Conference Summary 6 April 2022: A new EU Economic Governance for the Green Deal?

Brussels/Berlin, April 2022

Summary of Conference 6 th April 2022,

by Climate & Company

A new EU Economic Governance for the Green Deal?

LESSONS FROM THE PAST AND REFORMS FOR THE FUTURE

Organisation: Organiser: Climate & Company (https://climateandcompany.org/) Sponsor: European Climate Foundation (https://europeanclimate.org/) Date and time: Wednesday April 6th 2022, 11:00-13:00 Speakers and panellists: •

Mihails Kozlovs, Dean of Chamber IV of the European Court of Auditors

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Reinhard Felke, Director of Policy Coordination, Economic Forecasts and Communication at the Directorate-General for Economic and Financial Affairs (DG ECFIN.A) of the European Commission

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Dr Astrid Klesse, Deputy Director General for General Economic Policy, Federal German Ministry for Economic Affairs and Climate Action (BMWK)

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Tim Gore, Head of the Low-Carbon and Circular Economy Programme at the Institute for European Environmental Policy (IEEP)

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Louise Simon, Analyst at Climate & Company

Moderator: Dr. Oliver Herrmann, Partner at Climate & Company

Input by Mihails Kozlovs (European Court of Auditors): “Backward-looking perspective: what has worked well and not so well in the past with the European Semester?”

The event is very timely and there is a high importance of acting proactively in the field of climate change: the European Semester is one of the tools to achieve this.

The European Court of Auditors has performed several performance audits of the European Semester/EU Economic Governance in the past.

European Semester: •

Framework for integrated surveillance and coordination and economic and employment policies across the EU

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EU treaties provide the appropriate base because economic policies are a matter of common concern

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How future-proof are these provisions?

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Depends on appetite for reforms from national governments

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But as various crises appear more and more frequently, we come to realize that common concerns and the need to avoid weak links should also lead to more conversions in terms of important structural reforms

Before, we talked about the economic and financial spill-overs, and now we might also face the green and security spill-overs. o

Avoiding weak links should not only be applied to economics and finances but also beyond

Financial and economic crisis of 2008-2012 exposed fundamental problems and unsustainable trends in many EU countries: made it clear that EU economic are interdependent and interlinked.

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More surveillance and coordination were needed o

More peer pressure and responsibility in Member States

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More common tools at EU level

Despite various criticisms, the European Semester has become a well-established form for discussing fiscal, economic and employment policy challenges in a common annual framework. The Commission has made various efforts in enhancing national ownership.

In the last couple of years, we have seen various elements of flexibility within EU economic governance.

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In several cases, this flexibility was basically a one-way ticket to increase spending post-reforms without adequate and timely compensation measures to ensure sustainability.

For flexibility in future rules (for green spending for example), there is a need to make the assumption about the green nature of the investment, their timeline, their positive impact on the economy and expected results are actually achieved in practice.

There are a multitude of challenges and uncertainty (Recovery and Resilience Facility, invasion of Ukraine by Russian military forces ) and these complicate the search for the optimal policy coordination framework.

An open question is regarding an integrated strategic framework, as we had before with the Europe 2020 Strategy.

To what extend has the Semester contributed to the achievement of the objectives of the European Green Deal?

Important to assess the effectiveness and efficiency of existing policy tools and framework before revising the current tools to address the new challenges.

The European Court of Auditors has produced a considerable amount of reports on various economic and financial issues, including the Stability and Growth Pact (SGP), the preventive arm of the Semester, the Macroeconomic Imbalance Procedure (MIP), the national budgeting framework, etc.

On the implementation of the European Semester, the central piece is the Country-Specific Recommendations (CSRs), which are drivers for reforms agreed under the Semester.

