Green economy  |  Publications  |  29.05.2012

Exiting the crisis in the right direction

The Green New Deal offers a new socio-economic model for Europe. The French Institute for Sustainable Development and International Relations (IDDRI) has come up with one such vision of a Green social Europe, which claims to meet both short-term and long-term challenges the EU is facing. 

In this report, the French Institute for Sustainable Development and International Relations (IDDRI) argues that, though important steps have been taken in the past few months to strengthen economic and fiscal governance in Europe, short-term economic stimulus are now needed to avoid spreading recession across Europe. Furthermore, current economic reforms do not take into account the long-term challenges Europe is facing, in particular resource dependency and climate change. The authors maintain that a shift towards a green economy can bridge these two challenges

Below we point to the main arguments put forward by the IDDRI report.  

Understanding the intertwined financial, economic, social and environmental crises

The report explores the causes of the current intertwined crises and shows that at its roots was mainly the “positive confidence shock” peripheral countries of the Eurozone have experienced after having adopted the single currency. Peripheral countries of the Eurozone (mainly Greece, Spain, Ireland and Portugal) experienced negative real interest rates since the early 2000s that encouraged excessive borrowing, inward capital flows and the buildup of asset bubbles. Yet above this, the authors emphasise a sub-causal factor of the financial and economic crisis: the influence of rising energy price on macroeconomic imbalances. 

First, part of the US subprime mortgage bubble can be attributed to the global financial liquidity glut, of which petro-dollars were a significant part. Second, the authors highlight that the asymmetric reactions of current accounts to energy prices within Eurozone members were one of the factors that contributed to widening its destabilisation by participating to expand current account divergence. Even though the energy price-macroeconomic interaction is only one of the factors that led to the current crisis, it is important to highlight the interdependence between these two elements. The authors conclude: “energy policy should potentially be considered among the structural factors around which greater Eurozone coordination could be necessary in order to avoid structural divergences, monetary policy distortions, and macroeconomic imbalances.” 

A shift towards a green economy as a way out of the crisis

While mainstream economists currently advocate for reducing the tax burden on labour to improve competitiveness, the authors argue that one should think at environmental fiscal reform as a way to both reducing the tax burden on labour without cutting the revenue side of Member States’ budgets, and giving a price signal to production and consumption practices. Besides there is a room for manoeuvre in that field, since the EU27 average of environmental taxation is only 2.4%, and only 1.8% for energy taxation. 

The Ellen MacArthur Foundation estimated that investments in resource efficiency can save the EU 3% of its GDP per annum by 2030. Besides, and contrary to what one may think, capital is not scarce but just lacks safe investments opportunities to be invested in. The European Commission estimates that delivering a low-carbon economy by 2050 will require an increase in investment of 1.5% of GDP, roughly returning investment to its average over the 1985-2005 period. Yet safe investment opportunities are not shared equally around Europe. This is where the added value of a coordinated European action lies. The report therefore calls for a European investment strategy into Green jobs, infrastructures and technologies to enable inward investment in peripheral countries and bring short-term stimulus as well as long-term investments to the European economy. 

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