OFCE's Timbeau: A high carbon tax would help end economic stagnation

EU leaders should see public debt reduction as a long-term challenge and not be afraid of making investments for the future. Cutting debts quickly can increase unemployment and make a country worse off, Xavier Timbeau told EurActiv France.

Xavier Timbeau is an economist and director of the French Economic Observatory (OFCE), which contributed to the publication of the 2017 independent Annual Growth Survey.

Timbeau spoke to Aline Robert, Editor-in-Chief of EurActiv France.

The EU’s current economic growth prospects are modest at best. What can we do about this?

High long-term growth rates are not necessarily desirable or compatible with sustainable development. On the other hand, a return to full employment is desirable and socially necessary. We have to find ways to generate more activity, even if economic growth does not reach the levels we saw in the post-war years.

So for you, the question of debt is not a priority?

We have to distinguish between two different issues. Either we aim for a return to full employment with a sustainable environmental, social and political programme, or we just aim to resolve the question of debt. These are two separate things.

Any attempt to tackle public debt must be carried out as a long term strategy, taking into account the lower levels of economic growth and analysing their consequences. By dealing with this as a short-term problem, we may be able to reduce the debt more quickly, but we are likely to see an increase in the unemployment rate and we could end up with deflation, which would make the debt worse.

You believe the Juncker Plan was a good idea, but all it did was to cut interest rates. Why is this?

The Juncker Plan funds serve as a guarantee for private investments, allowing borrowers to reduce the risks attached to interest rates. In the end, the Juncker Plan is just an insurance policy whose impact is not necessarily all that positive. It contributes to diminishing the profitability of private investments, so it does not encourage investment in general.

The diagnosis is right, but the instrument is too weak and has too little leverage. We should go further. As a traditional budgetary relaunch is not possible, we need economic strategies that strengthen the member states’ bottom lines, which allow them to make investments for their future in education, renewable energies and research.

How could a carbon tax help us out of the crisis?

Europe’s economy is completely entangled in the crisis and it suffers as a consequence because there is less investment than elsewhere. But the question of climate change can offer a solution to this problem: the social return on any investment in the fight against climate change is high.

We propose establishing a carbon tax at €100 per tonne. This is a reform, rather than a revolution. It would allow us to devalue existing capital and make private investment profitable again. As well as to get out of this long period of stagnation we have been stuck in, with too much unemployment and not enough technical progress. A high carbon price would change the situation.

The idea is to whet the appetite of investors for tomorrow’s energy sources by guaranteeing their profitability. With the carbon market, we fixed unambitious objectives that have been reached without the carbon price increasing, due to the crisis and the industrial slowdown.

Imposing a high price across Europe is a credible response: it is what Sweden did. And it worked!

But won’t the poorest households end up paying the price for this?

Of course, we would need to put in place fiscal compensation mechanisms. But the transfers needed would not be huge either. They would represent about 1.5% of GDP – less than what was transferred in France with the tax credits for competitiveness and employment (CICE). The CICE was a transfer of 2.5% of French GDP from households and businesses to innovative companies.

The problem with the gradual approach is that people see it as something for the very long term, so they don’t change their behaviour. If we establish a carbon price in the next two to three years, consumers will immediately start to think of buying an electric or hybrid car, they will not wait. This is what will change the trajectory.

Is there not a risk that Europe will put itself at a competitive disadvantage by imposing a €100 carbon tax?

Of course, in this case, the carbon tax would also have to be established at the borders, that way, if the rest of the world does not follow the same course towards decarbonisation, imported products will be taxed according to their CO2 footprint. This would be enough of an incentive and the tax revenues at the border would pay for compensation.

Doesn’t this fly in the face of the free trade agreements that seem to be appearing around the world?

The environment is one of the two arguments accepted by the World Trade Organisation for imposing trade barriers, along with consumer safety.

You also argue for a revision of Europe’s economic governance.

Yes, I do not believe in the idea of a federalist leap. That won’t work. And the idea itself may be frightening to European citizens, because it means abandoning a framework that sort of works and stepping into the unknown.

On the other hand, I think we should introduce more democracy into the sovereignty that is shared at European level. For example, in terms of monetary policy, the European Parliament must have the power to exercise real control over the European Central Bank. Today, we cannot change the status of the ECB without changing the EU treaties. The system is too rigid, which leads to its constantly being called into question. More democratic control could also increase the legitimacy to the ECB’s actions.

But the European Parliament has managed to strengthen its powers of economic oversight.

That’s true, but the strategy is not very visible. The Parliament managed to impose its will on the Banking Union and the election of Jean-Claude Juncker, and it should gain even more importance with Brexit. But it has to go further.

On the Banking Union, the pillar of deposit guarantees is missing. Why is the subject not progressing?

We have to be pragmatic. The Germans do not want to commit because it would make them liable for the excesses of the Italian banks. I think this subject has to be resolved first. We propose the establishment of a “bad bank” scheme, in which the ECB would supervise the buying of shares.

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