The EU’s recent push to encourage the private sector to step in to finance critical investment – especially through the revival of Capital Market Union (CMU) plans – is both unrealistic and misguided, experts warned.
On Monday (11 March), European Commissioner for Economy Paolo Gentiloni suggested that the funds needed for the bloc’s digital and green transitions “will mostly be coming from private resources” – and that these could, in turn, be mobilised through boosting EU CMU plans.
Gentiloni was expanding on comments from the eurozone’s 20 finance ministers that the EU’s long-debated new fiscal rules will require government spending cuts next year, thereby further amplifying European officials’ focus on the private sector as the primary source of strategic investments.
However, Philipp Lausberg, an analyst at the European Policy Centre (EPC), was highly sceptical of legislators’ newly-found enthusiasm for almost decade-old CMU plans.
“It seems like member states have discovered the Capital Markets Union now as a sort of panacea for their investment needs,” he said.
Lausberg noted that it would be a “huge effort” for the EU to agree to deepen the CMU, given the bloc’s “minuscule” progress since plans to consolidate the EU’s single market for capital were first introduced by the Commission in 2015.
Nicolas Véron, a senior fellow at Bruegel think-tank, also pointed to the ECB’s assessment last week that “there are no more low-hanging fruits to pick” to further integrate capital markets.
Véron attributed the EU’s resistance to deepening the CMU over the past decade to a “mix of factors”, including “economic nationalism” and the “sheer inertia” of member states’ bureaucracies that “want to protect their existing turf”.
The role of private money
Meanwhile, other analysts criticised the broader implication of legislators’ assumption that private funds should and could replace public investments.
“Private money is different to public money,” said Sebastian Mang, a senior policy officer at London-based think tank New Economics Foundation (NEF).
“Private money needs investments to be financially profitable. And many climate solutions may not be, but have enormous social value in making sure we don’t overshoot planetary boundaries.”
“Public investment is also crucial for ‘crowding in’ private investment,” he added, referring to the theory that government funds can incentivise and trigger private investment.
Mang pointed to the fact that multiple recent studies have concluded that government spending will be crucial for Europe to meet its climate targets.
These include a report published last year by the European Central Bank (ECB) estimating that the bloc will need to allocate the equivalent of between 1 and 1.8% of total EU GDP to additional public investments over the 2021-2030 decade to reach its goal of cutting greenhouse gas emissions by 50% relative to 1990 levels.
“We need massive public investment [for things that span] from targeted industrial policy, to making sure low-income families are able to access green and cost-saving solutions like energy efficiency, to climate adaptation and nature restoration,” Mang said.
Fiscal rules queried
Patricia Velicu, a senior policy adviser at industriALL Europe, which represents seven million employees in Europe’s manufacturing, energy, and mining sectors, expressed dismay at the fact that the fiscal rules mean that member states must financially “tie their hands for absolutely no reason”.
“We are not saying that we should not have any fiscal rules, we are just saying that the current deal […] is not fit for the challenges that our society is facing in Europe,” she said.
Meanwhile, Mang also rebuffed another argument put forward by European Commission vice-president Valdis Dombrovskis at a press conference after the meeting of the bloc’s 27 finance ministers on Tuesday (12 March).
Asked by Euractiv about the restrictive impact of the bloc’s recently-approved fiscal rules on government expenditure, Dombrovskis said that such constraints are necessary to “avoid a situation where fiscal policy would contradict [the ECB’s] monetary policy in its task to reduce inflation”.
“Fiscal stimulus would stimulate inflation more than growth and [entail] corresponding higher financing costs for governments,” he added.
Mang, however, thought the view conveyed by Dombrovskis was misplaced, as green investments will ultimately contribute to long-term price stability.
“If we are able to transition to a new energy grid that is not reliant on fossil fuels, then we will not be as dependent on international fossil fuel price fluctuations, which will help ensure price stability,” he said.
