Spain must play a relevant role in the European Green New Deal and collaborate in the change of the current paradigm
Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)
Originally published in Spanish at vozpopuli
Translated and edited by BRAVE NEW EUROPE
The exogenous recession resulting from Covid-19 is the newest wake up call for a change in the economic paradigm. Do not worry, as in the Great Recession, it will not be done immediately, because those who implement public policy continue to prioritise their old, worn out instruction manual, absolutely out of date, completely inoperative. This time, however, from necessity they will wake up, let us hope! Because there are two pre-pandemic realities that will undoubtedly have to be addressed now, if possible, with more imagination and determination in the coming years.
On the one hand, climate change, which is already causing bankruptcies. The monetary authorities are de facto driving the transition to a low-carbon economy because it is in their interest to ensure that the financial system can adapt to the changes triggered by these decisions, and to avoid a climate ‘Minsky moment’. On the other hand, there is an urgent need to address the underlying causes of the current implicit fragility resulting from the excessive financialisation of the economy. The aim is to address both realities in an inclusive manner. Citizens must be the protagonists and beneficiaries of a new green public economic initiative, while putting an end to the neo-feudalism imposed by the increasing extractors of income.
Money is endogenous
Allow me to refresh several empirical findings and forceful ideas that I have been elaborating in past articles, and which are necessary to understand the economic policy of the future. Many hypotheses and theories generally assumed by economists are no more than daydreams of a nature similar to the story of the tooth fairy. The reality is that any monetarily sovereign country, which issues debt only in its own currency and has a floating exchange rate, can never go bankrupt. The reality is that money is endogenous – see the Bank of England research in “Modern Creation in the modern economy”, “Banks are not Intermediaries of loanable funds-and why this matters!” – which assumes that it is credit that creates deposits, and investment that determines savings, not the other way around. The reality is that the interest rate is exogenous, that is, the Central Bank can set the level of the short-term interest rate, the differential between the short-term and long-term interest rate, and the differential between the cost of sovereign and private debt or between sovereign debts. In fact, lowering interest rates is deflationary, except for the asset inflation it generates; and raising interest rates is inflationary (income effect). The reality is that the theory of lending and the effect of eliminating the public deficit is another fairy tale. The reality is that there is an overwhelming dominance of the principle of effective demand, remember the European Central Bank (ECB) article “On the sources of business cycles: implications for DSGE models: What’s the holdup?” The reality, to the disgrace of the ordoliberals, is that southern Europe has financed Germany and the Netherlands since the creation of the Euro, I bring to mind the analysis by the German think tank Centre for European Policy “20 Years of the Euro: Winners and Losers. An empirical study”.
Under these realities, the possibilities for economic policy action are infinite. During the period of confinement, governments had to protect families and businesses with a massive fiscal stimulus, either by directly monetizing additional spending caused the coronavirus, or by using equivalent alternatives such as the ECB’s 1.35 billion euro Pandemic Emergency Purchase Program, without requiring any conditionalities. Somehow, more or less effectively, this has been done.
However, once the containment period is over, the economy must be thawed and, depending on the extent of the damage, a recovery plan will be needed. You know our proposal, a massive Green New Deal, using the concepts of Modern Monetary Theory and employing a Job Guarantee as an instrument. I must reiterate something obvious which, in view of the seriousness of the health situation and the economic emergency of Covid 19, had been relegated to second place. The climate ‘Minsky moment’ is unstoppable, unless an active economic policy is implemented to prevent it. The previous public policies against climate change around the world must not only be continued but reinforced and accelerated. These will obviously alter the profitability and viability of companies in many sectors. In this regard, investors have already begun to manage these risks – and explore possible opportunities – by identifying areas where policy changes may end up affecting market prices. Five sectors in particular are currently experiencing the bulk of this disruption: financial services, mining, oil and gas, utilities, and automotive. They will soon be joined by tourism.
For our nation it will be a challenge, yet full of opportunities, where, hopefully, we will not miss the train of history again. Spain must play a relevant role in the European Green New Deal because it has part of the key sectors in that process, and it also has the necessary capacity and talent. But to do so, we must plan our public policy, so that it is inclusive and the Spanish citizens are the protagonists, not just the corporations that dominate the economy. Here are two examples. First: The construction sector must dedicate itself to ecologically sustainable housing, using the processes of building incorporates new technologies. I am sorry, but it is no longer possible to build as we have done up to now. Ecologically it is not acceptable. Furthermore, the public sector must focus on improving the energy rating of each and every one of the existing building, especially for the most vulnerable families, by means of direct and indirect aid. Citizens will appreciate living in more sustainable and energy-efficient houses. Their bank accounts and health will improve noticeably.
Second example: The automotive sector in Spain, which must play a relevant role in the European Green New Deal and somehow “help” to change the current paradigm. To do so, it needs to initiate two programmes. The first is a scrapping plan linked to climate change, which takes into account the current reality of the automotive industry in Spain, not the French or German one. On the other hand, an active public industrial policy that promotes investment in the automobile industry along different lines: industry 4.0 and Big Data; Spain as a key part of the global value chain of the electric car, which is still a chimera to this day; sustainable manufacturing processes; promotion of new fuels; planning, especially in these times, a new mobility -safe, shared, ecological, connected and autonomous. There are, of course, many more examples, but at least both of these, in two sensitive sectors for our economy, are an illustration of what can be done.