A Green Light for Public Investment
Europe urgently needs a fiscal-stimulus package aimed at bringing about much-needed economic transformation. But while the economic conditions for such an approach are favorable, the political conditions are less so, owing to the German and Dutch governments' misguided insistence on running large budget surpluses.
BERLIN/THE HAGUE – The eurozone faces immense economic challenges. Germany and the Netherlands – which together account for 35% of the monetary union’s GDP and have ample fiscal space – should take the lead in tackling them.
The biggest looming challenge – and not just for the eurozone – is the escalating climate crisis, which demands comprehensive economic restructuring, including an overhaul of energy systems, transport infrastructure, and agricultural practices. This process will be accompanied by another major challenge: adapting to the ongoing Fourth Industrial Revolution, characterized by the rapid development of disruptive technologies, such as artificial intelligence, nanotechnology, quantum computing, and network technology.
Such transformations do not happen by themselves. Governments must lead the way, by pursuing large-scale, coordinated, forward-looking public-investment programs.
Europe is already falling behind: both China and the United States are far outspending it on innovation, reflecting the central role of economics and technology in modern geopolitical competition. In today’s world, the only way for Europe to safeguard its strategic sovereignty is by rapidly increasing its own spending on innovation, education, and economic upgrading.
Europe would not have to wait long to begin seeing the fruits of such investment. Key economic indicators in the eurozone are now worsening, owing largely to factors beyond its control, such as the US-China trade war, tensions in the Middle East, and Brexit. A recession is a very real possibility.
The European Central Bank cannot be expected to take the lead in resisting a downturn, as it has done since the last crisis. With the ECB having largely depleted its monetary-policy arsenal – interest rates remain at historic lows – a repeat of the 2012 pledge by then-ECB President Mario Draghi to do “whatever it takes” to protect the euro would lack the credibility to reassure markets, as it did the first time around.
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What Europe needs instead is a fiscal-stimulus package that accounts for long-term imperatives. But while the economic conditions for such an approach are favorable – the Dutch and German governments can currently borrow at negative interest rates – the political conditions are less so.
Germany and the Netherlands have long resisted fiscal expansion. Both run large budget surpluses to keep their own public debt low, and push their eurozone partners to adhere to strict fiscal rules, even at the cost of growth and prosperity. They say that they are operating in eurozone members’ long-term interest. But what good will inheriting a low debt-to-GDP ratio be to future generations, if they are also saddled with an outdated economy and an escalating climate crisis?
The European Union’s fiscal framework, defined in the Stability and Growth Pact, comprises a highly complex set of rules and conditions, with countries facing corrective measures when their debts or deficits approach or cross a particular threshold. This is not a bad thing in principle: a currency union needs a mechanism to prevent countries from accumulating unsustainable debts.
But the singular focus on debts and deficits is misguided, because it ignores the asset side of the balance sheet. In fact, as it stands, deficit-ratio calculations treat consumption and investment in largely the same way.
To build an economy fit for the twenty-first century, Europe should reform its fiscal framework, so that governments, like private firms, distribute capital expenditures over their full maturity period. This would go a long way toward encouraging public investment, especially during economic downturns.
If reckless overspending is equivalent to running a red light, then failing to invest when conditions allow – let alone demand – is equivalent to stopping at a green one. And yet that is exactly what Germany and the Netherlands – two of the eurozone’s largest trucks – have done, and they are blocking other cars from getting past. Meanwhile, the world’s most powerful vehicles are speeding ahead, and road conditions are rapidly deteriorating.
It is time for Germany and the Netherlands to react to the green light, ideally in a coordinated fashion. In Germany, the Green Party has already proposed reforming the debt brake, as well as Europe-wide fiscal rules, to allow for more investment. In the Netherlands, the Green Party has long urged the government to use fiscal policy to accelerate the energy transition.
There is reason for hope: the Dutch government is now considering creating a public-investment fund worth billions of euros. But this is just a first step. The only way to get European traffic flowing again is for German Chancellor Angela Merkel and Dutch Prime Minister Mark Rutte to commit to a large-scale joint investment effort, focused on innovation, education, and sustainability.