Confronting Global Warming and Austerity

Photograph by Nathaniel St. Clair

In the United States, proposals for a Green New Deal have been getting considerable attention in recent months as activists have pressed both members of Congress and Democratic presidential candidates to support aggressive measures to combat global warming. There clearly is much more that we can and must do in the immediate future to prevent enormous damage to the planet.

However, major initiatives in the United States to combat global warming will almost certainly require some increases in taxes. There is likely some slack in the U.S. economy (perhaps we’ll see more slack as a result of Donald Trump’s misfires in his trade war), but a major push involving hundreds of billions of dollars of additional annual spending (2-3 percent of GDP) will almost certainly necessitate tax increases. This doesn’t mean we shouldn’t move quickly to take steps to save the planet, but these steps will have some cost.

In contrast, most of Europe is in a situation where it could easily make large commitments toward increased spending on clean energy, mass transit, and conservation at essentially no economic cost. In fact, a Green New Deal Agenda in Europe is likely to lead to increased employment and output. The big difference is that Europe is much further from facing constraints on its economy. It has plenty of room to expand output and employment without seeing inflation become a problem.

Before getting into the specifics on Europe’s economy, it is important to add a bit of perspective. The European countries have been far better global citizens in this area than the United States. Their per-person emissions are roughly half as much as the United States. Furthermore, many European countries have already taken aggressive measures to promote clean energy and encourage conservation.

Solar energy accounts for 7.3 percent of Italy’s electric power, 7.9 percent of Germany’s and 4.3 percent for the European Union as a whole. By comparison, the United States gets just 2.3 percent of its electric power from solar energy. There is a similar story with wind energy where the European Union’s installed capacity is more than 70 percent higher than the United States.

But in the battle to slow global warming, simply doing better than the United States is not good enough. The European Union can and must do more to reduce its greenhouse gas (GHG) emissions.

The most immediate obstacle to aggressive measures to reduce GHG emissions in Europe is the continent’s mindless push for austerity. European governments, led by Germany, have become obsessed with keeping deficits low and balancing budgets. Most have small deficits or even budget surpluses.

Germany exemplifies the European austerity obsession with a budget surplus that is close to 2.0 percent of GDP ($420 billion in the US economy). To some extent, fiscal austerity is not a choice. The eurozone’s rules require low budget deficits for the countries that use the euro, but even countries outside the eurozone have joined the austerity party. The United Kingdom has a budget deficit of less than 1.5 percent of GDP, Denmark less than 0.5 percent of GDP, and Sweden has a budget surplus of close to 0.5 percent of GDP.

There are certainly circumstances under which budget deficits can be too high, but these clearly do not apply to the countries in the European Union at present. Inflation has been persistently low and has been falling in recent months. The inflation rate for the eurozone countries has averaged just 1.0 percent over the last 12 months.

The story is even more dramatic if we look at interest rates. The classic problem of a large budget deficit is that it leads to high-interest rates that crowd out investment. Not only are interest rates extraordinarily low across Europe, in many countries investors have to pay governments to lend them money.

The interest rate on a ten-year government bond in France is -0.43 percent. In the Netherlands, it is -0.57 percent, and in Germany it is -0.71 percent. That means Investors have to pay Germany 0.71 percent annually to lend the government money.

This is the context in which the concern for low budget deficits in these countries is utterly mindless. The financial markets are effectively begging these governments to borrow more money, but they refuse to do so. The need to address global warming makes this refusal especially painful.

The fact that interest rates and inflation are so low indicates that these governments are needlessly sacrificing growth and jobs. That story would be bad enough in normal times –people should not go without work and important social needs should not go unmet for no reason — but the picture is much worse when we consider the urgent need to slow global warming.

If they were not limited by an unnecessary fixation with budget deficits, these governments could take strong measures to reduce emissions. For example, they could either pay directly to install solar and wind power, or provide large subsidies to businesses and homeowners. They could be subsidizing the switch to electric cars and making mass transit cheap or free, while they vastly ramp up capacity.

Emanuel Macron did try steps in this direction last year, but he stumbled over the eurozone’s austerity requirement. Since France was already near the caps on budget deficits demanded by the rules of the eurozone, he was forced to impose new taxes to offset the additional spending he proposed to reduce GHG emissions. Since the taxes he imposed were largely regressive, they prompted a massive reaction (the “yellow vest” protests), which forced Macron to back away from most of his green agenda.

If France didn’t face an artificial budget constraint imposed by the European Union, Macron could have simply borrowed to pay for his green agenda. It likely would have been far better received in that situation. People who are just scraping by will resent taxes to discourage energy use. They are less likely to get angry over subsidies to improve the insulation of their homes or to install solar panels.

The absurd fixation of the EU on budget deficits should be getting more attention in the media. While events outside the United States generally don’t make much news, there has been no shortage of coverage of Boris Johnson, the prime minister of the United Kingdom, and his hare-brained efforts to pull the U.K. out of the EU.

Brexit, especially the no-deal Brexit that Johnson seems to favor, will impose needless economic costs on the country, but the harm done by unnecessary austerity in Europe is far greater. While Johnson is largely portrayed as a power-hungry clown in the U.S. media, the enforcers of European austerity are treated with great respect. While these enforcers may all be smart and highly-educated people, their clownishness on this issue puts Johnson to shame.

There is one more point on austerity and combatting climate change that is worth mentioning here. The world has been appalled to see much of the Amazon in flames. While this is most immediately attributable to the development policies of Brazil’s far-right president, Jair Bolsonaro, there actually is a much deeper problem here.

The Amazon is a unique habitat that should be preserved in any case, but its survival is so important in the fight to limit global warming because of what the rest of the world has been doing. Rich countries have engaged in large-scale deforestation of their own lands, as well as having paid developing countries to destroy much of their natural forests to provide wood and other resources. In addition, we have been spewing vast amounts of carbon dioxide into the earth’s atmosphere for more than a century.

This is the context in which the Amazon matters hugely for limiting GHG. Placing all of the blame on Brazil is fundamentally misrepresenting the history of the problem. Brazil must act to preserve the Amazon, but it should be paid for this choice by the rich countries. It will be foregoing a path that would aid its development, just as the rich countries were able to benefit economically by causing irreparable damage to their environment.

Since climate change really is a global problem, we need to have the most effective measures to be taken, regardless of the country. Where we expect the actions to come from a developing country like Brazil, the rich countries will have to foot the bill.

This is both a question of fairness and realism. We can’t force Brazil to protect the Amazon. No one is going to send in troops to prevent its destruction. We can make it more profitable for Brazil to protect the Amazon than to destroy it. And, with so much slack in the EU economies, this would be a great use of some of their resources. Perhaps one day we will have a sane government in the United States and we will contribute our share.

This essay first appeared on Dean Baker’s Beat the Press blog.

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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