The global economic crisis has not been overcome; its character has merely changed. For us parliamentarians, its most tangible characteristic is the smoldering debt crisis in some Euro countries. Similar to the crisis in the banking sector, the European government debt crisis is typical of a large-scale financial crisis, the “Second Great Depression,” and managing it has to be addressed in this context. If it were only an uncontrolled government debt accumulation in Europe, then it would now be appropriate to simply apply debt brakes to manage the public debt, and to work with stronger sanction options. But would this have prevented the problems in Ireland or Spain? No. The financial crises in Spain and Ireland have absolutely nothing to do with government irresponsibly incurring debt. The government debt only increased when the government had to react to the excessive indebtedness of the private households and banks that it had previously permitted.

The conservative reinterpretation of the debt crisis as a purely governmental debt crisis due to excessive government spending is politically smart but factually incorrect. Drastic austerity programs alone are therefore not very useful in overcoming the crisis. On the contrary, the current crisis policy aggravates the crisis in many areas.

Moreover, we should not forget that we have barely made any progress in coping with the crises of poverty and distribution, or in the crises involving the climate and resources. Climate change has largely disappeared from the headlines, and, in terms of concrete government action, the brakes are being applied to many climate policy questions. Research results, however, show to what extent climate change has advanced and what tipping points are imminent. And, as in 2008, the connection with the strong increase in commodity prices becomes evident, as commodities increasingly become investment targets, with food and energy prices in strong correlation. The bottom billion has not gotten any farther today than it was three years ago, when we deliberately included this problem in the concept of the Green New Deal. It was, and, therefore, is correct to combine these three crises and to show the way out of them with an extensive package of measures, the Green New Deal. With its three pillars:

• financial market regulation,
• ecological modernization of the economy, and
• new social balance,

the Green New Deal is still the right answer.

However, we must develop our concept further because the situation has changed and new knowledge is now available. It is actually the currently emerging slowdown in real GDP
growth, which could soon lead to a recession, forcing us to take a position with regard to stimulus plans or the like. It is also important to place the current European crisis in the context of our response to the global economic crisis. It is my intention to contribute with this text in some way in regard to the financial market situation, the public debt, and the crisis of distribution by first analyzing the current situation in the financial markets, and, based on this, discussing proposals for the solution.

Read the full paper at The Heinrich Boell Foundation.

This post from Gerhard Schick will be his last, as he will no longer be a regular blogger. Triple Crisis thanks him for his insightful and timely contributions.

Estimates of the total amount of untaxed resources held offshore by individuals range from $7.4 trillion (the 2010 Global Wealth Report of the Boston Consulting Group) to $11.5 trillion  (Tax Justice Network (TJN)). By definition, it is impossible to identify the exact figure, but these are highly instructive estimates. Taking TJN’s number as a basis, approximately $250 billion in taxes are illegally evaded on an annual basis.  If these resources had been collected from 2000 to 2015, they could have almost entirely financed the attainment of the Millennium Development Goals.

Tax evasion has an even more direct impact on developing countries since they are entitled to the majority of unpaid taxes. James Henry, former Chief Economist at McKinsey & Co, estimates that about $6.2 trillion of the total amount held offshore by individuals represents developing country wealth.  He calculates that failure to tax this wealth deprives developing countries of an amount estimated between $64 billion to $124 billion in annual tax receipts.

The above estimates are based on the offshore wealth of individuals.  By including money moved offshore by private companies, the scale of losses would easily exceed the roughly $103 billion that developing countries receive annually in overseas aid.

Capital flight is a growing problem, too, with an additional $200 billion to $300 billion being moved offshore each year.  OECD’s Secretary-General Angel Gurría even says: “Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid.” And the 2010 African Economic Outlook notes: “The challenge is for African countries and their partners to end the vicious circle of aid dependence that shifts government accountability away from citizens towards donors. Instead, they need to start a virtuous circle of aid working to make itself redundant, by supporting public resource mobilisation.”

