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The Green Tax Revolution Europe Needs

European policymakers need to bolster short-term demand while simultaneously accelerating the shift toward carbon neutrality. The solution lies in a bold green tax reform, combined with generous compensation via the tax and benefits system and cheap funding to help firms and households adjust.

LONDON – On July 17-18, European Union leaders will meet in Brussels to try to reach an agreement on the bloc’s proposed €750 billion ($852 billion) recovery fund. Member states currently disagree on several issues, including the shares of grants and loans in the package and which conditions, if any, should be attached to the disbursements. But once leaders clinch a deal, the most important question will be how member states should spend the money. The answer is far from obvious.

Governments have two potentially conflicting objectives. First, European economies need a demand boost to compensate for the restrictions on “social” forms of consumption (restaurants, bars, concert halls, and the like) and to support spending by people whose incomes have fallen. In a recent working paper, researchers at the ifo Institute in Munich used surveys of German firms to show that COVID-19 is currently having a deflationary impact. This suggests that constraints on demand are greater than those on supply.

Second, European countries need to embrace digital opportunities more fully and make swifter progress toward carbon neutrality over the coming decade. The European Commission has therefore proposed that member states spend a sizeable chunk of the recovery-fund money on investments and reforms that promote long-term growth while fostering green and digital transitions.

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