April 18. 2024. 12:25

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If done right, green industrial policy can create value for us all

The US Inflation Reduction Act takes some steps to push corporations to act more socially responsible, particularly around wages and apprenticeships, but Europe should go far beyond this, building on a stronger welfare state and tradition of solidarity, writes Sebastian Mang.

As EU governments discuss the EU’s response to the Biden administration’s Inflation Reduction Act, they must seize the opportunity to embrace a new, more proactive approach to economic policy.

The conventional reliance on market forces and limited government spending have failed to sufficiently tackle the pressing challenges of our times, including climate breakdown and widening inequalities. Governments should now take a leading role in solving these fundamental issues and ensuring that the value created benefits all of society, not just a select few.

The European Commission earlier this month suggested temporarily relaxing state aid rules to stimulate green projects and establishing a joint European sovereignty fund to channel money to the green industries. So far, the Commission has been vague about what sectors the fund should finance, as well as the make-up of the fund, only confirming it would include the reallocation of existing funds.

New funding for the green transition is desperately needed. The Commission estimated that Europe needs an extra €520bn per year in investment to achieve the Green Deal objectives. Other estimates suggest annual investments of up to €855bns (excluding transport) in the EU27 could be required.

The Commission’s response to the Inflation Reduction Act has been criticised by some as only benefiting the most well-off member states. When the EU relaxed state aid in response to Russia’s invasion of Ukraine, 53% went to Germany, 24% to France and only 3% to Italy.

Worryingly, a recent analysis showed that only Sweden, Denmark and Luxembourg would have the financial space required to overcome the green finance gap without breaking the 3% deficit limit. If green industrial policy is to benefit all member states, either fiscal rules need to be loosened, or new EU borrowing for a genuinely green just transition is needed.

Some European leaders are seemingly eager to repeat past errors by advocating for green industrial policy to be financed through austerity cuts to public budgets and deregulation of the labour market. This would not generate sufficient investments to plug the green funding gap and would be disastrous during a cost of living crisis, threatening social cohesion as well as Green Deal objectives.

Instead, increased investment of public money into the economy should come with assurances that we all reap rewards. Renowned economist Mariana Mazzucato has argued that this begins with a new narrative around the role of government, recognising public investments’ role in guiding the economy and assuming risks, particularly in developing industries of the future.

Public investments should come with stronger social and environmental conditions. Currently, many businesses continue to prioritise short-term gains, including spending trillions on stock buybacks that increase stock prices and executive pay packages at the expense of reinvestment in production and labour.

Companies receiving subsidies from the government should be held accountable for achieving certain public policy goals in exchange for public investment. Subsidies to industry should be tied to specific performance targets, such as reducing emissions, creating jobs, limiting stock-buy backs, dividend payments and executive pay, and increasing innovation.

The Commission, so far, has not included its own “Buy European” rules, as French president Emmanuel Macron has called for. However, EU state aid rules focused on “cheaper, cheaper, cheaper” without considering other criteria, contributed to the exodus of European solar and (more recently) wind manufacturing.

Mazzucato argues that governments should retain ownership or equity stakes in the companies it supports. With the green energy market expected to be worth $194 trillion by 2050, governments taking equity shares would allow them to recoup their investment, reducing the debt burden of investments, as well as being able to influence the direction of the company to ensure that public policy goals are met.

Developing a European green industrial strategy must also mean a new sense of urgency to phase out public support for fossil fuels, as they make public and private investments in green technologies more expensive.

Industrial policy must not be developed in isolation, especially considering that energy and material demand must be reduced if we are to bring Europe’s economy in line with planetary boundaries.

Supportive policies include phasing out overly resource and energy-intensive products (e.g. private jets and SUVs) and providing universal basic services, as the New Economics Foundation has proposed, to ensure everyone has what they need and delivers it in a way that reduces our emissions.

The US Inflation Reduction Act takes some steps to push corporations to act more socially responsible, particularly around wages and apprenticeships, but Europe should go far beyond this, building on a stronger welfare state and tradition of solidarity.