BIOS: Ecological reconstruction

A key determining feature of the financing of ecological reconstruction is Finland’s membership in the Eurozone. Finland has transferred its sovereignty over monetary policy (e.g. central bank interest rates) to the European Monetary Union (EMU) and European Central Bank (ECB). Their main objective is Europe’s economic stability. Although Finland is still responsible for its fiscal policy – namely, its spending and taxes – this, too, is constrained by EMU budget and debt rules. According to the European Stability and Growth Pact (SGP), government budget deficit should not exceed 3 per cent (in relation to the national GDP) and government debt should not exceed 60 per cent (in relation to GDP).

In the modern fiat money economy, where money is not backed by gold or any other physical stock, money as such is not a scarce resource for the issuer of currency. After the 2008 financial crisis, the central banks in the US and Europe demonstrated this in practice by launching unprecedented programmes of quantitative easing. Between 2015 and 2018, the ECB bought financial assets, such as government bonds, worth 2,600 billion euros. All of this was newly issued central bank money. After the crisis, central banks also used non-conventional measures, such as very low, even negative, interest rates.

In the extreme, a fiat money system means that the issuer of currency can, in principle, buy everything that is sold in that currency. In other words, in the Eurozone, material capacity (e.g. natural resources, labour, technology) is the boundary condition for what is possible in European reconstruction, not the amount of money available. Thus, how much of this capacity is used for building the common good is a question of political will and decision-making.

Therefore, if Europe would reach a consensus on the need and means of ecological reconstruction, financing would not be an issue – at least not if the inputs required from outside the Eurozone are limited. Owing to the need for imports, sufficient capacity for exports must be taken care of. Within the Eurozone, central bank financing can be organised in different ways. For instance, professor of economics Paul De Grauwe has proposed that the European Investment Bank (EIB) start a large ecological investment programme and the ECB buy bonds issued by the EIB for this purpose. The ECB would buy the EIB bonds as the government bonds that the ECB now holds (due to quantitative easing) mature.

Even if the financing were to happen at the Eurozone level, the investments could be planned and implemented at the national, regional and municipal levels. However, multinational projects would also be necessary. For instance, energy and transport systems should not be planned strictly from national perspectives.

Alongside Germany and some other countries, Finland has supported tight application of the European Stability and Growth Pact (SGP). From the perspective of ecological reconstruction, this does not make sense. (The only emission-curbing feature in the pact is that it prevents governments from using direct measures to increase aggregate demand. This, however, has nothing to do with ecological reconstruction.) With other progressive nations, Finland should support a policy that involves making large investments in sustainable infrastructure possible, regardless of whether the investments lead to export and tax incomes or not. Instead of budget discipline, the goal must be climate and natural resource discipline. This implies significant changes in the economic directives and rules in the Eurozone.

At the national level, Finland can initiate ecological reconstruction even within the current international agreements, either by following or breaking the rules of the SGP.

Within the limits of the SGP, Finland can make some investments by moderately increasing the level of government debt and shifting finances from one item to another within the budget. Government can also make changes in subsidies and taxes so that market choices supporting ecological reconstruction become more attractive. The changes in incentives must be planned and implemented so that, in addition to the reconstruction of infrastructure, equal possibilities for a good life are supported. For instance, increasing taxes on emissions must not lead to a situation where some members of the population cannot afford to meet their basic needs.

Past Finnish governments have realised these kinds of measures in various combinations. However, they have been, and still are, insufficient, even in connection with emissions trading and other European level policies.

Using the tools of ecological reconstruction – mission-oriented innovation policy, public investment, job guarantee, sectoral transition policy, education and lowering of consumption – requires more. It will likely entail breaking the SGP. In terms of the possibilities and costs of financing, this is an opportune moment because the Finnish government can borrow very cheaply from the financial market. There are no signs that the market would consequently lose confidence in Finland’s ability to service the debt.

It is also important to note that since 2015, Finland’s debt (in proportion to GDP) to creditors other than the Bank of Finland has decreased, not increased. This is due to the ECB’s quantitative easing, which has meant that the Bank of Finland has bought large amounts of Finnish sovereign debt. It can be assumed that the Bank of Finland will under no circumstances demand the repayment of these debts under conditions that are detrimental to Finland.

As Finland is not economically sovereign, the breaking of budget and debt rules is based on three assumptions. The first is that breaking the rules due to financing ecological reconstruction will not be punished. So far, the rules of the SGP have been repeatedly broken, including by significant economies, such as Germany and France. Programmatic investments into ecological reconstruction are likely easier to accept as grounds for rule-breaking compared to financing regular spending.

Second, it must be assumed that investments in low-carbon solutions will help Finnish companies gain advantageous positions in international competition. The conditions of new debt are so favourable that in such a highly skilled economy, it should not be very difficult to find profitable investment targets. Third, if the investments do not lead to export profits in the future, it must be assumed that the ECB will act as one’s own central bank should and guarantee the continuity of basic economic functions (unlike what happened in the case of the debt crisis in Greece).

Ecological reconstruction shifts the focal points of economic policy. A larger share of economic activity will fall within the purview of democratic deliberation. This helps to ensure that investments supporting the long-term common good are made. At least for some time, a certain share of private purchasing power will be replaced by public investment capacity. In this regard, there will be regional variation: public investment into electricity, heating and transport is needed especially in cities, while in the countryside and areas of dispersed settlement, the role of private investment will be more significant. This difference must also be balanced by differentiated treatment of urban and rural areas in taxation and subsidies.

Overall, the economy will be directed towards concrete social and material goals. A high GDP growth rate or high employment rate, for example, will lose its significance as a stand-alone goal. The focus must be on ensuring equal opportunities for a good life while climate emissions and natural resource use are decreased radically. The content, quality and aims of economic activity – not the quantity – are paramount.