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Implementation is below expectations and could have been better

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The ECA concluded that the Commission did not sufficiently use its powers to recommend specific measures if Member States do not address adequately their CSRs int heir reform agendas

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Shows lack of commitment and lack of ownership in Member States themselves

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The Commission services have to be appreciated and recognized

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Out of the 5-7 CSRs per Member State, only the fiscal CSRs are theoretically enforceable o

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There is a high level political ambitious agenda, but there is a lack of tools to ensure that these reforms are actually implemented, in time with timelines but also in substance

How to ensure the achievement of the climate goals? o

The RRF is a first step in that direction, but the sustainable investment needs are very high

o

The ECA concluded that there is insufficient link between EU budget spending and CSRs implementation and therefor recommend the Commission to strengthen this link. The ECA will soon publish a new report, analysing the link between the CSRs and the RRF

In 2018, the ECA audited the MIP and found that, although the MIP is generally well designed, the Commission is not implementing it in such a way to ensure preventive correction of imbalances.

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What would be of more interest, looking forward, in terms of effectiveness of the European Semester as a governance tool, is that the Commission has never recommended the activation of the Excessive Imbalance Procedure, despite various Member States being identified as having excessive imbalances. This is another signal that enforcement has been an issue, which needs to be addressed going forward.

Maybe enforcement is not the right approach when we talk about multilateral coordination among sovereign countries. Enforcement might be, as a concept, counter-productive.

The increased prominence of the green objectives in the Semester framework: •

Implementation of Europe 2020 Strategy Semester. One of the five pillars of the Europe 2020 Strategy was climate change and energy, including four numerical targets. ECA report showed that they were on track to be met in 2020

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Commission started to monitor progress of national policies toward the achievement of the Sustainable Development Goals (SDGs) and to issue CSRs related to those.

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One observation regarding these integral strategic reports: the EU has now approved a different approach for the next decade: Europe 2020 succeeded by SDGs and European Green Deal, not

captured in a single strategy. So, there is no integrated strategy for the next decade as we used to have in the past with the Europe 2020 Strategy, and the Lisbon Strategy before that. o

The new Commission took a sector approach, with binding targets in various directives and regulations. There might be difficulties in monitoring the progress on all these targets.

To conclude, Mr Kozlovs certainly sees important reasons for the Semester to be adapted to take care of transitioning EU economies towards climate neutrality. There is a need for an integrated governance framework. With the war in Ukraine, there is an even bigger emergency now, not about only climate neutrality but also the energy security dimension of climate neutrality. If achieving these objectives implies significant structural reforms across all sectors, the EU Semester, CSRs and MIP have a bigger role to play than nowadays.

Input by Louise Simon (Climate & Company):

“Climate & Company’s proposals for an improved European Semester which considers the financial perspective of delivering the European Green Deal” •

European Semester: unique semi-annual structure with different processes which make it a great framework for steering the financing of the European Green Deal o

E.g.: country-specific expertise, established ex-ante assessment of economic impact of measures and policies taken by Member States, high visibility of Member States economic policies to other countries and civil societies, etc

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Why reforming the European Semester? (1) it has certain flaws (low implementation rate of CSRs, lack of national ownership, etc); (2) does not yet reflect the shift of economic paradigm rightly caused by the European Green Deal

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5 key areas of reforms for a European Semester fit for climate neutrality: o

Understanding the investment challenge - monitoring the sustainable investment gap

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Understanding the environmental sustainability of national budgets green budgeting tool

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From fiscal footprint to fiscal space - monitoring environmentally harmful government support

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Skills for sustainable labour markets - monitoring employment policies for a just transition

using a common

o Membe More information and details on the areas of reforms proposed by Climate & Company: here.

Panel discussion: “What do you think are the main achievements of the European Semester and what is actually working well? But also, where do you see shortcomings of the European Semester and the economic governance structure at European level?”

Reinhard Felke: •

To recall, the Semester provides a framework for policy coordination of policy issues where the competences are with the Member States. We are in a context where we are trying to coordinate policies across the 27 Member States, where the legal competences are essentially with the national Member States (education, social, environment,

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Things we need to maintain going forward:

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Diagnosis, analysis of the situation in Member States, whose quality is appreciated by Member States, and the fact of sharing this diagnosis. Apart for some of the bigger countries, many Member States do not have the capacity to systematic look at all these elements. The commission provides in its analysis comparisons of Member States.

