Introduction
© 2022 Floriana Cerniglia and Francesco Saraceno, CC BY-NC 4.0 https://doi.org/10.11647/OBP.0328.15
Ever since the Global Financial Crisis of 2008 macroeconomic theory has been in a state of flux. The crisis challenged the central tenet of the consensus that dominated since the 1980s, namely that markets are capable of absorbing macroeconomic shocks and converge back to the natural equilibrium with little or no help from macroeconomic policy (for details see Saraceno 2017, 2022). Rediscovering the old Keynesian recipes, the meltdown of the financial sector and the collapse of private aggregate demand were met by a timely and bold policy response, with central banks providing liquidity and governments stimulus plans to sustain demand and economic activity.
The success of the pragmatic policy response to the crisis inevitably triggered soul-searching among academics and policymakers. This “rethinking macroeconomics” (Blanchard 2016) is ongoing and wide-ranging, from the reconsideration of the merits of capital controls to the reassessment of the timing and nature of structural reforms, the interaction of monetary and fiscal policy (especially at the zero lower bound), the relationship between cycle and trend, the impact of income distribution on economic performance, and more. While a new paradigm has not yet emerged from this debate, we may safely assume that the cursor between markets and governments has swung back towards the centre and that macroeconomic policy will have a more important role than in the past.
Specifically, the pre-2008 consensus had sidelined fiscal policy: within a framework of a limited role for macroeconomic policy at large, monetary policy was to be preferred because it was less subject to biases (such as appropriation by vested interests and political cycles) and implementation lags. This consensus was the backdrop for the European fiscal framework, more specifically the Stability and Growth Pact strongly limiting discretionary fiscal policy. Determining the role of government expenditures and revenues, therefore, is pivotal in the current reassessment. Experience from the past decade has shown that fiscal policy strongly affects growth and convergence: for the better when in 2008 (and again in 2020) it kept the EU economy afloat through widespread stimulus packages; and for the worse when, during the sovereign debt crisis, it turned procyclical deepening the woes of Eurozone’s peripheral countries.
Following the 2008 crisis, the debate on fiscal policy effectiveness mostly dealt with the issue of how to use countercyclical fiscal policy to stabilise the economy during a financial crisis with features that were quite well known since the 1930s: the collapse of private sector demand that required Keynesian fiscal stimuli. This explains why the debate on the size of multipliers was particularly lively during that period (for an account, see Gechert and Rannenberg 2018).
In a second phase, attention shifted to fiscal policy for the long-term. On the one hand, it became evident that short run policies, through their impact on the depth and duration of the cycle, could have a strong impact on long term potential growth through the destruction of human and physical capital (Blanchard et al. 2015; Fatás and Summers 2018). On the other hand, public investment and industrial policy took centre stage as tools to foster potential growth (and incidentally contribute to the sustainability of public finances). Decades of subdued public capital accumulation, low levels of interest rates (IMF 2014) and complementary public and private investments (Durand et al. 2021) all called for a public investment push. The first European Public Investment Outlook (Cerniglia and Saraceno 2020) took stock of this new awareness, drew a gloomy picture of the state of public capital in all of the EU countries, and emphasised the need to adopt a broad definition of capital, comprising both tangible and intangible assets to boost human capital (such as social capital).
The emphasis of the 2020 European Public Investment Outlook on intangible capital proved prescient when, with the COVID-19 pandemic, we entered a third phase of the debate on fiscal and industrial policy: starting from the spring of 2020, policymakers increasingly focused on public investment as a means for providing not only physical and human capital, but also global public goods such as health care and education. Meanwhile, the pandemics acted as a powerful reminder that the efforts for economic recovery needed to be framed within the broader long-term goals of ecological and digital transitions (and the not-emphasised-enough social transition). The pandemics proved that, for most of these public goods, the appropriate scale for an efficient provision and cost-effective financing, is the European one. This was the justification for the flagship programme Next Generation EU (NGEU). Since the European Union lacks a central fiscal policy, NGEU is coordinating the national recovery plans by means of strict conditionalities on the scope and timing of public investments and reforms (European Commission 2020). This was done to ensure the attainment of common goals of recovery from the pandemic, cohesion, and investment in strategic sectors to ensure a green and digital transition.
