The “Green New Deal”, i.e. the goal of making the European Union with its 27 member states climate neutral by 2050, is the largest project of the current EU Commission under Ursula von der Leyen. This will require up to one trillion euros (1,000 billion euros) in investments annually.

Even in good times, this is a huge task. But times are not good. Russia’s attack on Ukraine has shown Europeans that they need to spend more on their security, and there are also bottlenecks in energy supplies, inflation, a shortage of skilled workers and a weak economy.

How are they supposed to finance all this? Many EU countries have budget deficits and excessive national debt (see interactive graphics).

For the 20 members of the Eurozone with the common currency, the euro, the scope for further spending is even more limited. Clear rules apply to them: debt may not exceed 60 percent of annual economic output (gross domestic product, GDP), and the government budget deficit is capped at 3 percent.

These limits were suspended during the coronavirus pandemic, but they are now in force again. Countries that fail to meet them risk penalties.

The reform from February 2024 has not changed this. What is new since then is that the rules now allow more flexibility. Each country can negotiate with the EU when and how it will get its finances back in order.

After months of negotiations, the reform of the stability rules was a typically European but nevertheless good compromise, says Greece’s Minister of Economy and Finance Kostis Hatzidakis. But he follows up with a warning.

“It is the financial markets that force countries to exercise financial common sense. Anyone who ignores this will have to learn the lesson like we Greeks did in the last decade,” said Hatzidakis at the Brussels Economic Forum in May.

From 2010 onwards, Greece was so heavily indebted that it could no longer borrow money on the financial markets. The consequences were aid packages with strict austerity measures and a loss of sovereignty.

But not everyone agrees that fiscal prudence should play a major role at the moment.

Tea Jarc of the European Trade Union Confederation argues that spending on combating climate change is not irresponsible consumer spending, but vital investments.

“If we are not prepared to make the necessary investments but instead impose austerity measures, then the Green New Deal is clearly not a priority,” said Jarc in Brussels.

Similar debates are taking place in every EU member state on other issues, from necessary military spending to the restructuring of health and pension systems to the digitalization of the economy. So what should we do?

One way to ease the burden on the public sector is to increase private sector investment. But here too, Europeans are realising that they have fallen behind.

When it comes to population (450 million) and economic output (17 trillion euros a year), the EU is a giant. But when it comes to mobilising private capital, it is a dwarf.

“It is really a shame that we still do not have a fully developed common capital market in Europe,” complains Polish economist and EU parliamentarian Danuta Hübner.

“The US capital market is twice as big. Ours is fragmented and lacks liquidity.” The main reason for this is that each EU country sets its own rules, from savings to taxation.

“In public discussions, you won’t find a single European politician who is against a single European capital market,” says EU Economic Commissioner Paolo Gentiloni from his own experience.

“But when the national finance ministers come together, even the smallest steps in this direction are incredibly difficult. Because every country wants to hold on to its traditions and rules, to its own capital market supervision and its own savings tools.”

Another source of money would be for EU countries to take on joint debt. This was first tried out during the Corona pandemic to finance parts of a large economic stimulus package.

Now there are increasing calls for the EU to take on debt, even from the Commissioner for Economic Affairs himself. Only the name has changed: we are no longer talking about Eurobonds, but rather about “common tools for common goals”.

“Five years ago, this would not have been possible, it was considered a crazy idea in the EU,” says Gentiloni. “Now it is possible, and it is high time we use common tools for common investment goals.”

However, such demands are met with strong opposition in some EU countries, including Germany, the Netherlands and Finland. They fear that their credit rating could suffer if they go into debt with the community.

Julia Cagé, economics professor at the renowned Science Po university in Paris, therefore advises that when looking for sources of finance, one should not forget those who have more than enough money: the rich and super-rich in Europe.

Their proposal: a tax on large fortunes, levied directly by the EU. That would make it difficult for the rich to evade this tax. “We have to do it at the European level because there won’t be many who really want to leave the EU because of that,” Cagé told DW.

“Of course, many rich people would prefer not to pay this tax. But if it meant losing their EU citizenship, things would certainly look different,” the economist continued. Sanctions, controls and a functioning financial administration are therefore needed. “We should really get serious about this.”

Rich people should also be made to contribute more to the costs of fighting climate change than before. “Several studies, including those from the World Inequality Lab, have shown that the rich have a much greater impact on the environment than the poor,” said Cagé. More and larger cars and houses, yachts and airplanes, all of this leads to significantly greater CO2 emissions.

An environmental tax that increases with the increase in the carbon footprint could enable the rich to participate more appropriately in financing the energy transition – analogous to the progressive income tax, where tax rates increase with income, says Cagé.

It would be a step towards more fairness in climate costs. And it would be a signal to the less privileged that the fight against climate change is not a project of urban elites, says the professor. It is often perceived as such, she says. The result: support for populists, often from the right.

Author: Andreas Becker

*The article “EU finances: investing despite high debts?” is published by Deutsche Welle. Contact the person responsible here.