European “Recovery Bonds” and “Recovery Fund”? Yes, if they are green and work for the most impacted !

In an unexpected twist, German Chancellor Angela Merkel signaled her openness to consider the issuance of European joint debt. This switch, a few days before a videoconference between EU leaders on Thursday April 24th, makes “Recovery Bonds” and a “European Recovery Fund” more and more likely options.

These measures could be a real plus in building a strong and sustainable recovery, away from austerity… As long as they aim at financing the transition to a decarbonized economy – with a fossil fuel phase-out – while increasing solidarity. To build a desirable shared future, Recovery Bonds or Funds need to be green and work for the most vulnerable people and States.

“Eurobonds” are a recurring issue in European politics, emblematic of the imaginary divide between a South that spends lavishly and a tight-fisted North. But, facing what can only be a lasting economic recession of historical proportions and struggling to find between 1 and 1.5 trillion euros, the epic divide could be bridged.

Common debt: where do the EU stand?

EU leaders are preparing to discuss how to finance the “after” of the crisis. The political dynamics call for innovative and common European means to provide long-term financing, beyond and after EU and Member States’ emergency responses. While an increased EU budget is likely, it alone won’t be sufficient to meet current economic and social challenges. Other options need to be considered.

Overall, nine countries, including France and Italy, support common debt issuance while Germany, the Netherlands, Finland and Denmark strongly oppose it.

In this context, Merkel’s recent statements could be a gesture of good faith toward the advocates of common debt. At the same time, Valdis Dombrovskis put forward an extra-budget fund that would come on top of the EU Budget. It would be financed by borrowing on the market. To avoid excessive debt, Spain is pushing for common debt fund based on grants.

For these options, European Treaties do not have to be reformed (a move that Merkel would not allow). Article 122 of the Treaty on the Functioning of the EU already allows the Commission to create such solidarity mechanism in time of crisis. It has already been used for the European Stability Mechanism and the new “SURE” program.

Common debt: to what end?

First, we need to correctly assess for how long these measures will be in place. Unlike the emergency response that Member States, the EU and the ECB launched, today’s choices are about the long term recovery. We are no longer talking about reducing the damages of the Covid storm, but about rebuilding the EU in its wake.

The next EU Pluriannual Budget will cover budgets from 2021 to 2027. “Eurobonds” or “Recovery Bonds”, with a fund like the ones from the French or Spanish proposals, would take between one and two years to set up.

The question for these tools is not so much “how fast can we act” but rather “how will we be able to sustain the financial cost of the recovery”. This assessment leaves us with a choice to make. Since we are talking about the future of our societies and economies, what direction do we want them to take?

The Covid and climate crisis have common roots – worldwide environmental deterioration – and many similarities:

• They embody uncertainty and unpredictability which contribute to inaction.
• They exacerbate inequalities and structural weaknesses.
• They are a worldwide phenomenon that deeply impacts our social and economic systems as a whole.
• They are at the crossroad of scientific and political issues.

The Covid crisis gives us a preview of what future climate-related crisis could look like. Then, no matter the point of view we take, the covid crisis shows that climate and social measures need to be tackled together. Failing to do so will expose us to further Covid-like crisis, at an unbearable human, social, economic, and financial cost.

Whether the EU chooses to create “Recovery Bonds”, an extra-EU budget or both, the additional financing raised through these tools must be allocated to the green transition. This means supporting the phase-out of fossil fuels and increasing financing to green activities.

Any “green recovery” requires a rapid fossil fuel phase-out and divestment from the most polluting activities

If calls for “a green recovery” are gaining momentum, they focus on financing green activities and forget the unavoidable stop of the most polluting activities. These halfway proposals would not even bring us close to keeping global warming well below 2°C.

• A coal phase-out by 2030 in OECD and Europe and by 2040 worldwide is a prerequisite to achieve international climate objectives.
• Burning all coal, oil, and gas reserves already in production would exhaust a 2°C carbon budget, while burning in-production oil and gas alone would take us past 1.5°C. Despite this, governments and companies currently plan to extract 120% more fossil fuels by 2030 than what a 1.5°C carbon budget allows.
• Global emissions must be reduced by roughly half of 2010 levels by 2030 and further reduced to effectively zero levels by 2050 to have even a 50% chance of limiting global warming to 1.5°C.

Even the most cynical champion of the current economy should lobby for a rapid fossil fuel phase-out: the cost of climate inaction could be 6 to 10 times the cost of the stabilizing global warming to a Paris Agreement level.

A “Green Solidarity” Fund for a real “green recovery”

Given previously discussed elements, we propose key principles that could guide the set up of a “Green Solidarity Fund” allowing for the issuance of common debt to overcome the shared challenges of recovering from the Covid and building a sustainable society and economy, that will protect us from similar disasters.