How are these devastating effects possible? In 2009, TJN published a Financial Secrecy Index, ranking the 60 most important so called “secrecy jurisdictions”. The Index identifies the jurisdictions that are most aggressive in providing secrecy for international finance and which most actively shun co-operation with other jurisdictions. With the help of these jurisdictions, both individuals and companies are able to shift their capital and profits to locations that are inaccessible to their home-country tax authorities. Interestingly enough, among some of the top ranked secrecy jurisdictions we find several that are linked directly to powerful developed nations, such as Delaware (Rank 1) or the City of London (Rank 5). This reveals that the problem of tax havens goes beyond small countries refusing to co-operate internationally. Jurisdictions sponsored by the US or UK are among the most secretive  worldwide. It is thus not very credible when the governments of these nations advocate for the closure of tax havens, as they did at the G20 summit in London in 2009. The final Leaders’ Statement  reads: “The era of banking secrecy is over.”  But, to date, few actions have been taken to end this era.

Secrecy jurisdictions are used not only to evade taxes, but also to hide hazardous or even illegal assets from the balance sheets of banks and other companies.   This underscores the fact that the fight against secrecy jurisdictions is necessary not only to recoup public finance, but also to achieve  global financial stability.  Of course, this fight must take place alongside other efforts to stabilize the system, but it is a critical lesson of the financial crisis. For example, the Deutsche Bank has about 500 subsidiaries in secrecy jurisdictions; in Mauritius alone, a small island with an opaque banking system, the bank employs over 180 persons. Even the German state-supported Commerzbank has 76 subsidiaries in tax havens. It can be assumed that these subsidiaries are mainly used to evade taxes, but during the financial crisis, we  also observed  the outsourcing of dangerous assets and liabilities to subsidiaries which could not  be monitored by German regulatory authorities.

What must be done to impede the use of secrecy jurisdictions? As is increasingly common in many policy fields, the best solution would be a global one.  Opaque jurisdictions pose a co-ordination problem, since every jurisdiction has an incentive to retain the comparative advantage provided by opacity. However, if all tax havens were closed, everyone could benefit.

In reality, however, a global solution is not in the offing. But we need institutions that provide knowledge, coordination capacities, and the possibility of “naming and shaming” in this matter. Among others, the OECD has been rather active in this role during recent years. However, its criteria are very lax: First, the OECD standard recommends a so-called “exchange of information on request”.  Jurisdictions that are signatories to a treaty including this provision must provide information to the tax authorities of another treaty member only when their request is based on a specific suspicion. However, this is hardly possible since almost all information is hidden – this is the definition of a secrecy jurisdiction. Second, if a country has signed twelve such treaties, it is removed from OECD’s “grey list” of tax havens. But what happens to this country’s relationship with the other 180 countries in the world?  This question is especially pertinent if the country has signed treaties with twelve  other tax havens.  This scenario is not unrealistic.

The first step toward dealing with secrecy jurisdictions should be to require an automatic exchange of tax information among those countries on the OECD “white list.” This step has already been taken  in the European Union (although there are several provisions needing improvement). Only when there is the automatic exchange of information, will the evasion of taxes and regulation become really difficult.

In a second step toward transparency developed nations must require that their companies issue  financial reports on a country-by-country basis.   Today, multinational corporations report on a consolidated basis, making it impossible to analyze where and  how it does business.  Systems of country-by-country reporting, which could be defined by the International Accounting Standards Board (IASB), would not prevent the use of secrecy jurisdictions per se, but it would provide much more transparency, making it possible to put pressure on companies engaged in the extensive use of secrecy jurisdictions.  At the end of 2010, the EU Commission started a first consultation on this topic.

In a third step toward transparency, countries can act unilaterally, as France has effectively demonstrated.  The French Government created its own “black list”, using more rigorous criteria than the OECD.   An almost prohibitively high tax is imposed on every transaction with one of the jurisdictions on this list.  Among other measures, the capacity of tax authorities has also been strengthened.  Unfortunately, Germany , has chosen another way:  Instead of keeping up the pressure for transparency, German finance minister Schäuble has openly agreed to sign a bilateral treaty with Switzerland allowing tax dodgers to remain anonymous and pay only a flat rate withholding tax.

This is but one example that shows the slow and uneven progress is in this area and how national fiscal aims are given priority over a coordinated approach to curb secrecy.  One of the major political challenges for 2011 will be to change these priorities and to show that bringing transparency to secrecy jurisdictions is an answer to both the development and the financial crises.