Next Generation EU is probably the most innovative instrument introduced by the EU in decades. It was therefore a somewhat obvious choice to devote the 2021 instalment of the European Public Investment Outlook (The Great Reset, Cerniglia et al. 2021) to issues focusing on post-pandemic recovery, NGEU, and the National Resilience and Recovery Plans. The common thread emerging from the chapters that compose The Great Reset is once again the gap in tangible as well as intangible public infrastructures and the potential for the NGEU programme to act as a game changer for public investment not only through the 750 billion euros that it will mobilise, but also through crowding-in private investments and the multiplicative effect on the private economy. As this manuscript goes to press (December 2022), the European Commission has disbursed the second instalment of NGEU funds and most National Recovery and Resilience Plans are broadly on track to meet their milestones and deadlines.
The long-term dimension of the debate on fiscal policy since 2020 has highlighted its role in ensuring a successful ecological transition; this is the topic of Greening Europe, the 2022 European Public Investment Outlook. Like the previous Outlooks, Greening Europe brings together research from European institutions, university departments, think tanks, and other institutions. In doing so, we not only have the objective of exploring a wide range of points of views, but also to keep building a network of economists and policymakers sharing their interest in the topic of public investment. Investment for a Green transition is tackled from a wide range of perspectives, from its financing to the value of green multipliers, the regulatory issues that arise, the need to redefine industrial policy, the investment needs in the field of energy (this specific subject has of course become central in the course of 2022 due to the war in Ukraine), the debate on the governance of the Eurozone, and more. As with the other Outlooks, two themes have emerged from the uncoordinated work of the chapters’ authors:
The first is the need to protect public investment through an appropriate fiscal governance framework. As we write this introduction (November 2022), the Commission has just unveiled its proposal for a reform of the Stability and Growth Pact. Unfortunately, there is little ground for optimism. The energy crisis, recent political developments in Italy and, above all, the German government’s minimalist approach to the rewriting of the rule (contrary to what seemed to be the case during the pandemics, see Saraceno 2021), have yielded a proposal that, while significantly improving on the current Stability and Growth Pact,1 clearly does not go far enough to protect public investment. If the new rule will resemble the proposal, it will become of paramount importance to create a fiscal space for public investment at the European level. A mild reform of the Stability and Growth Pact should push those interested in effective fiscal governance to urgently table a proposal for creating central fiscal capacity for the EU (Buti and Messori 2022).
The second theme that emerges from Greening Europe is the challenge to ensure a constant flow of investment, appropriately coordinated at different levels of government. Multilevel governance (at the EU and national levels) is a pivotal aspect for ensuring, in the coming decades, a comprehensive yet detailed investment plan that addresses the needs that arise beyond those of the single states. Moreover, a system with fragmented competences, among levels of government, would require much stronger coordination mechanisms to: a) quickly respond to exogeneous shocks and b) implement strategic projects/missions that require coordination between different levels of governments during the various implementation phases.
Greening Europe (like the previous instalments) is divided in two parts: an overview of public investment in Europe and in a select group of countries, (France, Germany, Italy, Spain) and a spotlight on a series of specific topics related to green transition.
Part One provides an assessment of the state of public investment in Europe as a whole (Chapter 1) and then focuses on the four largest EU economies. The common thread running through these chapters is understanding Europe’s Green transition by assessing the roles of energy policy, energy security and climate transition. These chapters also update, where relevant, the data presented in the two previous editions and provide a description of the impact and policy response of the respective economic recovery plans as part of NGEU to the economic crisis caused by the COVID-19 pandemic and now further exacerbated by the war in Ukraine.
