ESG criteria to condition EU recovery
In the context of the Covid-19 crisis, it is highly foreseeable that European member states will spend and invest large sums of public money. Part of that money will go to strengthen the health and social protection systems, and the other part will be employed to the support the social and economic recovery. In fact, both the EU and its member countries have started to draw up their recovery plans, which will be applied in phases as the lock-down is relaxed. The use of conditionality in the Covid-19 crisis In relation to the social protection of the most vulnerable groups affected by the lock-down and that might be affected by the foreseeable reduction in activity in later stages, in some countries (for instance, Spain) temporary basic incomes are being considered. Such provision of income will have a triple objective: first, ensuring material living conditions; second, avoiding the spread of the pandemic by reducing the pressure to leave the house seeking subsistence means; and third, sustaining internal consumption. Accessing this basic income is subject to a series of conditions as: being part of the active population, the level and period of income loss, personal wealth, family structure, and other social variables. Conditionality is also attached to aid to companies that face a reduction in activity. In Canada[1], Denmark, France and Poland[2], for instance, companies that are registered in tax havens will not be allowed to access public aid that is being granted to protect the supply of goods and services at the national level, protect jobs, and maintain tax revenues. In Portugal, although no concrete measure has been presented so far, both government and opposition have argued publicly that banks should not make a profit during the years 2020 and 2021, and that they should increase credit provision to support the economy in return for the bail-outs that they received after 2008. This last case points to the main bias of the recovery policies after 2008, which was that conditionality was omitted in the transfer of public money to ‘too-big-to-fail’ agents (Financial, Insurance and Real Estate corporations). The asset prices of the FIRE sector were reassured through new indebtedness assumed by states and households, which imposed few to no constraints related to social, environmental or governance responsibility. This has had a large negative impact in the form of inequality, environmental crises, corruption, lack of public control and accountability, and in turn, a large damage to democratic legitimacy. Conditionality based on ESG criteria In a scenario of -3.8% of GDP in the EU in the first quarter, governments should aim at reactivating the supply of goods and services, at avoiding the destruction of the productive tissue and laying the foundations for a new and more resilient production model. The consequences of this crisis will favor a re-localization and re-industrialization of European economies to reduce dependence on global supply chains, especially in the sectors most sensitive to domestic security (health, food, energy, etc.). As has been mentioned before, generally, nation-states will attach conditionality to public aid within their borders, either in their direct income provision to the population or other different types of aid to enterprises and banks. The sums of this expenditure will be very high, so high should be the degree of responsibility demanded to agents receiving this money, specially the most powerful. Responsibility should not only be demanded as a short-term condition until the crisis has been overcome, but as a permanent set of conditions that allows for the generation of more resilient and sustainable production-consumption models. In recent years, environmental, social and governance responsibility criteria (ESG) have become part of the usual vocabulary of institutional investors, both public and private. The ESG approach is a system of assessing the impact of business practices from environmental, social and governance (ESG) perspectives. The Ekona Center of Economic Innovation, based on these general premises, has developed an ESG Certification system that targets the real economy, including the SME system. Its aim is to assess the commitment to responsibility of enterprises. The certification provides an objective measurement of a representative set of variables associated to the environmental, social and governance areas of companies, which produces a composite indicator. This model allows, on the one hand, to measure current performance in ESG responsibility, and on the other hand, the detection of possibilities for strategic development regarding ESG responsibility. The advantage of Ekona’s model compared to self-declarative Corporate Social Responsibility (CSR) reporting lies on its objective measurement and absence of conflict of interests. As is shown in Figure 1, this model allows public and private fund providers to identify responsible enterprises through the rating obtained in the process of certification. With this information, public administrations can direct their effort through public procurement or other aid, which places them in a very advantageous position of influence in improving the responsibility of the economy[3]. Source: own elaboration Precisely in the period prior to the Covid-19 crisis, the use of ESG criteria was growing rapidly, as climate change was generating public pressure for both public administrations and the private sector to act accordingly. In fact, ESG concerns are rapidly shifting from the field of impact investing into conventional investment practice, as climate risks become increasingly apparent. Currently, the global responsible investment market is several billion euros in size, and is growing at a double-digit annual rate, despite the fact that so far it has been focused on large companies rather than on small and medium-sized companies, which have not yet found a method to be included in the ESG investment category. The growing importance of these new criteria is evident at institutional levels such as that of the European Union, which has developed an Action Plan for Sustainable Finance[1], which will serve as the basis for integrating ESG criteria in the evaluation of financial risks, as well as the United Nations Working Group on Transnational Corporations and Human Rights[2]. Ekona’s approach to the ESG criteria responds to social, environmental and governance concerns, but also to concerns related
