Commission has said the new recovery measures will be built responsibly using the new framework of sustainable finance. From this viewpoint it is puzzling, then, that the Commission has postponed its renewed sustainable finance strategy from the third quarter to the fourth quarter of 2020. The sustainable finance agenda is even more important with the coronavirus recession and there should be no reason to make long delays at this time.
We mustn’t let the valuable megatrend of steering capital into ESG-compliant targets be trampled over by the coronavirus. Our common debt-financed recovery package should be used to support the trend in every way.
This column was originally published in Finnish in the Verkkouutiset blog.