Europe's fiscal rules, global net transfers, Spring meetings
Welcome to the first [test] edition of The Polycrisis Dispatch. Our plan is for this to be a weekly email that gives you an insight into what Tim and Kate are reading and thinking about developments in climate, macroeconomics, geopolitics, trade, industry policy and energy. It is sent out at some point on Thursday each week, depending on your time zone. You can email us at the.polycrisis@gmail.com and, if this was forwarded to you, sign up here.
This is what we’re looking at this week:
Europe’s new fiscal rules are rightfully unpopular
The global south is sending money north, and Larry Summers is being right
Spring meetings: At least the failures are being measured more accurately now
Europe’s fiscal rules: The last of the neoliberals
The economic orthodoxy can’t withstand the combination of security concerns, climate change, growing fear of de-industrialisation. Nobody wants to be peasants in the green world order.
Mario Draghi last week previewed his big June report on how the EU should remain competitive in a rapidly-changing world. He called for radical change as others (read China, and the US) are no longer “playing by the rules”. The bloc, he said, should coordinate on procurement, defense, and more - even if it means leaving some countries out.
Most importantly, other regions are no longer playing by the rules and are actively devising policies to enhance their competitive position. At best, these policies are designed to re-direct investment towards their own economies at the expense of ours; and at worst, they are designed to make us permanently dependent on them.
Echoing the “foreign policy for the middle classes” doctrine developed by key Biden administration figures, he said:
“We are currently largely leaving this space to private actors, while other governments are directly leading or strongly coordinating the whole chain. We need a foreign economic policy that delivers the same for our economy.”
One of the few areas where this had taken place, he said, was the Critical Minerals Security Act, but this could be extended to joint procurement and stockpiling. A new tool for the era of Stuff, more strategic stockpiling has been adopted by the US with its Strategic Petroleum Reserve and there are proposals to expand this to other commodities, such as lithium.
Energy security and industrial competitiveness are the new priorities for the EU, coming on top of its existing green targets and digital aspirations, but looming largest of all is security, which takes centre stage in the Commission’s 2024-2029 outlook.
Security and climate are increasingly the twin drivers of many countries’ strategies, and while the persistence of green transition goals are heartening, a militarised, fractious world will not decarbonize anywhere near as quickly as a more cooperative one. Retaliation and soon the whole world goes blind. France and Italy are already transgressing both the old rules and the new.
In the shorter term, the problem is how to fund any of this. The EU’s new fiscal rules simplify some aspects of the old rules, but they introduce complexity (a debt sustainability analysis) and provide little extra space for governments to make investments than the strict Growth and Stability Pact rules that they replace. As we explored in Carbon Budget vs Fiscal Budget in June 2023, political consensus to find other ways to raise revenue is hard – potential new taxation sources will inevitably fall foul of one country or another’s more powerful industries. Tax on Heavy industry? Opposed by Poland. Nitrogen? Dutch farmers. Shipping? Greece…
Jean Pisani-Ferry says the fiscal rules will have to be revisited because they are too restrictive; new or extended exemptions are possible, as in the financial crisis and the Covid pandemic. A Politico piece asking where the money will come from, in the absence of common debt issuance. The hope, expressed by former Italian prime minister Enrico Letta in a report on European competitiveness, is once again for magical private money to come in. Macron raised the prospect of the EU’s mortality in a lengthy speech at the Sorbonne, but elusive capital markets union to keep savings at home is his main fiscal prescription.
The excessive restriction on public investment has many dire effects. Gordon Brown points out – and others including Isabella Weber have said this for almost a year – fiscal restraint will stop European countries from offering much to swathes of citizens who’ve endured years of low or zero growth and rising cost of living. The bloc’s elites can hardly be surprised that voters are flocking to the right – not that they will fare any better than regretful Brexit voters.
But the elites are becoming increasingly impatient.
Necessity knows no law
ECB chief Christine Lagarde cited the French phrase "necessite fait loi" to “pooling our resources for defense and green transition”. The ECB would like to create a large slug of NextGen EU style Common debt issuance; Draghi’s June report is expected to support this.
Lagarde used the phrase in her prepared remarks at at Peterson Institute event, and also Asked by Shahin Vallee whether the EU might further its “Hamiltonian” with the one-off NextGen EU.
“Faced with the urgent need to defend ourselves, to stand for our values, we are prepared to transgress rules that seemed intransgressible… we might very well be in that kind of moment.”
The global south sends money to the north, and Larry Summers is being right
Larry Summers and NK Singh pointed out in Project Syndicate that The World Is Still On Fire, and developing countries are sending more money to the rich world than they’re receiving.
The shocking news that in 2023 global finance flows went “uphill” from the Global South to North was picked up broadly, including by Adam Tooze and Ann Pettifor.
Spring meetings: at least we’re measuring the failures more accurately now
A new $11bn of new capital [?] contributions for the World Bank was one clear outcome of the Spring meetings in DC last week. The funds, from 11 countries, will go to three new facilities: a portfolio guarantee platform, a hybrid capital mechanism, and a “Liveable Planet Fund”. The amount will leverage as much as $70bn, the Bank says. Although it is a derisory amount in the context of the numbers cited above – and the project increased financing needs and costs as climate impact advance[V20 projects $908bn servicing costs for its 48? over 2022-2030… vicious cycle of climate vulnerability etc] –
Daniel Munevar noted that, at least, there had been a shift in the framing of the big numbers. “less ambitious and more on implementation”. the numbers being discussed are now “total finance” rather than the headline numbers (for MDB & IMF loans) which tend to avoid the costs. Whether this translates to changes in actual flows is yet to be seen.
Links:
FT Big Read on South Korea – the hero of strategic industrial policy is one of the world’s wealthiest countries, but it has become complacent; overly dependent upon a few industries/chaebols; staid in many obvious areas of needed reform – from gender equality to taking advantage of clean energy for its planned new chip park, Yongin.
Technology transfer & green transition - Nature Sustainability. A comment by Benjamin Bradlow and Alexandros Kentikelenis about the necessity of rethinking intellectual property rights in a world pursuing green industrial growth and decarbonization.
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