The European Commission put a cost on its Green deal estimate. It’s €620 billion. The EC has allocated €82.5 billion. Guess what...
2015 Image from 2015 climate conference via Associated Press.
Unfunded Green New Deal
If we had to pinpoint a single tragic error in the modern history of European integration, it is the moment sometime during the euro crisis when pro-Europeans gave up on eurobonds and a fiscal union. Instead, they adopted Angela Merkel as their new role model, the pragmatist-in-chief. What made their plight even more tragic was the mistaken idea that they were in possession of a clever and legally watertight funding mechanism, which gave rise to the Sure unemployment reinsurance programme, and later the recovery fund.
FAZ tells us this morning why this strategy is not working. The Commission has put a figure on the annual costs of the Green deal, a whopping €620bn. The Commission itself has only allocated €82.5bn towards this, via the social climate fund. You can add a few euros here and there from various other pots, but this is not going to come close. Thierry Breton wanted a debt-financed €350bn funds for green investments, to match the size of the US inflation reduction act. That would have done the heavy lifting. But this was killed off by member states.
When the EU launched the recovery fund in 2020 we expressed scepticism about whether it could form a blueprint for future lending. There is simply no consensus in the EU for a perpetuation of a financial instrument that is ultimately secured by the member states themselves. What is also not helping is that the financial markets are not bestowing top-notch valuations to EU-issued debt for the simple reason that it is not sovereign. You can package a bunch of mortgages into a collateral debt obligation. But you can’t repackage or reclassify sovereign debt. What characterises a sovereign borrower is the power to raise funds through taxes. For as long as the EU is reliant on the kindness of member states, it is not in a position to fund some of these giant programmes. What the EU needs, dare we say it, is the real thing: a eurobond. Or else, it has to admit that it cannot do as much as it wants, for lack of funds.
The Green deal is not the only unfunded programme. The project for a greater geopolitical role for the EU is in the same category. In addition, there is the cost of the reconstruction of Ukraine, which the Commission puts at €384bn a year.
Since there is no way they can fund this out of their own resources, we believe that more smoke-and-mirror tricks are on the way. No prizes for guessing where this will leave the substance of the Green deal.
The EU’s climate deal is 13 percent funded. How’s that going to work?
The Eurobond Idea Surfaces Again
Eurointelligence founder Wolfgang Münchau comments “What the EU needs, dare we say it, is the real thing: a eurobond.”
I disagree with most of Münchau’s ideas. He wants commingled budgets and a United States of Europe. Nonetheless, I like Münchau. He is very straight shooter. He also sees the issues and does not sugarcoat them.
The Euro is fatally flawed, and other than freedom of movement, the EU is mostly a failure. There are too many cultural differences, work rule discrepancies, productivity differences etc., for the Euro to ever smoothly work. The Italian banking system is insolvent and the Northern states led by Germany do not want to bail out Italy or Greece, neither of which belonged in the EU under budget rules anyway.
French president Emmanuel Macron wants a European army. Germany doesn’t. Why bother when the US is stupidly willing to pay for Europe’s defense with massive injections of cash and equipment to Ukraine while Germany did not lift a finger.
Germany does not fund NATO, will not fund an army, and will not pony up its share of €384 billion a year to reconstruct Ukraine. Germany will not lift a finger to help Southern Europe.
Attitudes Must Change First
EMU, the European Monetary Union, is an alliance of the 20 European states that belong to the European Union and have introduced a common currency, the euro.
Every one of those nations would have to agree to a eurobond. The unanimous agreement to change much of anything is in and of itself a fatal flaw in the construction of the Euro.
Meanwhile, one size does not fit all when it comes to interest rate policy, and it never will, until Italy, Germany, France, and Spain have similar work rules, legal systems, property rights, productivity, and tax structures.
The Euro founders thought that once the Euro was in place, attitudes would converge. They didn’t and won’t. France has veto power over agricultural policy and that won’t change either.
Curiously, this idea came up yesterday regrading a BRIC alliance. I bet most failed to spot it. Let’s take a look.
More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
Thorsten Polleit, chief economist at Degussa, told Kitco, “For making the new currency as good as gold, a truly sound currency, it must be convertible into gold on demand. I am not sure whether this is what Brazil, Russia, India, China and South Africa have in mind.”
Marc Chandler, managing director of Bannockburn Global Forex, told Kitco “Talk of BRICS gold backed currency seems like an echo chamber. They do not have the gold to back a currency meaningfully. Have we not learned anything from the EMU experience of monetary union without fiscal union. Color me profoundly skeptical.“
What precisely do Brazil, Russia, India, and China have in common other than a desire to escape the dollar?
BRIC Expansion List
South Africa joined in 2010. That was sure meaningful, wasn’t it?
Saudi Arabia and Iran have formally asked to join. Other nations expressing interest include Argentina, the United Arab Emirates, Algeria, Egypt, Bahrain and Indonesia, along with two undisclosed nations from East Africa and one from West Africa.
Perhaps they can concoct a way to avoid SWIFT, a dollar payment construct that makes it difficult to avoid US sanctions. If so, I will cheer, and that will be useful. But the EU announced such plans and failed.
US dollar use will decline naturally if and when emerging markets finally emerge, and BRICs won’t have much to do with it. It will simply be more cross border trading.
As for dethroning the dollar, I have to laugh. Egypt and undisclosed nations in Africa do not matter. How many times has Argentina defaulted?
How much do any of these nations trade with each other?
That’s a trick question because nations don’t trade, individuals do.
Yet, the recent announcement from Russia mentioned a “trading currency“. What does that even mean?
Let’s see the details on how this will work in practice, whether the currency is convertible on demand, how much gold backing there is, and who gets to use it.
Expect to be underwhelmed, but expect more hype anyway. Hype is sexy. So is predicting the collapse of the dollar.
With that, let’s return to the headline theme.
The Ever Growing Trillions of Dollars Per Year Demands to Fight Climate Change
An expert group under the auspice of the UN estimates that investments have to reach the order of $1 trillion per year until 2030 to respond to the climate and biodiversity crisis.
Oxfam estimated that $3.9 trillion per year will be needed over the same time period to fight poverty, inequality and climate change.
The World bank estimated that it takes $4 trillion per year to build the infrastructure for this.
That’s a mere $8.9 trillion per per year until 2030, a 7-year cost of $62.3 trillion. Who will fund that?
Germany Turns Against Green New Deal
Also recall my May 23, Germany is Turning Against the EU’s Green New Deal, Common Sense to the Forefront
Absent a Eurobond, don’t expect 20 nations that have little in common other than proximity to do much of anything in a united way.
The same applies to the BRICs who do not even have proximity in common other than Russia, India, and China.
RIC anyone? RIC bonds? Gold-backed RIC bonds when the yuan doesn’t even float and none of the countries have much of any bond market? What a hoot.
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