“If we really want to prepare the world of tomorrow, we must be able to act on the things that matter most to people,” said European Commission President Ursula von der Leyen in her speech on the state of the union.
She made clear what is needed to achieve this: changing the EU treaty – a process that could take years and is politically strained – to give member states more financial leeway to invest in green technologies.
Tested by years of crises – pandemic, war, energy crisis and looming recession – it doubles down on lessons learned at the start of 2020: that it is governments, not markets, that are the last line of defense when crisis hits .
European governments are now scrambling to increase their grip on volatile energy markets.
“We are in war mode,” said a European diplomat on condition of anonymity, evoking a growing sense of accomplishment and collaboration among commission workers, who have been trained to eradicate complex crisis plans.
By imposing price caps on the revenues of certain energy companies and a “solidarity contribution” on fossil fuel companies, 140 billion euros are supposed to be transferred from market winners to vulnerable companies and households.
But just as Europe is planning another massive bailout for the economy, the European Central Bank is unloading its balance sheet and retreating into monetary austerity.
“The standoff between the ECB and the fiscal authorities has changed,” Frank van Lerven, senior economist in charge of the macroeconomics program at the New Economics Foundation, told EUobserver.
Before the pandemic, the ECB functioned as “the only game in town” –– the lender of last resort tasked with supporting the economy using market-based tools –– while governments cut public spending and social programs.
This system stimulated economic growth by increasing the value of asset and real estate markets, but increased inequality.
The Covid-19 has put an end to the dynamic. When governments launched massive support programs, they were backed by generous loans from the ECB, which led to a rapid economic recovery.
Von der Leyen has now called for sticking to the schedule. Much of the €700 billion in pandemic support funds has yet to be invested. But repeating such a program may not be an option for the current crisis, as the European Central Bank has raised the cost of borrowing by a record 75 basis points.
“In 2010 governments threw the bank under the bus [by retreating into austerity.] Now it’s the other way around,” van Lerven said.
€400 billion has already been earmarked by EU governments for support measures this year, and more is likely to be needed as energy prices are expected to remain high for the foreseeable future.
Raising the cost of borrowing now will make these support programs more expensive.
“It’s significantly affecting people and small businesses that have borrowed money,” van Lerven said. And as banks transfer their excess reserves to the ECB’s deposit facility, the ECB must pay more interest to the private banking sector, using interest payments from governments that would otherwise be returned to them.
“Higher interest rates will have a huge impact on government revenue,” he said. “And it will have no effect on gasoline prices.”
Crisis now, cuts later?
In the short term, this is unlikely to derail emergency spending in a crisis, van Lerven expects. But that could require public cuts later, threatening von der Leyen’s green agenda.
“Ursula von der Leyen has called for a [treaty change] to allow for more spending. But it is well known that this will not be possible,” he said. “This raises questions: if post-crisis governments need to cut spending, how are they going to invest in renewables?
The problem, he said, is the complete separation of roles between monetary and fiscal authorities.
“If you’re worried about inflation, governments can also raise taxes. It has the same effect on demand as a rise in interest rates. If they continue to work in separate silos, they will continue to work in different directions,” he said. “I sincerely think there needs to be more coordination.”