Draghi’s Report Confirms Europe’s Irreversible Decline

Averting a Crisis

When the euro crisis was young, some of us became convinced that a massive public green investment programme was necessary to save Europe from economic stagnation and from the ultra-right that would emerge as stagnation’s sole beneficiary.

A Proposal

In 2017, I put a figure on what was needed: up to 5% of Europe’s total income for investment in green energy and sustainable technologies. Since we knew then, as we know now, that neither the European Union’s member states nor the EU’s budget could afford this sum, I proposed a novel way to finance it through European Investment Bank (EIB) bonds guaranteed by the European Central Bank (ECB).

The Rejection

When I presented this idea to the committee of European finance ministers and central bankers in 2015, it was never rejected because it was never debated.

The Green New Deal for Europe

Not giving up, in 2019 I ran for the European Parliament elections in support of DiEM25’s Green New Deal for Europe, arguing that the 5% green investment campaign could be “for progressives what immigration and racism is to the rightists.”

The Underfunded Green Deal

Instead, the incoming European Commission (EC), under Ursula von der Leyen, adopted a hopelessly underfunded so-called Green Deal that was macroeconomically insignificant and, as I had warned, environmentally duplicitous.

The NextGenerationEU and the Death Knell for a European Fiscal Union

Then came Covid-19. Europe’s leaders responded with a recovery fund, formally known as NextGenerationEU. As I predicted, the fund was not only another macroeconomically irrelevant programme but also the death knell for any prospect of a European fiscal union with which to fund the investments essential to Europe’s future.

The Draghi Report

EU officials, insisting that NextGenerationEU was all that Europe needed, rejected my proposal for public investments in the order of 5% of European income as “fiscally irresponsible” and “politically infeasible.”

Draghi’s Vindication and Devastation

Earlier this month, Mario Draghi, the former president of the ECB and former Italian prime minister, delivered a much-anticipated report to von der Leyen, now at the beginning of her second term as EC president. Its theme? Unless Europe takes certain steps, “it will have lost its reason for being.”

A Proposal Reborn

And what steps must Europe take, according to Draghi? The central pillar of his report is a proposal that 5% of Europe’s total income should fund a public green investment programme, using new common debt. Immediately, journalists from across Europe called me to ask if I felt vindicated. “No, I feel devastated,” I replied. “But,” one of them insisted, “isn’t late better than never?”

The Opportunity Lost

No, it isn’t, because for Europe, it is not merely late, but too late. The reason goes beyond the (at least) three trillion euros (US$3.3 trillion) of investment in green technologies that Europe has failed to make since 2019, thus causing it to fall far behind China and the US.

The Inflationary Dynamic

Simply put, the opportunity to channel 5% of Europe’s income into green investments, even at this late stage, is now gone. It has evaporated, disappeared. While biding its time, Europe shifted from a deflationary dynamic to an inflationary one, and this has closed the window of opportunity that was open until 2020. Let me explain.

The Failed Proposal

My 2019 proposal called for the EU Council to give the EIB the green light to issue around a half-trillion euros worth of its own 30-year bonds annually to fund green investments across Europe. At the time, the ECB was already buying bonds to defeat the deflation wreaking havoc in Germany (for example, by pushing savers’ interest rates to zero and below).

The Closed Window

Today, it is too late to do anything like this. After years of negligible investment, Europe’s supply side shrank. As a result, inflation, triggered by the pandemic, forced the ECB to sell bonds – thus closing the window for large ECB-backed EIB-bond issues.

The Sole Alternative

Nor can the EC issue its own bonds to the level of 5% of Europe’s income, as it did in order to fund NextGenerationEU, because these bonds are mistrusted both by investors and by member-state governments.

The Federal Solution

The sole alternative for funding the necessary investment programme would be a proper federation with a democratically elected federal government and a federal budget at least 30 times that of the current EU budget, plus the power to borrow and to tax.

The Inevitable Decline

Unfortunately, this is precisely the solution that the inane handling of the euro crisis and the pandemic has pushed into the realm of political impossibility.

Conclusion

In short, Draghi’s report will be honoured in the breach, not in the observance. Paying lip service to it, the EC will repurpose some of the unspent recovery fund. In reality, it will bury the report’s main recommendation. Does Draghi not know this?

FAQs

* What was the proposal for a massive public green investment programme?
Answer: Up to 5% of Europe’s total income for investment in green energy and sustainable technologies.
* What was the response of EU officials to the proposal?
Answer: They rejected it as “fiscally irresponsible” and “politically infeasible.”
* What is the central pillar of Draghi’s report?
Answer: A proposal that 5% of Europe’s total income should fund a public green investment programme, using new common debt.
* Is it too late for Europe to implement the necessary investment programme?
Answer: Yes, it is too late, as the opportunity has evaporated due to the shift from a deflationary to an inflationary dynamic.