In his essay The Idea of Europe (2004), George Steiner sought to characterize the essence of our continent. According to him, beyond cafes and intellectuals, an essential dimension of European identity is walking: Our lands are walkable and our continent can be crossed from end to end. “European men and women have walked their maps, from hamlet to hamlet, from village to village, from city to city. More often than not, distances are on a human scale. […] There are stretches of arid, forbidding terrain; there are marshes; alps tower. But none of these constitute a terminal obstacle. […] Europe has no Death Valley, no Amazonia, no ‘outback’ intractable to the traveller.”
In this dossier, it is precisely this essence of Europe that we seek to preserve, asking ourselves what policies could protect our lands. We thus bring forward a series of proposals for Europe to be at the avant-garde in economic and climate policy. They all respond from different angles to a crucial question: How to avoid having to choose between fiscal and planetary exhaustion? In the current context, the terms of the debate could even be specified. As an agreement has just been reached on fiscal rules that will significantly restrict our budgetary room for manoeuvre, how can we ensure that the goal of climate sustainability is not sacrificed on the altar of public finances?
This question is not only of concern to French experts, and we stress that it should be at the heart of debates around the European elections. We have therefore brought together French, as well as German and Dutch researchers who share this concern, to formulate joint proposals. The question of reconciling climate, social, and economic mandates must be addressed more directly, which can be made possible by constructing symmetric European rules, establishing a European Climate Fund with a fair distribution of resources, making monetary policy greener and more democratic, and finally ensuring that the sectoral restructurings related to the transition are acceptable by the public through the implementation of European wage insurance.
These issues are not only technical and economic but at the heart of political considerations. This is why it is essential to engage in a transparent debate on these issues, which will eventually influence “the idea of Europe”.
This dossier is structured around five themes and six policy proposals.
1. Initiate a new round of negotiations to create symmetric European rules that reconcile economic and environmental sustainability
The first two contributions constitute a diptych: climate rules and means to make them enforceable.
As negotiations on the Stability and Growth Pact have recently concluded, it is time to move to the next stage: agreeing on complementary rules aimed at ensuring compliance with our emission reduction targets. Together with the German think tank Dezernat Zukunft, we advocate the launch of a new negotiation cycle to create symmetric European rules, which are as concerned with economic as with environmental sustainability.
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European countries face a dual threat of fiscal and climate crises. They are lagging behind their emission reduction commitments, but the accumulation of crises has also left a legacy of higher public debt levels. The new European fiscal rules aim to improve the fiscal sustainability of European countries, but what will be the consequences for the fight against climate change? Member States may be forced to reduce their investments in decarbonising their economies, even as the coming years are particularly critical if we want to meet our climate goals.
In this text, we remind that emission reduction targets are no less a European legal requirement than those for debt reduction. European fiscal rules are more restrictive than European emission reduction commitments because the latter are not associated with explicit sanctions and follow-up procedures as strict as the fiscal framework at the European level. There is thus an implicit hierarchy between emission reduction and debt reduction objectives, in favour of the second.
This Franco-German contribution, therefore, advocates the launch of a new negotiation cycle to restore a balance of objectives. The aim of this negotiation would be to establish climate rules, complementary to the existing European fiscal rules. The economic cost of climate default and the presence of externalities between generations and Member States mean that these climate rules are just as legitimate as the existing fiscal rules.
What could climate rules look like? Climate rules could define result-oriented obligations. Emission reduction trajectories would be set, and Member States would need to publish plans detailing how they intend to invest to meet their long-term reduction targets. They could also define means-oriented obligations by establishing investment rules in the decarbonisation of economies, for example, by setting a minimum percentage of GDP to be invested each year.
But the very form of the rules must also take into account their credibility and acceptability. We explore several mechanisms that would ensure compliance: either financial penalties modelled on the Stability and Growth Pact or the non-payment of resources from a European Climate Fund. The creation of symmetric climate rules also involves a reform of European carbon governance and the involvement of Independent Fiscal Institutions like the “Haut Conseil des Finances Publiques” in France to assess Member States’ action plans.
This proposal is the first part of a diptych. We believe that Europe should not merely adopt a punitive logic (via rules) but also give itself the resources to achieve its ambitions by creating a European Climate Fund to ensure compliance.
For these rules to be realistic, the negotiations must therefore cover two aspects: the total amount of resources to be mobilised in the EU, their origin, and their allocation; as well as the definition of credible climate rules that could be accepted by the Member States. Initiating these negotiations will truly confront one of the thorniest questions in economic policy today: how to resolve the dilemma between planetary and fiscal exhaustion?
A contribution by Cyprien Batut, Jonas Kaiser, Max Krahé, and Clara Leonard
2. Establish a European Climate Fund
Member States of the European Union face contradictory objectives that the creation of a European Climate Fund would help mitigate, if not solve. On the one hand, they must make the necessary investments to meet their emission reduction targets and achieve net-zero greenhouse gas emissions by 2050. On the other hand, they are constrained by the European fiscal rules and rising interest rates, which limit their borrowing and financing capacities. Caught in this vice, governments have, until now, preferred to neglect their climate ambitions and prioritise fiscal sustainability. In France, the 2.1 billion euros cut of funds for environmental projects to meet the budgetary targets is a striking recent illustration. To address this dilemma that endangers our ability to meet the climate challenge, we propose the creation of a European Climate Fund. Initially tasked with financing the transition, it could also incorporate European sovereignty considerations and represent a step towards a united Europe around common challenges.