The public discussion about the root causes and consequences of the financial crisis seems to be over before it  really began.  In Europe, the discourse focuses on the astonishing economic recovery, rather than the roots of the crisis and how we can prevent a recurrence.

What would it take to prevent a recurrence? In addition to rebalancing the relationship  between the state and the financial sector,  the state must regain its dominance and its capacity to act, independently from the financial sector. What might this take?

1) Financial “borders”:  In a world in which multinational companies are able to dominate national politics and shift their capital freely between jurisdictions, it is illusionary to think that states will ever be able to set and enforce rules for the financial market.  It is only possible to combine two of the three following conditions:

• globalized financial players
• stable financial markets
• national policies

In the European context, there is a dispute between those who insist on regional supervision to ensure stable markets and those who insist on national supervision.  The implementation of a European financial supervision institution was a step in the right direction. But, some member states would impair the institution by denying it sufficient funds and personnel.   If we still want to allow cross-border financial institutions in Europe, the regionalists must win out over the nationalists in order to ensure strong and effective supervision.

At the global level, as long as we find a world government or world regulation unrealistic or undesirable, then the stabilization of the financial markets will depend upon the ability of nation states regulate every financial player within its political borders.

2) State Capacity:  Investigations into the causes of the financial crisis reveal a frightening deficit of expertise in national public institutions. In many cases, market-related laws have been written (and passed)  in the relative absence of information (not to mention deeper analysis and understanding) about market size, structure and character.  This is analogous to designing and constructing schools without studying the demographics sufficiently to know who the schools might be serving.  Thus, parliaments and state institutions desperately need to expand their expertise on financial markets and establish effective rules.  Financial supervision authorities, in particular, need better and more-independent research to understand the national, regional and global markets over which they have authority.

3) Political influence of Markets:  In Germany, the financial sector contributes less than five percent to GDP, but 20 percent to party donations – a similar trend can be observed in most industrialized countries. Could this be a reason why, in virtually all states, the interests of the financial players seem to have priority over the interests of the majority of citizens?  We can see many examples – in Germany and elsewhere – of how financial interests trump all others.  When do we acknowledge and deal with the consequences for democracy?  As a starting point, we must take action to ensure that regulated entities, such as financial institutions, are not allowed to make donations to political parties.

4) Consequences of the Crisis:  How can we address the adverse impacts of the crisis if we lack information about these impacts?  My impression is that, due to conflicts of interest, much relevant information about impacts is being suppressed.  If we really knew what happened, I am sure that  some people would be fired; some would be required to pay compensation for damages, and some would be punished by law.  To date, the main financial institutions have not faced any legal consequences.

We need powerful parliamentary committees investigating the crisis in several countries.  In the U.S., we have yet to see the report of the Financial Crisis Inquiry Commission.  In April 2010, Iceland published a very detailed report (including analysis of cross-border transactions) which establishes who was responsible for the unprecedented crisis that hit that country so hard.  But, in Germany as well as almost all other countries, there is no institutionalized or systematic investigation of the financial crisis at the national level.

We must come to terms with not only the political dimensions of the crisis, but also the legal dimensions.  Investigating complex financial misbehaviour or even crimes can only be done by highly qualified specialists, but most states do not have such specialists at their disposal.  This must change so that the state can put legal pressure on financial players and, thereby, fulfill  its responsibility to its citizens.

Regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act, one can debate whether the “glass is half empty or half full,” but the verdict may not be known for years.  If the Act is the beginning of the end of years of laissez-faire and deregulation, then ultimately the verdict will be positive.  In the 1930s, the New Deal legislation was not accomplished through one law, but through a series of laws and regulatory measures.

I fully understand Jeff Madrick’s critique. The Act’s approach is far from being perfect, as it focuses more on plugging holes than on creating a new paradigm for financial markets. But, it has several redeeming features: reducing proprietary trading by banks; shifting an important part of derivative trading to central counterparties; providing consumer protections; and requiring reporting by extractive industries in ways that can significantly advance transparency.