Of Strong and Weak, of Arrogance and Ignorance
Let’s explode the myth that a surplus economy is good and a deficit economy is bad. The euro zone will work only if deficit (South) countries can borrow to keep the surplus (North) countries trading. It is stupid and arrogant to think otherwise. We are the strong, the others are the weak. The Dutch-German mantra is not only arrogant, it’s stupid. Whoever utters it only shows that he has not the slightest idea of co-operation between nations. “Where there is need, foolhardiness becomes wisdom,” Niccolò Machiavelli once said – and he is right. In times of need, it shows who is the child of whose spirit, who can be trusted and who cannot be trusted. It also shows who has the intellectual ability to leap over his own shadow and question his own dogmas. Germany, the Netherlands and Austria are just showing that they do not have the foolhardiness that becomes wisdom. That will have dire consequences. To know exactly what this is all about, you only have to listen to the interview that Federal Minister of Economics Peter Altmaier gave to Deutschlandfunk Thursday, April 9. There it is clear again that only those in Europe “who have really made an effort in the past few years” can now have the opportunity to borrow the money they need to fight the corona crisis without any problems and without any interest surcharge. Altmaier said literally: “The state… we are all part of it. But together, by adhering to the debt brake, by consolidating public finances in recent years, we have created the conditions for us to be able to take money in hand now, for us to be able to temporarily increase government spending significantly in order to save companies, to save jobs, to save the prosperity of this country”. Which, conversely, can only mean that “the others”, who have not done just that, cannot now take money in their hands either, because they have none. They have not created the conditions for saving their economy today. And the German media – how could it be otherwise – have jumped right on this government bandwagon. In a special programme by the German state television station ZDF this week, there was repeated talk of the “weaker” countries in the South and the “economically strong” ones in the North, who are supposed to be liable for the weak. ntv has the effrontery to talk about the “credit addicts” in the South. But also DIE ZEIT says that countries kept afloat by the ECB could “slide into bankruptcy” if interest rates do not remain permanently low. The weak logic of the “strong” “Weak” and “strong” seem to be quasi natural categories. Weak countries are those that have not succeeded in consolidating their national budgets and reducing their public debt since the financial crisis of 2008/2009. And this despite the fact that a country like Italy has made greater efforts to save money than any other European country. “Strong” are those who, like Austria, the Netherlands and Germany, have taken advantage of the “good times” to prepare themselves for an emergency like the present one. All this, to put it bluntly, is the German view, which is narrowed down to a tunnel vision, which has absolutely nothing to do with macroeconomic logic and therefore nothing to do with the reality of European Monetary Union (EMU). At the same time, it is an impressive testament to intellectual poverty. The underlying error is the years of refusal by German policymakers and the mass of the German media to acknowledge the importance and consequences of Germany’s current account surpluses. After all, whether or not it is possible to reduce public deficits depends almost exclusively on whether or not it is possible to build up current account surpluses under present global economic circumstances. It is precisely at this point that there is a logical restriction in the form of a zero-sum game, because not all countries in the world can post current-account surpluses at the same time. Nor can EMU as a whole build up huge current-account surpluses because it would then provoke counter-reactions in the rest of the world, especially in the USA. The euro would appreciate in value and prevent a current-account surplus strategy on the scale that Germany and the Netherlands have been pursuing for years. The very fact that every surplus country necessarily needs deficit countries is a reason why the arrogance of surplus countries is completely out of place. The classification of strong and weak is stupid from the outset. The same logic applies to the argument over competitiveness. People say that the countries in the South have lost competitiveness and pretend that this is all their fault. Anyone who has understood that EMU cannot have persistently large current-account surpluses vis-à-vis the rest of the world also understands how void of any logic is the idea that within EMU all countries could and should have improved their competitiveness. This idea has not become any more logical over the years, even though it has been repeated like a mantra by most German politicians, above all Angela Merkel, and because it was and still is seriously considered an economic strategy for Europe. It is precisely because, for logical reasons, not all EMU members can become more competitive together that the northern members of EMU needed the loss of competitiveness of the southern members, otherwise they would never have been able to increase their own competitiveness so enormously. And how was that possible? Contrary to the economic rules of EMU, the northerners did not increase their wages as much as would have been appropriate in view of the jointly agreed inflation target. If all countries had tried to pursue the same wage restraint policy from the outset, EMU would have been in a deflationary situation much earlier and no country would have improved its competitiveness. The statement about competitiveness (those who increase it are right, those who decrease it are wrong) is therefore just as nonsensical