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The Semester provides a framework for integrated surveillance: looking at many different dimensions, which is partly also a problem or at least a challenge. The Semester is not looking only at fiscal, macroeconomic per se, but is bringing the social developments and climate-relevant developments and educational aspects into the prism of what is relevant for the macro-, social and sustainable development of countries.

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In terms of policy coordination, the Semester is matching EU priorities with national priorities.

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The governance structure of the Semester means that these issues (the diagnosis but also the CSRs) get the attention of heads of states of governments.

Shortcomings: o

Question : How do we measure the success of the European Semester?

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Can count the implementation of CSRs, but to Mr Felke, what is most important is to gain traction in national policy debates and to get some conversions of what the key priorities are. When we moved to the RRF, there was no doubt in Member States that the CSRs were the right point of departure, that they are the right priorities to be tackled in national reform plans.

The Semester should do better in gathering national ownership of what they do. Mr Felke diagnosed a bit of different degrees of attention across Member States: bigger countries are sometimes faster or more casual about shrugging off analysis and recommendations, while looking at the media echo in smaller countries, the impact might be more important.

Tim Gore: •

From the perspective of a civil society, bringing a more political economy lens to the comments and evaluating how the Semester and other instruments of economic governance helped to shape the power dynamics particularly at the national level and to what extent they can help civil society in particular to advocate for the kinds of measures that we may think are necessary.

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What has worked well: o

The Semester has worked well particular on the social side. We can learn a lot from social justice organizations who have been more thoroughly engaged in the Semester process, both at EU but critically at national levels for much longer. They have an institutionalized process within those organizations for engaging with the Semester officers at national level, mobilizing their national organisations and engaging in a detailed way throughout the cycle. Result: the Semester more deeply integrates the European Pillar of Social Rights and the Social Scoreboard. Lessons can be learned there regarding how the Semester can be a useful tool to stimulate national debate and empower civil society at national level to press for the kind of policy measure that we need.

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National Energy and Climate Plans (NECPs) have been helpful for climate considerations.

There is room for improv European countries, the NECPs are sometimes the only avenue for them to start engaging with their governments on difficult questions on climate and energy policies. The existence of NECPs has created the space for a form a dialogue between civil society and governments on these issues.

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All issues related to methodologies, analysis and coordination also point out to a start of things. While the lack of definition of fossil fuel subsidies is a problem, their inclusion in the NECPs is already a good start and shows what more progress is needed, allowing civil society and EU stakeholders to pressure the EU and Member States to improve their methodologies and governance frameworks. For all of the imperfections, the fact that all these processes exist does create space and opportunities for engagement.

Shortcomings: o

IEEP has in the past produced reports recommending a variety of indicators that would better reflect well-being economy objectives, sustainability objectives, etc. There has been some progress in that regard but more could be done.

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Regarding taxes: the majority of fossil fuel subsidies take the form of tax expenditures. So, if we want to address fossil fuel subsidies, we have to have some instrument for better coordination of tax measures, particularly energy tax measures in the EU. The Semester could be one of the avenues through which we can have a more sustained dialogue with about their tax systems.

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The tax systems is going to look a lot different through the transition in the coming ten, twenty, thirty years and it would make sense that the Semester process starts to create the space for long-term planning and strategy for long-term fiscal sustainability that takes into account the need to ensure the polluters are paying in the near term, but also that measures are in place to ensure fiscal sustainability.

Astrid Klesse: •

We should keep in mind for the European Semester where we come from: the idea of the Semester is to create better coordination concerning economic, fiscal and employment policies. Finance ministers are discussing the analysis of the Commission and the CSRs. We have to integrate all other duplication of processes and not to topics that are not really the competence of ministries.

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As Mr Felke pointed out, legal competences are still with the Member States. This is what Member States and the Commission always discuss and why Germany has not always followed the CSRs received.

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The performance of the European Semester: o

The Semester has strengthened multilateral coordination and surveillance and raised the awareness of structural challenges and the need for reforms. This helped the political discussions in Germany in many respects.

