Proposals

#5 Support green investment by public banks via quantitative easing

The European Union (EU) set itself an ambitious goal of reducing greenhouse gas (GHG) emissions by 55% in 2030. The EU’s green transition goals come at the same time as the world is going through a global pandemic and an economic crisis. Some people are rightly worried about how the EU is planning to finance the green transition when currently so much resources are being dedicated to fighting the pandemic and minimizing its economic impact. They wonder whether sustainable recovery and transition are at all possible given economic limitations.

Indeed, big infrastructure projects, such as repairing roads to meet the energy standards, retrofitting millions of buildings, including schools and hospitals to make them energy efficient, and installing solar and wind farms, require large amounts of money. In the EU there are big public infrastructure investment banks, such as the European Investment Bank (EIB) at EU level, or the German Infrastructure Investment Bank (KfW) at national level, that are tasked with doing exactly that.

Furthermore, thanks to the European Central Bank (ECB)’s quantitative easing (QE) programme, it has become extremely cheap for these public banks  to borrow money in recent years. For instance, the EIB can borrow long-term (up to 15-30 years) very cheaply from the market to finance green recovery and sustainable transition, beyond the pandemic, all around the EU.

However, there is a limit to how much debt the ECB can purchase from these banks. Some people therefore advocate creating a separate QE programme dedicated to purchase of debt of public banks such as the EIB and the KfW, to make sure that ever more resources are made available for the green transition.

➕ Pros

• It would send a clear message that the ECB is committed to tackling climate change directly and indirectly using all of its policy tools.
• More green investments will support economic development, as infrastructure projects will employ millions of people thus creating a dynamic economy.
• This proposal would merely extend further the current practice whereby the ECB buys up to 50% of bonds issued by the EIB.

➖ Cons

• Explicit support for EIB and public banks contradicts the principle that the ECB must not finance public institutions
• Borrowing by public banks remains a tiny fraction of what is necessary to meet the EU’s climate goals.
• There are only a few public banks that are tasked with meeting EU’s climate goals.
• Risk of unequal treatment among EU Member States, as not all countries have a well-performing public bank.