Chapter 1 by K. Atanas, D. Revoltella, A. Brasili, and J. Schanz describes how the war in Ukraine poses new challenges for public investment in the EU. It has worsened the macroeconomic environment by increasing uncertainty and raising energy and other input costs. Concerns over public debt and increases in current expenditure, to contain the impact of higher energy costs, might decrease government spending on investment. That said, large EU-wide programmes will be supporting governments’ investments over the coming years, in particular through the Recovery and Resilience Fund and RePowerEU. RePowerEU is designed to rapidly reduce dependence on Russian fossil fuels—a challenge that can be addressed only with coordinated policies and efforts both at the national and EU levels. While the cost may not be overwhelming, it comes on top of the large investment needs related to transitioning to a net-zero carbon economy. The solidarity within the European Union will need to be a key ingredient for successfully overcoming these challenges.
In Chapter 2, M. Hamdi-Cherif, P. Malliet, F. Reynes, M. Plane, F. Saraceno, and A. Tourbah argue that public investment in France has been on a downward trend since 2009, rebounding only in the wake of the COVID-19 crisis, with the objective of supporting global demand and spurring economic growth. The increase in investment, however, is less pronounced than during the global financial crisis. Orienting investment towards low-carbon capital within the framework of a long-term emission reduction goal, despite being unprecedented in history, is also insufficient, especially if its level is not maintained over the coming decades. The type of low-carbon transition strategy chosen—either relying more on technological progress or reaching a significant reduction in energy consumption (a Sobriety scenario)—will noticeably impact the composition and amount of investment needed to meet the targets.
In Chapter 3, K. Rietzler and A. Watt emphasise that against the backdrop of an increasingly broad consensus that Germany has substantially underinvested in public goods for an extended period, the new Traffic Light Coalition Agreement sets out ambitious spending plans that go beyond the modernisation of Germany’s infrastructure and speeding up decarbonisation. At the same time, it has also committed to the debt brake and to avoiding tax hikes. Moreover, since the establishment of this new government, other fiscal challenges have arisen because of the war in Ukraine and a sharp rise in energy and food prices. By exploiting the scope of short-run flexibility (the debt brake is currently still suspended) and new off-budget measures, the government is seeking to square this circle by allowing greater investments in the face of competing demands. The national plan under the Recovery and Resilience Facility (RRF) complements national initiatives; but in Germany’s case, it is of limited macroeconomic relevance. The latest developments in RRF projects are sketched out in the chapter.
In Chapter 4, G. Barbieri, F. Cerniglia, G. F. Gori, and P. Lattarulo provide a general overview of the Italian National Recovery and Resilience Plan (NRRP) with a focus on the investment needs to ensure an ecological transition. The NRRP contains six missions, of which Mission 2 is specifically dedicated to the ecological transition (approximately 59.5 billion euros); however further resources for the transition are also available in other Missions under climate objectives. In total, the available resources are around 71.7 billion euros. This means that out of the total funding allocated to the NRRP (191 billion euros), 37.5% is dedicated to green investment, which is slightly above the minimum threshold set by the EU. In absolute terms, because of the size of the Italian NRRP, this is by far the most significant investment out of all the EU countries. The NRRP is a huge gamble for the future of Italy due to the sheer number of resources involved, the deep structural lags that must be overcome, and the major political consensus needed on the overall objectives and/or missions.
Chapter 5 by J. Villaverde, L. Ibáñez Luzon, D. Balsalobre-Lorente, and A. Maza summarises the different public initiatives in the Spanish energy market in recent decades, always within the European Union framework. At the same time, it portrays the current turbulent situation, marked by the crisis unleashed by the COVID-19 pandemic and Russia’s invasion of Ukraine. The chapter reviews the historical evolution of the energy mix in Spain, with a focus on the effect that the different energy packages approved by the EC and their implementations have had on it. The chapter concentrates on the Spanish government’s policies and plans, within the guidelines set by the EU, especially Next GenerationEU and REPowerEU, in support of a green transition over the 2020–2030 period.
