A Credible Decarbonization Agenda Can Help Strengthen Europe’s Economy

Europe faces few sure-fire policy options to combat the next recession. As previously discussed, monetary policy, fiscal policy, or their combination through “helicopter money” all face serious limitations in the eurozone. Could a “Green New Deal”—massive investment in the transition to a carbon-neutral economy—provide a more promising option?

Of course, the case for climate action is not driven by macroeconomic stabilization concerns. Achieving carbon neutrality will take at least 30 years. European leaders plan to set themselves ambitious targets when they meet on December 12. Should they agree to a concerted, sustained green investment program, the resulting increase in aggregate demand could be exactly what the eurozone needs to fight off secular stagnation and acquire the resilience it currently lacks. The current negative long-term interest rate environment provides an opportunity to front-load investment and to finance it by issuing debt.

A sustained rise in investment over projected levels by at least 1 percent of GDP annually over the next decade is required for the European Union (EU) to reach the new, more ambitious climate objectives proposed by the European Commission. Such an investment would also significantly contribute to strengthening the European economy and making it better able to fight off the next recession. But investors will not embark on new, risky projects if they doubt that the European Union will be able to set the price of carbon at a level consistent with its plans. Investment will only materialize if the EU finds ways to overcome the credibility handicap its climate strategy is suffering from.

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Πηγή: piie.com