Only nine countries will meet the EU’s climate goals under reformed fiscal rules, new report warns

Only nine out of the 27 member states of the European Union will be able to have enough leeway to accommodate the investments needed to achieve the bloc’s climate goals after the introduction of the reformed fiscal rules, a new report has warned.

The findings, released on Friday by the New Economics Foundation, a British think tank, illustrate a long-standing conundrum of the European Green Deal: how to unleash the billions required to decarbonise the entire economy while simultaneously complying with legally-binding caps on the budget deficit and government debt.

The path to finding that balance seems to be a privilege reserved for just a few, the study shows.

Denmark, Ireland, Latvia and Sweden will be the only EU countries with the fiscal space necessary to reach the bloc’s overarching climate target and fully respect the terms of the Paris Agreement, while Bulgaria, Estonia, Lithuania, Luxembourg and Slovenia will manage to achieve the former but not the latter.

This will leave some of the largest European economies, such as France, Italy, Spain and the Netherlands, woefully under-resourced to meet the climate agenda in time.

Under the Green Deal, the EU has set a compulsory target of slashing greenhouse gas emissions by 55% before the end of the decade, an ambition estimated to demand an eye-popping EUR520 billion in additional investments on an annual basis.

The New Economics Foundation uses the EUR520-billion figure as the baseline for its estimations but also considers extra investments for social infrastructure and the digital transition, which combined would represent 2.3% of the EU’s gross domestic product (GDP).

The report then takes a closer look at the EU’s fiscal rules, which mandate all member states keep their budget deficit below 3% and their government debt below 60% in relation to GDP.

These thresholds, which date back to the late 1990s, are currently exceeded by a large number of countries after years of heavy spending to cushion the worst effects of the COVID-19 pandemic, Russia’s invasion of Ukraine, soaring inflation and record-breaking energy prices.

The European Commission presented this week its long-awaited proposal to reform the rules, based on mid-term structural plans that each capital will negotiate with Brussels to gradually sanitise their public finances. The review is meant to provide governments with greater ownership and flexibility, but the latest proposal introduces a series of mandatory benchmarks to ensure debt levels are visibly lower at the end of the four-year plan, regardless of a country’s specific circumstances.

According to the New Economics Foundation analysis, neither the present rules nor the proposed reform will be enough to inject sufficient oxygen for climate investments, leaving a majority of member states in a bind to reconcile the Green Deal with fiscal surveillance.

In fact, five countries – Austria, Cyprus, the Czech Republic, Malta and, crucially, Germany – will be at pains to muster the bare minimum levels of green investment and stay below the deficit limit.

Meanwhile, the remaining 13 member states, representing 50% of the bloc’s GDP, will simply fail to strike a balance between the climate and fiscal tasks. Even states like Poland, Romania and Slovakia, whose debt levels are already below the 60% mark, will fall short because their carbon-intensive economic models require even greater financial support to transform.

“These governments will have to choose between cutting public spending, increasing taxation or having insufficient green investment,” Sebastian Mang, co-author of the report, told Euronews.

Mang spoke of a “contradiction” between the “real-life economics” of climate change, which compels governments to reinvent their entire societies, and the EU’s “overly restricted” fiscal rules, which in his view set “arbitrary caps” on deficit and debt.

Reacting to the report, a spokesperson for the European Commission rejected the existence of such contradiction and refused to further comment on “any simulations” about the proposed reform.

“The very raison d’?tre of our proposal to reform the economic governance framework is to put two objectives on par: on the one hand, to effectively reduce debt through a gradual, realistic fiscal consolidation and, on the other hand, to boost sustainable and inclusive reforms and investment that promote our common EU priorities, such as the European Green Deal,” a spokesperson said on Friday.

Brussels had previously said that a “large amount” of the EUR520 billion needed to slash emissions by 55% would come from the private sector, something that, in principle, would exempt governments from footing the hefty fill on their own.

“Public investment is really central to scale up,” Mang said.

“We shouldn’t be scared of acknowledging the important role that public investment plays in creating and shaping the market towards a fairer and more sustainable economy.”

While Mang admitted the Commission’s reform based on country-specific was going in the “right direction,” he suggested two key changes to the draft text.

First, the so-called “golden rule,” a legal exemption to spare spending on climate projects from the debt and deficit calculations. And second, a permanent facility funded through common EU debt to ensure all countries, especially highly indebted ones, have a line of credit to pay for the green transition.

The Commission has already rejected the first proposal, arguing it was “too controversial,” while the second one, which would imply fresh borrowing, has been categorically – and repeatedly – shut down by frugal countries like Germany, the Netherlands, Denmark and Finland.