Coronabonds: Administer with Caution
Once again, the Covid-19 crisis has exposed the Eurozone’s weaknesses. Faced with the extraordinary expenditure that the different countries will have to make to counter this crisis, the question once again, as in 2010, is: how will this be paid for? Or more specifically, who is paying for it? Faced with this question, different proposals are already emerging with various mechanisms for sharing costs to a greater or lesser extent. Despite the fact that Peter Altmaier (German Minister of Economy) has already ruled them out, around these proposals the concept of Euro bonds is once again emerging. There is a very broad spectrum of what this policy should look like, for some it means one thing and for others something completely different. Traditionally, from the European Left, the concept is considered progressive and there has already been a collection of signatories (here) to demand them, with a text so unspecific that it is impossible to know the implications of what was actually signed, opening the door to proposals that would only deepen the crisis. To date, three proposals seem to have prevailed in the debate, the result of which will mark the future of the lives of tens of millions of people in Europe. The first proposal is that the European Stability Mechanism (ESM, informally, the «European rescue fund») should finance the crisis effort with the money it has available (410 billion euros) through a credit line for those nations that request it (see proposal here) and issue new bonds in case more resources are needed, which is likely. This would mean that countries that need it would have to apply for a loan from the ESM, associated with a Memorandum of Understanding (MoU), a document of macroeconomic commitments, such as those that have served to impose austerity until now. The Eurogroup meeting on 24 March agreed that this would be the way to finance countries in need and Italy and Spain are already preparing to apply for loans. Despite the fact that, due to the current spirit of solidarity, it is claimed that these loans would be offered without conditions, Article 7 of Regulation 472/2013, which regulates the economic supervision of the Member States, allows the European Council to change the conditions of the loan merely with a qualified majority (55% of the countries or countries with 65% of the Eurogroup population) if it considers that the state that has requested the loan is deviating from the macroeconomic objectives of debt reduction. It is not difficult to think that this would happen when things return to relative normality, given that the debt levels of Italy, Spain, Portugal or Greece are very high and any small deviation could serve as an excuse for the more orthodox countries of the Eurozone to impose drastic debt reduction prescriptions. It should be remembered that these states enjoy a majority and the decision to intervene could be taken by the countries that have signed these MoUs. In short, this proposal is tantamount to a rescue like those practiced during the financial crisis from which Spain is still recovering, with the only difference being the initial goodwill to offer favourable conditions. This is why this proposal is a huge danger for nations like Spain and absolutely unacceptable. The second proposal would be for Member States to issue sovereign bonds with maturities of 50 or 100 years, or even perpetual (non-maturity) bonds at interest rates close to 0%, for example 0.5%. These bonds, despite being issued by the states, would be guaranteed by the European fiscal authority, that is, by the Eurozone budget, which would have to be expanded in the near future to give these bonds credibility. Nine Eurozone Member States have just called for such an initiative. Such a proposal is more interesting than the previous one, but nevertheless keeps us within the neo-liberal monetarist framework. The monetarist theory, already proven to be false, is the theory behind the idea that states should not spend too much, nor intervene in the economy, and even less if they do so with their own currencies and their own central banks, because this causes inflation to rise. It is this theory that prompted the treaties that have imposed austerity on Europe, such as the Stability and Growth Pact, which have justified the tight control of deficits and forced a retreat from the welfare state in recent decades. It is also this theory that has underpinned the anti-inflation doctrine of central banks such as the Bundesbank or the European Central Bank (ECB) that are prohibited from financing public deficits and has served to impose the independence of most Western central banks that have been expropriated from the ministries of finance and economy, putting them at the service of the private banking sector. Thus, this proposal, despite being associated with fewer austerity constraints, admits that it is the markets that must give the states permission to finance their effort to exit the crisis, since it would be these markets that would buy the issued debt and allow the ECB not to organise the crisis effort at its discretion and indefinitely. In short, it would be tantamount to increasing debt through market mechanisms. It is true that these «safe assets» that would be the Eurobonds could serve to break the dependence between the banks and the public sector of the same state, allowing a greater banking internationalisation and thus a greater integration of the European markets. However, it is highly debatable whether we need more financial globalisation and more market mechanisms to be able to finance this crisis effort. And it is also very dangerous to use the pressures of the crisis to associate the fate of the EU integration project with the successful resolution of the crisis. In short, in our opinion, the issue of Eurobonds in the market would legitimise this theoretical neo-liberal framework that we should bury forever. This proposal, moreover, continues to distance the economic tools available to states from their citizens, which would deepen