European reforms are still nascent. Many laws are still in the pipeline – quarrelling between member state governments and the European Parliament has postponed the timetable for passage. In addition, reforms face opposition everywhere, especially from the financial services lobby.  To top things off, the European Union struggles with its inadequate institutional structure when it comes to dealing with the financial crisis.

Therefore, Europe is still battling over whether the new European supervisory agencies will have only weak coordinating functions or enforcement powers.  Member state governments, mainly in Britain, but also in Germany, are unwilling to transfer the necessary powers and competencies to the European level.  Still more ridiculous is the fact that the planned supervisory authorities for banks, insurance companies and securities will probably be set up in different countries – thus weakening their capacity to work together closely. This demonstrates how national egotism impedes rational solutions.

The US reform – even with its weaknesses – puts pressure on the European Union to follow suit. The Dodd-Frank-Act is a clear sign to European countries and others that their corporate subsidiaries in the US will be imperiled if they fail to adopt similar provisions.

Without a doubt, one of the disappointing facts is that the compromise struck in the US Congress does not include the levy on banks intended to raise up to $90 billion. The intention — to make the institutions responsible for the crisis foot the bill for it — was not realized and taxpayers are left “holding the bag.” Comparable resistance to proposals is evident in Europe.  For instance, some European governments are blocking the introduction of a European Financial Transaction Tax. To me, this is, together with the loopholes in the Volcker rule, the clearest example of how powerful banks fend off reform.

The priorities for the future are clear. In my opinion, we have to work more intensively on the root cause of weak legislation – namely, regulatory capture and lobbying. We find ourselves trapped in a vicious circle: As long as the financial sector retains its influence on financial market reform, regulators will not enact and enforce the desired rules. But to reduce this influence, we would need financial market reform to diminish the sector’s grip on its regulators. As the Dodd-Frank Act opens the way for hundreds of new rules to be set by the regulators within the next 6 to 36 months, a large part of the work still lies ahead and its quality will depend very much on how much regulators conform to the industry’s will.

In Europe, lawmakers of all the major political parties called out for help in countering the power of the financial services industry. As this “call” states, it is fine if  “[financial] companies make their point of view known and have discussions on a regular basis with legislators. But it seems to us that the asymmetry between the power of this lobbying activity and the lack of counter-expertise poses a danger to democracy. Indeed, this lobbying activity should be balanced by that of others. [...] As European elected officials in charge of financial and banking regulations, we therefore call on civil society (NGOs, trade unions, academic researchers, think-tanks…) to organize to create one (or more) non-governmental organization(s) capable of developing a counter-expertise on activities carried out on financial markets by the major operators (banks, insurance companies, hedge funds, etc …) and to convey effectively this analysis to the media. [...]“.  We hope for a strong response to this call.

As of Friday, July 2, Mr. Wulff became Germany’s new Federal President, the state’s highest office. The election electrified the German public even though the German President has little power and is chosen by the members of the German Parliament and representatives of each of the sixteen states rather than by public vote.

It has been a long time since the German public was as captivated as they were by Mr. Wulff’s opponent, Mr. Gauck.  Despite the great enthusiasm for his candidacy, he was, at last, defeated by the conservative majority of electoral delegates.  But one can learn a lot from Gauck’s one-month campaign: He was able to inspire people to become politically active.  Broad-based activism is needed to transform society and achieve a socially and ecologically sustainable economy.

But let us start at the beginning: The election of a new President had become necessary because the predecessor, Mr. Köhler, submitted his resignation, which was effective at the end of May. The liberal-conservative majority rushed to identify a candidate who would fit into their system’s internal balance of power.  Mr. Wolff – a conservative prime minister of the state of Lower Saxony who, until then, was not famous for charisma, rhetoric or inspirational ideas – fit their criteria.

In contrast, his opponent Mr. Gauck accomplished what many people in German society considered impossible.  That is, he inspired a broad swath of the population with his speeches; he garnered wide support from the internet community; and he enlisted a significant number of people – who previously had never been politically active – to canvass for support of his leadership.   Sound familiar?

