Towards a resilient green economy

Austerity measures will not boost growth, but investment in a green economy will.

Europe’s response to the crisis cannot be limited to fiscal austerity and structural reforms. A focus solely on deleveraging and structural reforms risks enormous economic and social dislocation. Europe therefore needs a plan to re-launch jobs and growth. Simultaneously, the current reform of the European economy must address long-term challenges, such as resource scarcity and climate change.

We face great global challenges, including resource scarcity and climate change. Europe has the world’s highest net imports of resources per person, making it highly vulnerable to resource shocks. An extra three billion people will enter the middle class by 2030 and will compete for increasingly scarce and costly global resources.

We are already seeing a ‘megatrend’ of growing scarcity, rising prices, and competition for resources. And there is evidence that these ‘megatrends’ had a role in the current crisis. For example, asymmetric economic reactions to rising energy and commodity prices over the period 2005-08 played a role in the European crisis. Some European countries were better equipped to ride out and even benefit from the commodity-price boom; others continued to grow only at the expense of increasing trade deficits, and public and private indebtedness.

Austerity problems

It is becoming increasingly clear that a focus only on austerity and structural reform will not create jobs, restore public finances, nor lay the foundations for mid-term prosperity. Investment in the ‘green economy’ can connect these two timeframes, creating growth and jobs now, and laying the foundation for European prosperity in the future.
 
In the short term, it is vital that governments kick-start growth. If not, the debt burden of a number of European countries will be unsustainable. Currently proposed structural reforms can bear fruit only in the longer term. Demand and business confidence are low, and most governments’ room for fiscal stimulus is limited. Nonetheless, near zero real interest rates on perceived ‘safe haven’ assets (UK and German government bonds) indicate that there is a dearth of productive investments, and a surplus of idle savings. In some parts of Europe, capital and labour are sitting idle.

Now is therefore the right time to invest in long-term productive assets and reduce Europe’s internal imbalances. Resource efficiency is a key driver of future economic competitiveness and resilience. There are substantial economic savings to be made, and the scale of transformation is huge. No other sector offers the same logic of scale, opportunity and necessity. Small public initiatives to address market failures can create large investments in Europe’s green infrastructure, creating local growth and jobs, and European benefits. For example, the ‘green’ portion of the 2009 US stimulus created was more successful at leveraging private funds than any other measure in the package. A European approach could involve a green infrastructure fund, with a dedicated revenue stream, which could leverage significant investments. 

Budget issues

Governments also need to consolidate their budgets, while promoting jobs and growth, and undertake structural reforms to enhance competitiveness. However, such reforms risk lowering demand and causing social unrest. Green tax reform offers the opportunity to address fiscal consolidation in a more coherent way. Shifting excessive labour taxes to under-taxed resource consumption can create employment incentives and improve real wages, boosting jobs and growth. Reducing labour taxes progressively according to income can also address broader equity concerns.

Europe already has extensive and positive experience with environmental tax reform, largely in Germany and Scandinavia. The European Commission estimates that one-third of eurozone states could boost jobs and growth by shifting taxes from labour to dirty resources.
 
Finally, there is also the opportunity to create the conditions for long-term growth. Price competitiveness is an important part of intra-European imbalances, but Europe cannot compete with emerging economies by focusing solely on price. Innovation is clearly central in the age of scarcity and competition. Europe needs to strengthen innovation to reduce resource imports and exposure to resource shocks, and lead the booming market for green and low-carbon goods and services. But competitive green industries cannot be created from scratch.

The European budget and national reform packages must prioritise support based on the capacities of industries to innovate, and the potential for European benefits. Public intervention can address market barriers to innovation, and release rapid cost and efficiency improvements. They should be applied to better fit with sound economic analysis and take account of a compelling European, positive-sum logic to innovation.

Europe cannot afford to lapse into misguided short-termism, preparing the ground for future crises. A coherent plan for a green and innovative economy should be central to the response. It offers the means for short-term job creation and growth, by building the European infrastructure, resilience and intellectual capital necessary to compete and prosper in the long term.

Nicholas Stern is a professor of economics at the London School of Economics and Political Science, a member of the UK’s House of Lords, a former chief economist at the World Bank and the author of the 2005 Stern Review on the effects of global warming on the economy. Teresa Ribera was Spain’s secretary of state for climate change in 2008-11. Laurence Tubiana is the director of the Institute for Sustainable Development and International Relations (IDDRI), a professor at SciencesPo Paris and a professor at Columbia University, New York.

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