Green Strings Attached - The EU Bailout and the Roadmap to 2050

Introduction

No one can now doubt the EU's commitment to its environmental and social goals; indeed, it may be that the bloc's determination to attach constructive conditions to its fiscal programmes ends up seriously destabilising the already fragile integrity of the union.

One specific condition attached to the EU's EUR1.8 trillion budget and coronavirus recovery plan – that member states observe the rule of law – has hit the headlines, with Hungary and Poland vetoing the 7-year budget and associated bail-out, in protest against the potential for this condition to be used against their regimes.

A Bad Name

Attaching conditions to bailouts has accrued something of a bad name over the years. It's often argued that the 1997 Asian crisis was exacerbated by the monetary and fiscal policies pursued by the IMF in making its loans.

More recently, the EU came under fire during the 2012 Sovereign Debt Crisis for imposing conditionality in its loans to countries including Italy, Greece and Portugal. The austerity programmes attached to bailouts were seen as being driven by goals that were as much ideological as economic. Now, again, there is disquiet about the conditions attached to a rescue deal.

The 'Next Generation EU' bailout fund, announced this summer as the response to the pandemic and part of the budget that Viktor Orban and Andrzej Duda have jeopardised, is a model of green conditionality. Allocating EUR750 billion of grants and loans, the fund is the first of its kind to put the environment at the forefront of its conditions of allocation.

More Carrot Than Stick

The EU may characterise this as 'alignment' rather than conditionality – making it appear more carrot than stick – but it's very clearly a euphemistic re-framing of the kind of conditionality traditionally attached to funding by multilateral development banks.

Next Generation EU is now part of a suite of financial packages with green strings attached to them by the EU. Another, the Just Transition Mechanism, dictates that member states that do not commit to carbon neutrality at a national level will only receive half their proportional share of the money (currently, the 'Infamous Four' – Poland, the Czech Republic, Estonia and Hungary – would fail this test).

There's also the more than EUR10 billion allocated to the ground-breaking Innovation Fund, one of the largest-ever schemes supporting low-carbon technology.

Europe's 'Rooseveltian Moment'

In a recent edition of the 'A Sustainable Future' podcast that I host, I interviewed Andrew McDowell, Vice-President of the European Investment Bank. McDowell was one of the key architects of the European Green Deal, the sustainable stimulus programme that was already in process prior to the advent of the pandemic, but which is now deeply embedded within the coronavirus rescue package.

One of a number of fascinating points raised in our discussion was the way that the deal had been characterised by some as representing Europe's 'Hamiltonian moment’. The bailout is not a backward-looking consolidation of debt, nor is it an attempt to strong-arm the continent into federalism.

Rather, McDowell argued, what Europe is currently experiencing is a 'Rooseveltian moment', dramatically altering the fiscal landscape for the continent and establishing the possibility for member states to raise new comingled debt going forward. Critically, that debt will have extensive conditionality attached to it, much of it associated with the Green Deal and other climate-related policies.

Far from being an opportunistic co-option of the bailout package, the green conditionality of the deal is a clear continuation of the EU's commitment to sustainability. The bloc has already committed to the Net Zero 2050 pledge – the first continent to do so – and the conditionality embedded in its coronavirus rescue package appears to contain within it a roadmap for achieving this goal.

Thirty percent of the EUR750 billion rescue package has been ring-fenced for the financing of green initiatives, while the remaining EUR500 billion is guided by the 'do no harm' proviso, meaning that it will not back any project that has a detrimental effect on the environment.

This supra-national focus on sustainability is evident throughout the EU's institutions, from the European Investment Bank to the European Bank for Reconstruction and Development (‘EBRD’) to the European Central Bank. Each of these institutions has installed a series of ambitious climate-related targets in recent years, including the EBRD's own exit from thermal-coal financing to the ECB's shift of its asset purchase programme brown bonds to green bonds.

Indeed, it's not inconceivable that other countries also reconsider the idea of conditionality and alignment under the light of their own loan facilities. The list of countries announcing carbon-neutral commitments continues to grow, highlighted most recently by a suite of Asian G20 countries, including China (2060), South Korea (2050) and Japan (2050) joining the charge. G20 countries are responsible for roughly 80% of global emissions.

It is, though, the Next Generation EU rescue fund that marks a real sea-change in the way states and supra-national agencies employ conditionality. It's a clear sign of the extent to which sustainability has risen to the top of the bloc's agenda that at a time of such uncertainty and upheaval, they should choose not to roll back on environmental pledges, but rather to make them integral to the rescue package.

Conclusion

Make no mistake, the transition from green carrot to stick will inevitably segue from the supranational sphere to corporate decision-making. Citigroup CEO Michael Corbat has already intimated that the bank may walk away from long-term relationships with clients if emissions from carbon-intensive companies aren't abated.

With a pro-environment Biden Presidency, coordinated action from state and supranational institutions and widespread public support for urgent climate action, Citigroup's stance is merely a matter of a bank jumping before it is pushed.

Wherever you sit in the corporate landscape, it is no longer possible to pretend that the environment is somebody else's problem. Whether Hungary and Poland accept this is anyone's guess just now.