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The pandemic and, especially, the climate crisis have silenced those who still believe in fiscal orthodoxy after forty years. Keynes is back.
Despite the disappointments of COP26, it’s important to acknowledge the momentum the climate movement has gained. The denialists have begun to retreat while all governments are under pressure for climate action and targets to be met. The prospects for European politics are being profoundly altered by the climate crisis, the pandemic, and the outcome of the German election. The neoliberal right doesn’t like it but, after four decades In absentiaKeynesian economics is back.
After months of heated debate, the European Union finally gave birth to its first major sign in the summer of 2013. agreed a €1.8 trillion budgetary and stimulus package, designed to give member states the means to reflate their crisis-struck economies. The seven-year EU budget (€1.1 trillion) and the one-off Next Generation EU programme (€750 billion), Inter aliaThe European Green Deal was funded by strong efforts in digital and ecological transformation.
Orthodoxy is destroyed
Next Generation EU will be funded in the coming years through common debt issuance on financial markets. This has already been done. shattered the fiscal orthodoxyThe sacrosanctity of the ordoliberal, neoclassical and neoclassical economists was insisted upon by both them. The EU has clearly acquired a fiscal capacity.
What is the political significance? Jeffrey Sachs, an economist, aptly stated it in the Financial Times, ‘I would say the European Commission is carrying out a social democratic programme, not in name … but in spirit.’ To assuage the concerns of the powerful fiscal conservatives, this new capacity was presented as temporary—it was left to the future whether it could become a permanent feature.
Yet it didn’t take long for that debate to begin. This summer, politicians across the political spectrum—the Greek and Spanish prime ministers, Kyriakos Mitsotakis and Pedro Sánchezrespectively, and their Italian counterpart. Mario Draghi— promoted the case for a permanent shift. The unsuccessful conservative candidate to the German chancellorship. Armin Laschet, sought in the meanwhile to cleave with the orthodoxy.
Major investments
However, the German elections of September have seen a combination of increased awareness of the climate crisis and the result of the German elections. Leaders of the putative ‘traffic-light’ coalition parties—the social-democratic SPD, the Greens and the liberal Free Democrats—have engaged in protracted negotiations since. They have agreed to make major investments in Germany’s creaking infrastructure and to boost public spending for the green and digital transition.
They are being put under increasing pressure by German business. In a major report published late last month, BDI, the German industry association, said the next government had to act quickly—triggering large-scale, low-carbon investments and setting the right framework to ensure the country would transform its economy to reach climate neutrality by 2045.
The report presented a comprehensive plan, with an emphasis on the importance of making crucial changes within the next decade. To reduce greenhouse gas emissions by 65 per cent by 2030, compared with 1990, BDI said additional investments of €100 billion were needed annually.
Joint borrowing
How can the coalition partners finance such ambitious plans, when they have already promised not to raise taxes or change Germany’s constitutionally-embedded ‘debt brake’ (Schuldenbremse), which severely limits new public debt? One suggestion is to use KfW, the state bank, to finance investments. This would be considered off the public balance. But more interesting and novel is a proposal for joint EU borrowing—for example via a European Commission bond programme, similar to that which the EU has launched for the recovery fund.
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Two benefits come with an EU facility. The EU pays very low interest on its common debt, while project-specific financing would come at higher rates. Secondly, this would be a solution also addressing the need for investment in the rest of the EU, as other member states wrestle with the conundrum of reining in rising national debts while investing in climate.
The politicians recognize that Germany alone would not be able contribute to the environment if it switched to green production technology. And it would be devastating for Germany’s economy if it were surrounded by countries which couldn’t afford to buy its electric cars and didn’t have the infrastructure to charge its hydrogen trucks.
Such a new borrowing programme would build on the success of the EU’s Recovery and Resilience Facility. It would do what Mitsotakis, Sánchez and Draghi are demanding.
Keynesian road
Joachim Lang (Director General of BDI) indicated that the association was open-minded to the idea EU borrowing to fund the huge public and private investment required to meet European climate goals. ‘To meet its climate targets, Germany needs additional investment of €860 billion until 2030,’ Lang said. ‘But other EU countries will also need to make similarly large efforts. SPD, Greens and FDP should therefore not discard discussing borrowing and financing at the EU level.’
This shift is important, because the FDP, the liberal party that opposes EU borrowing, is the strongest. It has always been proud of its closeness to business interests.
The outcome of the negotiations over the German coalition programme is not yet clear. However, the recognition of the severity of the climate emergency is driving centrist politicians and industrialists down a Keynesian path. The new government will likely give more leeway to KfW to get around the debt brake. The more innovative and dramatic step would be to call on the EU to create a new bond program.
In the months ahead, EU institutions will need to decide on the size and shape of such programs. But agreement on such a move would confirm that the European Green Deal was no one-off transaction—rather a first step towards Europe adopting Keynesian macroeconomic policies.
Social democracy is back
The tectonic plates move. The four decades of hegemony of neoliberalism and the ‘Washington consensus’ are drawing to a close. The peculiarly restrictive German ordoliberal version—pursued by EU institutions at great economic and social cost to southern Europe and immense political cost to the credibility of the European project—could be crumbling too. Sachs claims that these moves are a sign of a return towards social democracy.
Three huge questions arise. First, will this shift occur through social-democratic parties, or more likely by larger coalitions like in Germany? To revive social democracy, it will need to get rid of the frugalContinuation of a northern-European party’s austerity outlook.
Second, will the orthodox European right accept the climate-change agenda? Or will it succumb to the climate denialism exhibited by the nationalist right in the United States of America?
Thirdly, can the citizens’ and youth movements which have been so effective in foregrounding the environmental crisis find ways to intervene effectively in this battle? They will need to let go of anti-politics populism, reflexivity, and recognize the importance of maximising the European Green Deal’s potential and a follow up bond programme.
COP26 showed that politics is on a roll, despite its many flaws. For progressives, there’s plenty to play for.
Jon Bloomfield is an honorary research fellow of the University of Birmingham. He is also the author of ‘The politics of Green New Deal’ with Fred Steward. Political QuarterlySeptember 2020. Together they run a regular blogThe Green Deal.