Part Two of the 2022 European Public Investment Outlook focuses on a selection of themes related to the extremely ambitious and optimistic European Green Deal, which aims to provide a roadmap towards sustainable economies and ensure a just and inclusive transition. The chapters on green spending multipliers (Chapter 6) and green investment requirements (Chapter 7) focus on the positive impact of green expenditure on economic activity. The chapters on public spending needed to reach the EU’s climate targets (Chapter 8) and the EU plan to reduce dependence on Russian fossil fuels (Chapter 9) provide preliminary snapshots of the fiscal implications and the energy investments required for an effective green transition. The chapter on public spending for future generations (Chapter 10) proposes an innovative expenditure aggregate to better capture the public sector’s contribution to economic and social development and environmental protection, while the chapter on Green Finance Standards (Chapter 11) discusses the effectiveness of green bonds and maximising the effectiveness of climate investments and finance. The chapter on the Do No Significant Harm principle (Chapter 12) presents a case in favour of a broader approach to the principle, thereby transforming it into an effective lever for investments within a sustainable development strategy and for rapidly achieving European energy security. The last chapter, which focuses on a socially just green transition (Chapter 13), argues that achieving such an objective requires an integrated approach.
In Chapter 6, N. Batini, M. Di Serio, M. Fragetta, G. Melina, and A. Waldron argue that fixing the twin climate and biodiversity crises is still possible, but it requires stewarding the global economy within limits set by nature. The chapter addresses the question of whether there is “a trade-off between spending on the green economy and an economy’s strength,” and two key results are discussed. First, every dollar spent on green activities can generate more than a dollar’s worth of economic activity, whereas non-green spending returns less than a dollar. Second, for spending categories that are comparable, like renewable versus fossil fuel energy, multipliers on green spending are about double their non-green counterparts. The findings suggest that investments in energy and land/sea use transitions may be economically superior to those offered by supporting economic activities that involve unsustainable ways of producing energy and food.
The EU countries’ priorities on climate and environmental spending, as reflected in the allocations of the Recovery and Resilience funds, are assessed in Chapter 7 by K. Lenaerts, S. Tagliapietra, and G. B. Wolff. The results suggest that the priorities differ significantly. Also, broader estimates of the required investments are provided, and these indicate that annual investments in energy and green tech must increase by 2 percentage points of GDP to reach climate neutrality by 2050, both globally and in Europe. Policies, therefore, must focus on boosting private investment and creating a viable green tech sector.
In Chapter 8, C. Baccianti argues that the 2020s are a crucial decade for steering the European Union towards climate neutrality and decreasing dependence on imported fossil fuels. In the period from 2021–2030, public expenditure on climate investment across the EU should increase by 1.8% of GDP (1.1% excluding investment in public transport) compared to the previous decade. The bottom-up analysis of the chapter reveals that almost three quarters of that spending will go to the construction and transport sectors. Filling such a significant public green investment gap will be challenging for EU countries with little fiscal space, especially once the Recovery and Resilience Facility comes to an end.
Chapter 9 by M. G. Tertr and B. Saveyn provides an estimate of the investment needs and additional costs of bringing the EU’s dependence on fossil fuels from Russia to zero by 2027, with a specific focus on natural gas. This analysis was used to prepare the REPowerEU plan presented by the Commission on the 18th of May 2022. Decoupling the EU from Russian fossil fuel imports has already begun and will pass through various stages affecting both demand and supply. From this perspective, the analysis indicates that implementing the full potential to reach zero-dependence could require 300 billion euros cumulative from now to 2030—which is beyond the Fit for 55 proposal. By the end of 2027, this transition could correspond to approximately 210 billion euros in investment. These REPowerEU investments correspond to about 5% of the total Fit for 55 investments up to 2030 and would come in addition to them. The Commission analysis estimates that the Fit for 55 and REPowerEU measures combined could save the EU 80 billion euros annually on gas imports, 12 billion euros on oil imports, and 1.7 billion euros on coal imports.
