Recent statements by Olivier Blanchard, ex-chief economist at the IMF, all point in a similar direction: the debt and deficit are not necessarily a bad thing in a low growth and low interest rate environment and could be used to finance investment programmes designed to resolve the structural problems of an economy. Public Debt and Low Interest Rates, published in February 2019 launched the debate. In May 2019, Fiscal Policy Options for Japan argued that Japan should defer its deficit reduction programme to sustain demand and production. Meanwhile, in the USA, debate rages around Modern Monetary Theory, according to which the public authorities can engage in major infrastructure programmes to sustain the economy by drawing funding from the Fed.
The fact is that economists seem to be gradually abandoning the decades-old orthodoxy to embrace a more interventionist view of governments and central banks. Two economists have been arguing for this approach over recent days. Writing in Les Echos on 23 May, Hélène Rey, professor of economics at the London Business School underlined that “Germany's reluctance to invest more in its economy and support demand is hard to explain in terms of prudence or enlightened long-term management. Investing today in ageing infrastructure and in the energy transition would unquestionably cut the bills for a shrinking German population in decades to come. This is particularly true in a period like the present of very low real interest rates.” Jean-Paul Betbeze, former head economist of Crédit Agricole, wrote on 6 May in Atlantico.fr: “If the ECB starts seeing global warming as an inflationary factor it will be buying green bonds and providing cheaper funding for environmental programmes.”
The ECB has in fact already bought green bonds as part of its monetary accommodation programme. Its July 2018 economic bulletin (Purchases of green bonds under the Eurosystem’s asset purchase programme) rates the Bank's contribution to cutting the spreads paid on green bonds: “Overall, while the amount of green bonds held by the Eurosystem remains relatively small, evidence suggests that through its purchases the Eurosystem has reduced the yields of green bonds and supported their issuance by non-financial corporations.”
We also have the Climate-Finance Pact initiative, led by economist Pierre Larrouturou and climate scientist Jean Jouzel, which proposes explicitly channelling monetary creation to fund the energy transition. Economist Michel Aglietta, a specialist in monetary issues, is one of the project’s backers.
This development in economic doctrine reflects the low-growth and low-inflation environment in the euro zone. A massive plan for investment in infrastructure supported by the ECB would help stimulate growth, inflation and productivity while meeting environmental demands. By buying up green bonds at cheap yields the ECB would support the private sector's roll-out of green investments. It is a version of the helicopter money theory that seeks to direct monetary creation towards the real economy. This latest variant could garner considerable support as climate issues command a degree of consensus.
Nor are politicians sitting idly by. Advocates of greater public involvement are plentiful. On 30 April, Donald Trump called for a new quantitative easing programme which will allow him to easily fund the Federal deficit and support the roll-out of a US infrastructure investment plan. On the Democrat side, the party's rising star, Alexandria Ocasio-Cortez, is arguing for a green new deal combining the public deficit, infrastructure investment and deficit finance by the Fed.
In France, the idea of using the ECB to fund energy transition is an explicit pledge in the EELV (Europe Ecologie-Les Verts) manifesto for the European elections. Meanwhile, the left-leaning PS-Place Publique list is arguing for the abovementioned Climate-Finance Pact. This project's website cites political backers from across the spectrum, including Daniel Cohn-Bendit, Jean-Pierre Raffarin, Laurence Parisot, Pascal Lamy, Christian Estrosi, Anne Hidalgo, Martine Aubry and Enrico Letta.
All of which means backing infrastructure projects with public money will unquestionably be a big element in global economics in the next ten years. Will these Keynesian-inspired policies kick-start a resurgence in inflation? Perhaps, but the global deflationary pressure of globalisation are so strong that economists seem ready to take the risk of monetary creation.
Article completed on 28 May 2019 by Florent Delorme, macro analyst at M&G Investments.
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