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Some core elements should be brought back to the Semester: for example, Member States mostly had bilateral consultations with the Commission. Those have been intensified as a result of the consultation on the RRPs, which have been really useful. We should go back to multilateral coordination and surveillance, including country reports and the fully-fledged CSRs.

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The implementation of CSRs and reforms is slow at times: reforms need a lot of time to be implemented. So a classification of CSRs regarding a time frame would be appreciated. We need to keep in mind that there are short, medium and long-term needs. Member States sometimes just need sufficient time to implement CSRs, which this is an issue that Germany has brought up to the Commission in the past. Germany has particularly been proposing for years to extend the Semester cycle to 2 years, for example. Might be an idea to increase ownership.

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See a high danger in duplication of processes and reporting obligations. When the Semester will be more focused on the green and digital transition, we really have to be careful not to duplicate discussions that are better been hold in other structures.

Inputs and questions from the audience: On measuring the success of the European Semester: •

Measuring success could be done by analysing whether a national debate has been open on the issues which have been raised in the European Semester (more successful countries in that regard such as Belgium, Italy and the Netherlands)

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Measured outcome of policies in the sense of common interest to the European Union. What is then a measurable output?

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Reinhard Felke: ultimately, the Semester should be about changing policy actions. In a way, this should be the ultimate way to measure success. This might be more indirect: many things take time, as pointed out by Dr. Klesse. The Commission is in principle open to the idea to move to a 2year horizon. o

The RRF changed the traction on the follow-up to policy actions: ▪

The NGEU envelope changes completely the incentives for follow-up on policy challenges and priorities in countries. It made a lot of sense and fostered the credibility of the tool that the allocation of the funds were in function of the challenges and needs of Member States.

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The approach: RRPs follows a bottom-up approach. The CSRs are not formulated in the level of details needed for the translation into plans. All the transition has been done by Member States

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There is a complementary combination of investments and reforms. The reforms in the RRF make it a way more sustained effort that will help countries to really anchor the progress being made.

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On average over the plans, we have well over 40% of the expenditures planned by Member States go to climate-relevant projects or measures. So, the RRF is contributing to making progress on the European Green Deal.

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Challenge the view of Dr. Klesse: share the view that it is sometimes challenging to keep the focus in the Semester, but the climate transition and the transformation of the economies, and the investment both from public and private sectors that need to be leveraged over the next decade are of no doubt of macroeconomic significance. Therefor the Semester needs to closely integrate that into our analysis and this is what the Commission is doing.

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With the RRPs taking up so much room for Member States actions (in a positive way), there will be way less room for additional CSRs. However, with the war in Ukraine and its implications for the EU and its Member States, the energy security matter will be very prominent in the CSRs this year.

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Astrid Klesse: fully share the view that we cannot and should not exclude the green transformation and energy supply discussion from the Semester. But we should think about which processes should be the central processes for the green and energy transition discussion. It would be better to have another process/forum for steering all those questions. We should still try not to turn the Semester into a mechanism that is the central steering instrument for a green transition.

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Mihails Kozlovs: if we look at what the Green Deal is, the whole purpose is to transform the EU into a modern, resource-efficient, competitive economy ensuring that by 2050 we should become climate neutral, its economic growth is decoupled for resource use and no person and no place is left behind. It in a way encompasses the issues that are now in the centre piece of the Semester. It is an economic issue. o

We have to avoid constantly postponing solution of important imbalances.

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We need a strong policy coordination framework. The ECA always advocate for these frameworks, because with framework we have clear goals for the EU and Member States, we can track progress, we can discuss with Member States and come up with some kind of solution.

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Tim Gore: it makes no sense to hive off consideration of the climate and energy transition into a separate process. We should aim to achieve a fully coherent framework. Assumes it would help with the many reporting requirements of Member States.

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Reinhard Felke: making progress on climate transition is almost by definition a European public good. Such public good is best produced at the central level. Or at least a minimum would require proper coordination. This is another argument that the Semester provides a good framework to bring this together.

Has Climate & Company analysed the European Semester, looking at the local and regional governance for driving the energy transition?

