Financing Energy and Low-Carbon Investment in Europe: Public Guarantees and the ECB

Financing Energy and Low-Carbon Investment in Europe: Public Guarantees and the ECB

Etienne Espagne (CEPII, France) and Michel Aglietta (CEPII, France)
DOI: 10.4018/978-1-5225-0440-5.ch007
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The Eurozone has been said to have caught a disease called “secular stagnation”. The engineering of a powerful investment drive seems the only way out of this self-fulfilling low-growth trap. The European Union has already set investment objectives in the Climate and Energy Package, related to four key sectors. Several financing tools need to be combined to tailor risk-sharing devices for investments in each sector. This can be achieved through a two-tier approach. First, for the four key sectors, a high notional carbon price is used to set an asset value on the carbon saved by new investments (“carbon asset”): these assets are accepted as repayment by central banks, and publically guaranteed. The ECB, by buying financial instruments issued by the low-carbon investors, creates a direct transmission channel to these areas of the economy. Second, fiscal measures ensure the carbon price catches up with the notional value, thus generating revenues that allow for the purchase of the carbon debt held by the central banks, guaranteeing the final budget neutrality of the process.
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The Curse Of Low Growth In The Eurozone

For the last seven years (2007-2014) GDP has stagnated in the euro zone. This dismal performance has been compounded by significant disparities between the largest countries: a deep slump in Spain followed by a modest recovery, persistent recession in Italy, a bumpy track in France with hopes of sustained recovery repeatedly disappointed, and moderate growth in Germany despite flat domestic demand, due entirely to its huge trade surplus (around 7% of GDP in 2013).

Figure 1.



Broadly speaking, the euro zone can be said to have caught a disease called “secular stagnation”, empirically defined (Teulings & Baldwin, 2014) as GDP per capita growth between 0% and 1% for a prolonged period of time. We see the primary cause of this disease as being the severe lack of willingness to invest. Productive investment in the private sector fell by about 20% overall in the euro zone between 2007 and 2014 (IMF, 2014). Meanwhile, private saving surged, spurred by the desire to deleverage and the fear of an uncertain future increasing the preference for liquidity. The result is a huge gap between gross national savings and gross domestic investment (see Figure 2). IMF (2014) does not foresee much improvement before the end of the decade.

Figure 2

The widening gap between gross savings and investment in the euro zone (% of GDP)

Source: IMF, World Economic Outlook, October 2014.

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