Indeed, Mr. Gauck was compared to Barack Obama more than once, and if the Federal President could be elected by popular vote, surveys suggest he most likely would have won. In the former GDR, Mr. Gauck – a Lutheran pastor – openly criticized the regime.   Then, he entered politics during the peaceful revolution that swept away the communist government and, in the 90′s, he was the head of the authority that investigated the crimes of the GDR’s secret police. His main message   was the need to build stronger links between citizens and the political leadership based on an ethic of freedom and responsibility. This doesn’t sound like a great campaign, does it? Indeed, it was the exact opposite of the kind of populist campaigning that marketing experts would prescribe. But it gathered momentum.

A German Newspaper wrote that, after hearing Mr. Gauck’s speeches, even those who disagreed with the content of his messages were usually impressed and newly inspired. Therefore, he was able to rally members of different political parties behind his campaign that did not propose changes of policy as much as changes of political culture and a renewal of informed public debate.

To learn from this approach, the proponents of a Green New Deal need advocates to listen to public debate and inspire people to re-think their positions and actively participate in shaping the future of our society.   We need politicians who will encourage debate on the German lifestyle, including its patterns of consumption and production.  If we only count on experts, elites and technocrats to shape the future, there will be insufficient consensus or political backing in German society for proposals to undertake the necessary transition to a sustainable society.

In other words, populist short-termism is likely to defeat the initiatives of those political leaders who call for more assistance for developing countries, more environmental protection or stricter emission caps to guard against climate change, unless there is a vital public debate, strong participation of citizens in the formation of public opinion, and an inclusive style of policy making.

When people turn away from politics, we lose support for our struggle against large corporations that defend their short term profits at the cost of future damage for the environment and our society.

The Gauck campaign demonstrates that it is possible to renew German democracy in ways that are urgently needed. Of course, no single person can fulfill this process.  It is an arduous process to gain and maintain the kind of momentum and dedication that is needed to build a political base for   transformation of society.  But, we now see that this is possible.

Thus, seen from a progressive point of view, the result of the election is not a happy ending, but the election process represents a success in developing a large, politically active base. This is necessary in order to organize majorities in the society to back dramatic policy changes in order to combat the crises of climate, finance and poverty.

In many places, including Germany, the idea of a Green New Deal continues to be criticized from the well-known conservative angle and, more recently, from a progressive perspective as well.  For instance, in a recently published book, “Green Capitalism: Crisis, Climate Change and Unchecked Growth,” the authors — Stephan Kaufmann and Tadzio Müller — equate the Green New Deal with the idea of “Green Capitalism.”  Coming from a progressive perspective, they claim that these concepts only provide an ecological basis for perpetuating the existing and highly problematic economic system.

This new critique of the Green New Deal is not valid because it fails to understand that the Green New Deal does not entail a simple “greenwashing” of the existing system. In fact, the project would profoundly transform our economy and society.

The global Green New Deal is an imperative.  Why?

First, the existing economic system has led to devastating financial and economic crises.  And, all over the world, the quantitatively huge and qualitatively unique rescue packages being implemented do little, if anything, to contain the risk of new crises spawned by excessive national debt and new speculative bubbles.

Second, the current economic system destroys the climate and endangers the rich diversity of species. The TEEB-Study on biodiversity sets forth alarming estimates of the costs of eliminating natural capital.  For instance, as much as $5 trillion and $50 billion are lost due to destruction of forests and overfishing, respectively. These numbers show a dramatic trend towards the irretrievable destruction of the ecosystems that sustain lives and livelihoods.

And third, the system of finance-driven globalization destroys our societies because it leads to crises of poverty and distribution. How can anyone accept an economic model that allows one billion people to starve? The gap between rich and poor continues to grow in industrialized countries as well as developing countries.  In industrialized countries, the middle classes are shrinking and the earnings of most workers are declining, while at the same time, the incomes of the already rich continue to grow.

To tackle these frightening developments, we cannot simply “green” the current capitalist system.  For instance, it is insufficient for people to adopt lifestyle changes, such as buying electric cars instead of fuel-driven ones or heating with wood chips instead of oil.   Since the current economic model is at a dead end, we need a comprehensive ecological and social transformation of the economy, a Green New Deal with three pillars which can:

1. effectively regulate the financial markets in order to restore their original function: serving real economic development;
2. ensure that the current economic system develops a “circular flow” based on renewable energy and recycling; and
3. establish social balance, on a local and a global level.

