Lindner’s position on fiscal rules stands in the way of a just transition

As EU finance ministers meet in Brussels, they should not fall for the German finance minister’s hawkish position, or they will jeopardise European investments in the green transition and risk social tensions, argues Sebastian Mang.

Sebastian Mang is a senior policy officer at the New Economics Foundation.

EU finance ministers will meet on Thursday (9 November) to discuss EU fiscal rules. German Finance Minister Christian Lindner is pushing for unnecessarily strict budget rules that could lead to austerity measures for many member states. This economic vision could lead to cuts to already insufficient green investment budgets across Europe, but public investments are crucial to speed up and deliver a socially just transition.

The urgency of the climate crisis requires decisive action. According to the ECB, “frontloading green investment significantly reduces costs and risks facing households and firms”. But as a McKinsey analysis shows, there is no business case for 60 per cent of all green investments needed by 2030. Public investments are, therefore, essential to deliver the transition.

Unnecessarily restricting green public investments is doubly counterproductive. According to the International Monetary Fund (IMF), green spending has an outsized multiplier effect compared to other public investments. Every euro invested in sustainable and climate-friendly technologies has a particularly positive effect on economic development, reducing a country’s debt compared to its GDP.

The market alone will not stop climate change.

This logic is increasingly evident on the other side of the Atlantic. Jake Sullivan, security advisor to the Biden administration, explains that the logic behind the Inflation Reduction Act is that markets do not always allocate capital productively and efficiently.

Instead, he says, the belief in trade liberalisation to help the US export goods has led to an exit of jobs and economic capacity. He stresses that governments should invest in their own financial and technological strengths as a way out.

The failure of market mechanisms to address the existential challenges of our time is becoming increasingly apparent. The COVID-19 pandemic and the energy crisis that followed Russia’s invasion of Ukraine have highlighted the consequences of this approach, exposing critical shortages of essential supplies such as face masks, medical gloves, and semiconductors. Moreover, the increasing extreme weather events have exposed the market’s inability to shield us from the effects of climate change.

Restricting government action through arbitrary fiscal rules would be utterly irresponsible at this time, as it would hinder needed investment towards a socially just transition. We need less market fundamentalism and a stronger role for democratic public investment in green industrial policy and green public services.

Fiscal consolidation does not necessarily reduce debt

“Borrowed money can’t generate growth in the long run”, argues Lindner, which is factually incorrect. A recent analysis by the New Economics Foundation found that the most indebted countries in the EU could increase their green investments by at least €135 billion and still reduce debt by the 2030s due to the outsized multiplier effect of green investments and its positive effect on growth.

European fiscal rules during the euro crisis were supposed to reduce member-state debt, but they failed on their own terms and in the years following the global financial crisis, government spending was curbed. As a result, demand fell, and economic output declined.

Even the IMF now says that, on average, fiscal consolidation does not reduce the debt ratio but can instead increase the debt burden.

Those European countries that pursued more robust austerity policies and cuts in public spending ended up with higher, not lower, debt levels due to lower growth. In fact, unlike our household budgets, it is generally true that when a government reduces its spending, it also reduces its revenues.

Limiting public investment leads to greater disparities within Europe

Contrary to the EU’s goal of economically weaker countries catching up with economically stronger countries, we have observed the opposite since the euro crisis: a widening gap in economic performance between the north and south. Austerity measures contributed significantly to exacerbating this divergence.

The EU’s current economic policy has the potential to further worsen this trend. It will allow richer and less indebted countries to invest significantly more in their economic development than those constrained by arbitrary budget rules. It may let richer countries adapt to changing economic realities, drive technological innovation, and adopt sustainability initiatives while less advantaged countries struggle to keep pace.

Austerity is politically dangerous

Lindner’s austerity policies limit the ability of states to take necessary action in the face of the urgent challenges of climate change and biodiversity loss. Insufficient action now will cost us and our state budgets much more in the long run due to the immense costs of droughts, floods, and climate adaptation than investing now in a resilient economy.

Moreover, austerity polarises and favours right-wing populist parties like the Alternative für Deutschland. Austerity policies fuel the multiple crises of our time instead of strengthening solutions and solidarity.

Lindner’s position should, therefore, be resisted. Instead, governments should back quality green investment clause that ensures that all member states can invest to accelerate the transition and make all green and cost-cutting solutions available.