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Estimates of the current investment deficit to reach our decarbonisation targets agree on the need for significant additional resources: a lower bound estimate of around 2 to 3% of EU GDP per year. These needs arise in a context marked by an agreement on new European fiscal rules just as restrictive as the previous ones, and the end of the financing linked to the Next Generation EU recovery plan by 2026. In total, these constraints would require Member States to cut their budgets by an additional 2.5% of GDP within four years, which seems hardly feasible.
The necessary investments for the transition are not all profitable, and some, by their very nature, have a supranational scope and are related to European public goods. The European Climate Fund could direct its financing towards these investments that are currently insufficiently covered by both the public and private sector. Joint EU financing would have numerous positive effects: it would enable economies of scale, respond to the concrete demand of European citizens to see projects financed at the European level, coordinate and plan the transition effort, and ensure that all necessary expenses are made while reducing the fiscal burden for Member States. For this, subsidies should be favoured. However, other tools could also be considered, such as concessional loans to Member States at rates lower than the market rate, and guaranteed loans (similar to those from the European Investment Bank).
To finance the European Climate Fund, it will be necessary to think about the EU’s own resources as well as national contributions by Member States based on criteria adapted to the challenge. While new own resources for the European Union could be considered, they might not be sufficient or politically too costly to implement. Therefore, common financing by Member States will be necessary. A negotiation on the size of the contribution by Member States will then be needed to determine the criteria according to which the funds will be provided and allocated. We analyse different criteria that could be considered, which would not merely reflect the economic weight or population of these different states. The Climate Fund could be primarily financed by Member States with the highest fiscal capacities and the largest historical greenhouse gas emissions; it could particularly benefit states whose capacities are too limited to adequately meet the challenge of the green transition and who have the most significant financing needs to achieve their emission reduction targets.
Initiating a discussion on a European Climate Fund will ultimately enable the establishment of an orderly and transparent financing strategy for the green transition that seeks to resolve the dilemma between planetary and fiscal exhaustion. Indeed, the distribution of the burden between the national and European level, between Member States, and between governments, businesses and households must be the result of a comprehensive dialogue. It must lead to the definition of a transparent financing strategy, avoiding systemic risks for Europe, whether from excessive budget deficits or climate inaction. This text also highlights the necessity to develop an estimate of financing needs for each European country with a harmonised methodology to ensure planning and develop a systemic vision.
Finally, given the current geopolitical context, the creation of this structure could serve to finance other expenses that could pose an existential risk to the European Union in the future. Defence and sovereignty issues will weigh on the EU’s future. While this proposal focuses on climate investments, a European Climate Fund could integrate these objectives, which, in some respects (such as energy), go hand in hand with climate objectives.
A contribution by Jérôme Creel, Fipaddict, Clara Leonard, Nicolas Leron, and Juliette de Pierrebourg
3. Rethink the policy of the European Central Bank
This theme around monetary policy covers two chapters of this dossier.
3.1 Strengthen monetary and fiscal policy coordination
In Chapter 3, Sebastian Diessner presents a series of possibilities to strengthen the coordination of fiscal and monetary policy. Since its creation, the ECB has been sceptical about coordinating its policies with other decision-making bodies of the European Union, but over the years, particularly since the Eurozone crisis from 2009 to 2014 and the COVID crisis of 2020, this stance has become increasingly untenable.
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3.2 Make the ECB greener and more democratic
In Chapter 4, researchers Éric Monnet and Jens van ’t Klooster offer two proposals to make the monetary policy of the ECB greener and more democratic.
On 2nd December 2023, during the COP 28, French President Emmanuel Macron suggested “the establishment of a green interest rate and a brown interest rate”. The authors show that sector-specific interest rate policies have already been implemented by some central banks and that they have been compatible with preserving independence and their price stability mandate.
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However, technical reflections on policy tools cannot do without a debate on associated institutional reforms. Defining the role of the ECB in the context of the green transition must go hand in hand with creating a European Credit Council to strengthen democratic control and legitimacy of the policies influencing credit conditions in Europe. This Credit Council would be a deliberative body that would enhance the expertise and legitimacy of the European Parliament to control independent authorities (ECB, European Investment Bank, etc.) and would be a venue for thinking about coordination and the broad directions of European credit policy.
4. Create a European wage insurance
Environmental policies have concentrated costs, but diffused benefits, particularly in the labour market. This makes the question of their acceptability particularly thorny. This text proposes the creation of a wage insurance at the European level to compensate workers who lose their jobs due to environmental policies, by subsidising their wages if they find a lower-paying job than before. It would fill a gap in the employment policies of most European countries and would be superior to alternatives that today range from early retirement to retraining at all costs. Its net cost is expected to be limited, especially as it increases the benefit of returning to work and would thus save money on unemployment benefits.
A contribution by Cyprien Batut
5. Transform the Common Agricultural Policy
The Common Agricultural Policy is one of the oldest European policies: it has enabled Europe to increase its food production and ensure its self-sufficiency since the 1960s. It has been the subject of many criticisms, both today and in the past, whether for its complexity or its inability to redirect agricultural systems towards more sustainable production methods, to meet societal expectations in terms of food supply, or to guarantee a decent income for farmers. This has led to several reforms, notably the integration of environmental criteria since 2014. However, in mid-March 2024, the Commission proposed changes of the CAP rules in response to farmer protests, to revisit these criteria. This political rollback raises questions about the evolution of this historic European policy; this text aims to make several proposals to turn the CAP into a real lever for transitioning the European food system towards a more resilient model, both economically and ecologically.
A contribution by Julien Fosse