While the “Green Capitalism” model focuses exclusively on the second pillar, the Green New Deal explicitly has two additional dimensions.   The goal of the Green New Deal is not to rescue the global financial capitalism by giving it an ecological basis.  To the contrary, Roosevelt’s New Deal was chosen as a model because it not only regulated financial institutions, but also introduced the minimum wage, granted union rights (e.g., the freedom of strike), and implemented progressive taxation and social security.  Through such means, it altered the distribution of power and wealth.  The concept of “Green Capitalism” can be rejected since it would fail to alter either the distributive patterns of growth or the unchecked power of the financial markets.

In addition, the concept of the Green New Deal is far superior to an approach, suggested by some, that argues for lowering greenhouse gas emissions by shrinking the economy.   Indeed, a shrinking economy does lower levels of carbon emissions (witness the collapse of the Eastern European economies or during the current economic crisis), but it also leads to a significant rise in unemployment and an explosion of national debt.  Therefore, it is irresponsible to advocate for a constantly shrinking economy. The dilemma is that, while lower levels of economic growth may curb climate change, it intensifies the poverty crisis.  On the other hand, while higher levels of economic growth may help reduce poverty and improve distribution, it exacerbates the climate crisis.

To resolve the dilemma, we need to foster a model that bears in mind the ecological, economic, and social dimensions of economic development. Only a Green New Deal which transforms these three dimensions of policy can address the needs of a burgeoning number of vulnerable people who are consumed with fears about job insecurity, the adequacy of their retirement pension, or how to finance their children’s education or a medical procedure.

For the first time, the failure of our current economic system is obvious to the great majority of people.  History will judge us harshly if we allow this crisis to “go to waste” by failing to remodel our economies in sustainable ways. Otherwise, there may be a new type of crisis in the near future: a crisis that calls into question the legitimacy of our political systems.

The European Union is in dire need of new economic government arrangements as a consequence of forming the currency union and learning the lessons of the global financial and economic crisis. Tighter cooperation with regard to the economic policy is needed to ensure the success of the currency union.  But how might stronger cooperation be realized? To answer this question, one needs to scrutinize the prevailing governance of the Euro area in regard to two points: First, the inflation of consumer prices which is controlled by the European Central Bank (ECB) and, second, state expenditures, which are controlled by the European Commission in compliance with the European Stability and Growth Pact.  This governance arrangement creates two blind spots.

The first blind spot relates to private debt.  In recent years, the private debt soared in those Euro-countries which were most seriously hit by the economic crisis. For instance, Spain and Ireland accumulated private debt of more than 160 per cent of their gross domestic product (GDP). This rise inflated asset prices, especially the prices for real estate and financial assets. But the European Commission and ECB were not alarmed by these developments. To the contrary, prior to the crisis Spain and Ireland were heralded as shining examples with respect to their state expenditure levels which met the targets of the European Stability and Growth Pact.
But the crisis-stricken countries had only one way out – namely, to increase public expenditures in order to stimulate private consumption. This reaction to the crisis increased the public deficit and led to a breach of the Stability and Growth pact.  This situation illustrates why the ECB and the European Commission must overcome their dogmatic belief that, in a currency union, it is only public debt which causes difficulties.

The second blind spot of the current economic governance arrangements relates to the shifts in relative competitiveness among the EU member states. Germany’s competitiveness grew because, during the last ten years, harsh wage restraints were put into effect. But this caused a tremendous imbalance in the current account.  No one can rebuke Germany for its world champion status in exports due to the high quality products.  Yet, it’s not quite normal that wage restraints depress Germany’s demand for higher levels of imports.  A race to restrain wages isn’t a good idea for the Euro zone. In a strongly integrated economic zone, such as the European Union, the current accounts surplus of one group of countries is the current account deficit of another group of countries.

For its member states, the Commission’s key indicator must be the trade balance. As soon as the imbalances exceed three percent of gross domestic product, the Commission must begin a process of surveillance and – if necessary – reap the political consequences. Where the deficit or surplus exceeds 5 per cent of the GDP the surveillance process should be obligatory. Today, for example, Greece’s current account deficit with other European states (14.4 per cent of its GDP in 2008) forces only the Greek government to act. But, as a German politician I have to admit, the German surplus (7 per cent of GDP in 2008) necessitates a change in German policy as well.