L. Ferrari and V. Meliciani in Chapter 10 propose a new “quality” of public spending (public spending for future generations) measure which goes beyond the traditional distinction made between public gross fixed capital formation and public current expenditure. The proposed aggregate is more in line with the objectives and policies introduced at the European level such as NextGenerationEU, which requires EU countries to spend a certain percentage of their resources on projects aimed at promoting digital and green transition, scientific research, and social cohesion. Highly indebted countries have significantly decreased the share of GDP for public spending for future generations, especially since the financial and sovereign debt crises. However, countries have not reduced their share of total public expenditure of GDP. It is suggested that national governments and the EU fiscal rules should focus more on the composition of public spending, not only public gross fixed capital formation, but also current expenditures that have long-run effects on sustainable development such as education, R&D and environmental protection.
X. Liang and Z. Gao in Chapter 11 argue that climate change is one of the greatest challenges that humans are facing in this century. Mobilising investment and finance in addressing climate issues is key to unlocking actions on climate change across countries. The estimated investment required to achieve the climate mitigation goal established in the Paris Agreement ranges from US$1.6 trillion to US$3.8 trillion annually from 2016 to 2050, while the tracked annual flow of climate finance is US$579 billion on average. Despite significant growth in climate finance flows, the gap remains substantial. In response to the gap, an issue that must be urgently addressed is maximising the effectiveness of climate investment and finance. Developing Green Finance, such as green bonds, green funds, or green loans, has provided hope for a potential solution to bridge the climate change funding gap. Since the first green bonds were issued in 2007 by the European Investment Bank (EIB), the green financial market has grown rapidly in both scale and market coverage. Green bonds remain the dominant asset in terms of market share. In 2021, green, social, sustainability, sustainability-linked, and transition-themed debt reached US$1 trillion with growth spearheaded by green bond issuance. This represents a twenty-fold increase from 2015, and accounts for 10% of the global debt markets.
In Chapter 12, C. De Vincenti argues that the concrete implementation of the Next Generation EU strategy and the recent aggravation of the energy security question have brought a crucial issue to the fore: what is really meant by the Do No Significant Harm (DNSH) principle. Up to now, EU documents have adopted an extremely restrictive interpretation of the principle that hinders essential investments for the green transition and the diversification of energy supplies. In this chapter an alternative interpretation of the DNSH principle is proposed, which could transform it into an effective lever for the required fundamental investments.
Chapter 13 by C. Alcidi, F. Corti, D. Gros, and A. Liscai builds on the issue that finding a balance between the objectives of economic growth, environmental sustainability and social fairness has been one of the key priorities of the EU agenda in the last years. While the link between economic growth and social and ecological objectives has historically received much attention, the socio-environmental nexus has received much less. Some scholars recently attempted to identify the possible functions that the welfare state could perform to accompany the green transition. Based on this recent literature, the authors identify two main functions (activating and buffering) that are not mutually exclusive. An important distinction is made in the logic under which the welfare intervention is carried out. Two different types of logic can underpin eco-social policies: compensatory or integrated. They show that an integrated approach to social and environmental policies seems to be the most suitable solution to achieve green and positive social outcomes.
Overall, the contributions in Greening Europe depict a mixed picture. On the one hand, the issue of ecological transition is now steadily among the top priorities of policymakers; this is all the more clear in the current energy crisis, when difficult decisions such as the reopening of coal plants to meet short-term needs are clearly seen as temporary. Luckily, most policymakers do not seem ready to sacrifice long-term sustainability goals to face short-term shocks. On the other hand, nevertheless, the contributions of this European Public Investment Outlook highlight the colossal financing needs, the regulatory hurdles, and the institutional shortcomings that will need to be tackled for a successful transition. We hope that Greening Europe will contribute to a debate that will remain central for years to come.
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1 The Commission proposal scraps controversial variables such as the structural balance (in favour of an expenditure rule) and foresees a country-specific debt reduction path, based on Debt Sustainability Analysis. These are welcome changes to a rule that was cumbersome and pernicious; but there is no explicit recognition of the importance of public investment. See https://ec.europa.eu/commission/presscorner/detail/en/ip_22_6562.