The EU must triple down on green investment

Russia’s war on Ukraine forces Europe to make some tough economic choices. Higher climate investment is a no-brainer, however.

 
Before Putin’s invasion of Ukraine, European policy-makers already faced tough choices. They needed to provide support to the incomplete recovery from the pandemic, and contain the increasingly stubborn inflation that was spreading from energy and some industrial goods to more and more sectors. Policy-makers also had to re-draft the EU’s fiscal rulebook to account for much higher public debt while making fiscal room for climate investment to reach Europe’s 2030 climate goals. The war makes Europe’s economic problems even more difficult to handle, especially inflation, with further energy and food price hikes underway. But Europeans now realise the fight against climate change is a national security issue, and shifting away from fossil fuel use could help limit inflation. EU governments should triple down on climate spending, and at the very least shield it from the fiscal adjustments to come.

There are good times and bad times to be a central banker. And then there is 2022. Before the invasion, markets had priced in a normalisation of energy prices over 2022 and a slow but steady widening of bottlenecks in some industrial goods, which have both contributed to inflation. Now, very high energy prices will be prolonged, while fading supply problems from the pandemic are giving way to new ones: cratering exports from Russia and Ukraine of wheat and other food, and some critical industrial commodities like nickel or neon.

This supply-side inflation is hitting consumer budgets, and starting to undermine growth, as industrial plants that need a lot of energy are shut down and their workers put on furlough schemes or laid off. Add the uncertainty that the war brings, and a slowdown of the European economy seems likely. A slowdown would usually prompt the European Central Bank (ECB) to lower interest rates or increase bond-buying programmes to stimulate the economy. But not, of course, when the inflation rate is already above target. Worse, such high inflation could become entrenched if firms and workers started to expect high inflation rates to continue and worked them into their prices, delivery contracts and wage agreements.

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Πηγή: cer.eu