There are also institutional gaps to be filled. George Soros is right when he states: “It is clear what is needed: more intrusive monitoring and institutional arrangements.” To achieve this, a reliable and a verifiable data base is needed because, at this point, Eurostat is dependent on the national reports from the member states. Soros is also right when he reminds us that a currency union needs a central bank and a finance ministry. Of course, in the institutional context of the European Union, we would not think about the creation of such an institution in the first place. But it is crucial to establish at the European level the competences that a finance ministry possesses: taxation, control of a budget that can be adapted in times of crisis, the right to implement and enforce the economic policy guidelines, and the organization of financial transfers between parts of the Union.

Whereas the union requires closer co-operation among member states, the need for unanimity in decision-making makes political progress very difficult in matters such as the Eurostat problem and the move toward more binding economic policy guidelines.  While European leaders are considering the levying of EU-wide taxes and the strengthening of the fiscal policy role by increasing the European budget, these matters are still on the side lines of the political debate.  Still, one should not expect that closer economic policy co-operation by member states, in and of itself, will be sufficient to avoid a breaking up of the currency union in the long run.

The issues raised here require a bold political move…a complete turnaround in the economic policy of the European Union. But a turnaround is needed if we want to avoid further crises in the European Currency Union.

According to UNDP, limiting global warming to less than 2° Celsius above the pre-industrial era is estimated to require about $250 billion a year in additional investment to “green” the world economy in 2010-2015.  Governments would be wise to meet this target by investing in low-carbon development – particularly since the cost of the alternative is much more expensive.  However, high and rising government debts will significantly preclude this path.

In order to avoid climate catastrophe, we need to focus on the role of private finance in climate change.  At present, the level of private investment in renewable energy is only a “drop in the bucket” compared to overall investment levels.  It is urgent that more private capital be channeled into financing sustainable technologies, eco-funds or energy efficiency initiatives in order to fight against climate change.  However, the majority of banks are making a negligible contribution to the promotion of sustainable investment strategies.  Indeed, private investors are often unaware of “green investment” options, since banks do not usually include such funds in their portfolios and, when they do, clients are seldom informed about them.

The financial crisis could be the window of opportunity to change this situation – assuming that governments are willing to provide banks with incentives to change.  Governments are well-positioned to carve out a more constructive role for banks — not only because they are spending billions of Euros and Dollars in rescue packages, but also because they are frequently becoming  bank shareholders  with voting powers commensurate to their holdings.   Bearing in mind the fact that all developed country governments are wielding high-flying rhetoric about the need to fight climate change, it would make sense if – as bank shareholders – they set out sustainable investment priorities for banks.  The report “Financing Objectives 2020 – Mobilising Private Capital” (Sustainable Banking and Public Policy Consortium) correctly points out that “it is certainly within the interest of governments to ensure that overall State interests along a broader set of metrics are also represented in the banks’ lending and investment policies.”  It seems self-evident that mitigating climate change is an “overall State interest.”

In response to the financial crisis, some governments – not all and not enough – have formulated economic stimulus packages that support climate-friendly technology sectors.  Nevertheless, governments have usually relinquished their power to shift the priorities of “their” banks through, for instance, voting on shareholder resolutions or appointing a member of the Board of Directors.  This power should be exercised not only in regard to investments of existing capital but also  in efforts to leverage more “green” private capital through improved consultation with prospective investors.

When it comes to shaping a new, sustainable banking system, governments are not only able to exercise influence through their shareholding, but also by implementing effective laws and policies to finance green technologies.  The international debate on regulation of financial markets neglects the significant potential of such strategies.  However, positive examples exist.   France and the Netherlands have established green savings accounts and lending programs.  This is a beginning, but more is needed.   Banks should also be required to report on the climate impacts of their investments.  Incentive and subsidy mechanisms must complement bank policies.  And last, not least, public money, e.g.,  public pension funds, should to be invested following sustainability criteria – everything else contradicts the efforts taken by national governments to fight climate crisis. In the end, greening the financial sector has a lot to do with policy coherence.