Debt is not necessary to end this crisis
The expansion of Covid-19 is leading most developed countries to a crisis similar to that of 2008. The first challenge we face is finding a way to return to normal levels of economic activity. This inevitably involves finding a solution to the health crisis and, therefore, makes it necessary for all States to mobilize as many resources as possible to stop it. We urgently need to provide the public health services with material, human, technological resources, etc., in a massive way, without thinking about the bill, only in the needs, and adapt our health system to treat critically ill patients in unimaginable quantities so far. In parallel, the stoppage of economic activity will lead to a sudden drop in demand that will greatly reduce the income of the self-employed, companies, and workers, making it impossible to pay payrolls, supplies, rents and debts. In parallel, the State will suffer a decrease in tax revenues and an increase in expenses: in health, research and development, unemployment benefits and other automatic stabilizers and discretionary social compensation policies for the most affected groups and companies. To avoid a negative spiral much more devastating than the 2008 crisis, and the policies that helped aggravate it, we need to act on many fronts: guarantee a minimum income for citizens (a basic income for a pandemic); liquidity to companies and financial entities; decree a moratorium on contracts (rental, mortgage, loans …); subsidize expenses for supplies or help pay wages to avoid layoffs. All this supposes a massive expense, much higher than the bank rescue that led us to the change of article 135 and the European rescue. And for this, we need to use all the tools available to the EU. To finance the massive spending necessary, the ECB needs to provide states with the possibility of anti-crisis spending, so it must transfer the necessary resources without generating debt or imposing conditions. In other words, this amounts to this institution creating money out of nothing and unconditionally putting it in the hands of the States, without counting it as a deficit or adding it to future obligations. Doing a fiscal quantitative easing that the states manage is the way that the costs of the crisis can be distributed in a balanced way. In the current context, this unconditional creation of money is one of the few (and most powerful) tools that we have to avoid a socioeconomic devastation typical of wartime. It is not acceptable that, as Christine Lagarde insinuated, the ECB abandons the “whatever it takes” (Draghi’s commitment that the ECB would do “whatever it takes” to save the euro) and goes on to state that “the ECB is not here to reduce the risk premiums “of the countries’ debt – these are rising in the countries on the periphery of the eurozone, especially that of Italy – and that” there are other instruments for this “, referring to the possibility that the Italian government asks for a ransom from the European Stability Mechanism (ESM), obviously in exchange for the usual neoliberal reforms. This was already discussed last Friday in a teleconference between the ministers, as reported by the Financial Times. This change in the political position of the ECB has been perfectly interpreted by investors, who are already pushing up the risk premiums of peripheral countries to the upside. It is not surprising, then, that recent surveys show that 88% of Italians consider that the EU does not help them in this crisis and that almost 67% believe that being part of it is a disadvantage. If this continues, Italy may find itself at risk of bankruptcy. To avoid this, the story is emerging that a community debt bond must be issued to create community taxation as salvation. As it has already been said, it is not necessary to issue debt to get out of a situation as serious as the current one, but institutions with the capacity to issue money simply have to create money from nothing and transfer it to the States. If the European elites try to take advantage of this crisis situation to force more degrees of European integration by creating a common tax system, we run the risk of a new euro crisis being unleashed. Therefore, to avoid a repetition of the debt crisis that our countries suffered in the period 2010-12, we must be clear that a debt bond is not necessary at this time. If the pressure rises in Italy, the contagion from Spain will be immediate. In fact, this Monday, at the Eurogroup meeting, Italy and Spain asked to be able to use the 410 billion euros available in the ESM unconditionally to deal with the crisis, but the proposal was rejected. At the moment, the agreement in the EU is to allocate a meager 1% of GDP for added spending and 10% of credit guarantees and tax deferrals, always “within EU budgetary rules and respecting medium-term financial sustainability. ” This is the logic of the anti-crisis packages that governments have announced so far and that will not be enough. If the EU does not make a 180 degree turn and guarantees that the States have total freedom to face the crisis, this will be its end. Thus, as in 2008, the expansion of the Covid crisis19 is highly likely to trigger the institutional weaknesses of the euro. Lagarde’s words last week and the Eurogroup’s decision on Monday give us reasons for pessimism in the medium term. Some Member States have already made, and others will have to prepare for, exceptional decisions, far from the neoliberal orthodoxy that has governed the EU in recent decades. In Spain, it is convenient for a social dialogue table to be activated, with political forces and representatives of all kinds of economic and social actors, given the possibility of signing new Moncloa Pacts. Agreements that cushion the political costs of decision-making, distribute social costs carefully and make it possible to maintain the country’s political stability. As the emergency measures lengthen,