In this paper, ZOE Institute describes a proposal designed to incentivise needed green investments within the reformed EU economic governance framework. Increased fiscal leeway can be an important tool to help Member States invest in climate action.
The current proposal by the European Commission to reform the EU economic governance framework risks that Member States do not invest enough in decarbonising their economies. This paper details a proposal to amend the Commission’s proposal based on the idea of ‘Sustainability-linked Fiscal Leeway’ (SLFL). In order to incentivise needed green investments, EU Member States could be granted more fiscal leeway – through the lengthening of the budgetary adjustment path – subject to the achievement of climate goals. This is largely in line with the direction of the Commission’s proposal but solves many of the challenges with aligning fiscal rules and public green investments: No ex-ante definition of green investments is needed, governments have more flexibility in their investment decisions, and the maximum effectiveness of green public investments is ensured.
This proposal for how to apply ‘Sustainability-linked Fiscal Leeway’ to the EU economic framework builds on ZOE’s original proposal to make the granting of additional fiscal leeway dependent on the achievement of green targets.