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Oliver Herrmann governments and the Commission. Question is particularly interesting because a lot of the

investment for the energy transition will be done at the local level. Maybe the Semester should encourage the governments to have discussions related to these kind of investment with local and regional entities and have them included in the drafting of National Reform Programmes, for example.

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Reinhard Felke: there are limits to the semester process as such. But it does not mean that regional or local issues are not being addressed, they are addressed for example in country reports and in the national Recovery and Resilience Plans (RRPs).

What do panellists think about the proposal made by Climate & Company to include the sustainable investment gap in the Semester?

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Oliver Herrmann: The RRF is the European part, the biggest contribution will have to come from national budgets and from the private sector. Are we really measuring correctly what is sustainable investment and are we reaching our targets? Investment needs estimates vary by a factor of 20, so having a clear picture of investment needs and where the sustainable investment gap stands would be a step forward. This could be a steering for the European Semester.

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Mihails Kozlovs: agrees that the RRF, as huge and important as it might look like, is only a minor part of the funds required for the green transition. certainly not replacing their own efforts from understanding that this is a common problem.

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Tim Gore: extremely important to put the focus on the sustainable investment gap. We are now in a completely different context in that regard than we were even 6 months ago. Before, we were talking about the sustainable investment gap in a context with ultra low interest rates and extremely cheap borrowing and we were already struggling to close the investment gap. Today, we have high inflation, and presumably entering a period of higher interest rates as well. The Semester idea to reform tax measures in this regard and to look at the broad tax system.

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Reinhard Felke: identifying the sustainable investment gap is hugely important but also hugely difficult to pin down. It is not a static thing, which makes it really hard to come up with such numbers. o

Public actions are needed, both on reform side and investment side, to crowd in private investment and to create the right expectations and predictability of the framework in which private actors take their investment decisions. Would see here a role for the NECPs.

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In terms of efficiency, we would want to make sure that each euro is spent where the biggest effect on CO2 emissions reduction will be. Do we have the adequate methodology?

Are we there politically in the EU to make sure the money flows in these projects where the biggest impact is? Not sure. More work to be done methodologically.

On making the European Semester more effective: •

Tim Gore: the importance of participation o more important than compliance is to focus on strengthening the participation of civil society actors in this process. There were efforts towards this with the RRF but this worked particularly well. the principle of participation, dialogue with effective workers and communities.

Any views on the role of the Semester to follow-up the implementation by Member States of the upcoming Council recommendations on a fair transition towards climate neutrality?

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Mihails Kozlovs: concerned by the fact that we have entered in the last decade in a circle of almost permanent crises. These crises somehow increase inequality. Many of the objectives discussed today might be undermined by this raising inequality and obviously then resistance by populations in Member States to these needed reforms. We have to address this issue very carefully and the issue of inequality should feature very prominently in a set of measures that they EU and its Member States will take in the future. In the European Semester, the inequality issue has already been quite present in CSRs of some of the Member States, and although dealing with this is rather a competence of Member States and enforcement by the Commission might be difficult, this issue concerns.

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Astrid Klesse: the social dimension of inequality is of course very important to consider. The Semester should not become a place where we think about the most important target, the most important issue to tackle. We have to think about how to put these targets into a tangible order. We have to think more thoroughly how to rank the targets in a way to produce the best results for all the fields of action.

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Tim Gore: the boundaries between macroeconomic policies, climate policies and social policies are increasingly blurred. We need a framework at the EU level that allows the interconnections of all those aspects of the policies.

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Reinhard Felke: the Semester provides a very well established and valuable framework for coordination. It allows to bring the different dimensions to the fore, and it identifies trade-offs, which prompts policymakers to set priorities. It would be an illusion to believe we could have one big governance scheme that addresses everything simultaneously and fully.

Curious about our proposals to reform the European Semester? Find out more: At Climate & Company, we understand the unique potential of the European Semester for the climate and sustainability transition in the EU. With our project "Greening the European Semester", funded by the European Climate Foundation, we are exploring how the Semester can become a key tool for achieving the European Green Deal and the EU's sustainability goals.

Stay up to date by visiting our project page and browsing our knowledge hub and its many valuable resources. For any questions or comments, get in touch with us:

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