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25 March 2019
Compared to one and a half years ago, when the prevailing narrative was still revolving around global synchronised growth, the economic outlook for Europe has darkened significantly.
From the time of ‘peak optimism’ in late 2017, real economic growth across the eurozone has slowed to 1.2% a year. Meanwhile, the closely-watched Purchasing Managers' Index, a measure of business confidence and health, has pointed to a sharp contraction in the region’s manufacturing sector.
Even the notoriously optimistic European Central Bank (ECB) eventually had to face up to reality and slash its forecast for eurozone economic growth in 2019 from 1.7% to 1.1%.
One possible way for Europe’s limping economies to stimulate growth, and perhaps prevent full-scale Japan-style stagnation, would be to suspend austerity and boost government spending.
Some argue that the onus lies first and foremost with Germany. And, of course, it would be exceptionally cheap for Europe’s largest economy to borrow.
At current yield levels, Germany would only have to pay around 0.7% a year in nominal interest when borrowing money by issuing 30-year Bunds, its government bonds. After the effects of inflation, even at very low levels, the real cost of borrowing would be negative. Over shorter periods, the German government would actually be paid for the privilege!
Clearly, Germany should seize the moment and issue tons of Bunds, right?
Many of my fellow German compatriots would vehemently disagree. They would argue that a balanced federal budget should take priority over boosting the economy via fiscal expansion.
There are valid reasons for this position. If Germany abandoned austerity and went on a debt-fuelled spending spree, it would be politically difficult, if not impossible, to demand fiscal discipline of other eurozone countries, many of whose belts have been tightened in the face of local opposition.
I believe there is more to it, however. Without wanting to indulge excessively in kitchen sink psychology, many Germans’ aversion to national debt seems to stem from ethical concerns, perhaps amplified by the proximity of the German words for guilt and debt: ‘Schulden’ and ‘Schuld’. Issuing debt is often regarded as unscrupulously borrowing money from future generations, irrespective of the cost of borrowing and how that money could be well invested.
I believe there could be a solution to assuage such ethical concerns about the sustainability of government debt: green bonds.
Green bonds are debt instruments that are issued to provide funds for designated environmentally-friendly purposes. For example, Spanish telecommunications company Telefónica issued €1 billion in green bonds in January 2019 to finance improvements in its energy efficiency by switching from copper to fibre-optic networks in Spain.
Several European countries have issued green bonds too. Belgium, for instance, very recently raised €4.5 billion via a green bond, while France has around €16.5 billion in green bonds outstanding.
Since green bonds specifically address the issues of ethical finance and long-term sustainability, they could offer a more politically palatable way for the German government to issue long-term debt.
The potential benefits of Europe’s largest economy borrowing money in this way could go beyond investing billions of euros into environmentally-friendly projects. If Germany harnessed its vast latent capacity to borrow, green bonds – or ‘Green Bunds’ – could play a part in catalysing economic growth across the continent.
The views expressed by the author should not be taken as a recommendation, advice or forecast.