EIB Annual Economics Conference 2021
Never waste a good crisis
Let me start with a few words about the context we are now operating in.
Winston Churchill reportedly said: “never waste a good crisis”.
This is not a “good” crisis that we are living through.
But it should not be “wasted”.
Because the fact is that the coronavirus pandemic provides a unique opportunity to question – and possibly remake - our economic foundations.
Depth and breadth of the crisis
The challenge we are facing is enormous.
In the European Union, we are talking of lost income in 2020 alone in excess of €1.5 trillion.
These estimates may yet prove to be conservative.
It is a fair assumption that around 40 per cent of consumption in a modern economy relies on close social contact.
The impact of the crisis on the livelihood of individuals has also been very great.
In emerging markets where the EBRD operates, in the EBRD regions, a striking 73 per cent of respondents – to a study conducted by the EBRD and the Munich-based independent research group, the ifo Institute – say they have been personally affected by the Covid-19 crisis.
This compares with 41 per cent of respondents in advanced Europe.
Job losses, and, in particular, business closures, appear to be already more widespread than in the aftermath of the global financial crisis.
The burden of the crisis has been disproportionately borne by those with lower levels of education and income.
This, in turn, means that the Covid-19 crisis is having a deeply negative impact on inequality, in advanced economies and emerging markets alike.
It has also exposed the fragility of many jobs in the services sector.
Governments have responded with ample fiscal and monetary stimulus, in advanced economies and in many emerging markets.
In the EBRD regions, large fiscal stimulus packages, exceeding 4 per cent of GDP on average, helped to cushion the impact of the crisis on individuals and firms.
The survey suggests that fewer individuals lost their jobs, had to close a family business or were otherwise impacted by the crisis in economies where fiscal stimulus packages were larger.
But this also means sharp increases in public and private debt, to historically record levels.
In the EBRD regions, debt-to-GDP ratios are projected to rise, on average, by more than 11 percentage points this year.
This is thanks to higher government expenditure, lower revenues, sharp contractions in GDP and, in some cases, exchange rate movements.
Average public debt in economies where the EBRD invests was estimated to exceed 63 per cent of GDP by the end of last year.
Most emerging market economies and advanced economies face much lower costs of borrowing.
This helps sustain higher levels of debt.
But already the strain caused by higher debt is evident in some economies where the cost of financing has risen rather than declined, from Belarus to Zambia, from Lebanon to Tunisia.
If the recovery from the Covid-19 crisis takes off and interest rates start rising, we may need novel solutions to debt restructuring.
Given all this it is hard to be too optimistic.
And yet history does offer plenty of reasons for hope.
For thinking that this crisis will not be wasted.
Recent history is full of periods of major economic and social upheavals that were deeply traumatic.
Yet many of them gave rise to features of the modern economy we very much value today.
After the crises of the late 19th century, modern anti-trust policy was born.
The Great Depression of the 1930s paved the way for the provision of public infrastructure on a large scale.
The Second World War was followed by the establishment of the welfare state – public provision of health care and education.
It also gave rise to major public funding of research and development, an innovation that helped create today’s digital world, for instance.
And the post-war period also gave rise to multilateral development institutions such as ours.
In other words, each crisis has reshaped the role the state plays in the economy.
We looked at this in the EBRD’s most recent Transition Report, entitled The State Strikes Back.
So history shows that there is nothing provocative or shocking in the belief that today’s very deep crisis is an opportunity to think ahead to the future.
And to build back better economies.
Building back greener economies
We feared in March 2020 that COVID would prompt a slowdown in green transition. But in fact it seems the momentum has accelerated.
(China, South Korea, Japan, and the new Biden administration are all committing to net zero).
The European Union has shown great leadership.
It strengthened its reduction target to minus 55% by 2030, the most ambitious in the world.
And the European Green Deal sets us in the right, ambitious, direction to do so.
There is an opportunity to integrate a ‘tilt to green’ approach into our public and private investment programmes aimed at speeding up the recovery from the Covid-19 crisis.
In the short term, countries’ responses to the Covid-19 crisis should ideally seek to foster a transition to the green economy in two main ways.
By providing state support for greener industries and firms.
And by backing labour-intensive projects with clear environmental benefits, such as the retrofitting of buildings and investment in public transport infrastructure.
In the medium term, the focus will need to shift towards removing the barriers which are currently impeding the green transition.
Need for a nudge
In addition to incentives and financing, firms need a “nudge” to think green.
The latest round of Enterprise Surveys conducted by the EBRD and the EIB jointly with the World Bank in around 40 economies asked firms detailed questions about their green investments and energy efficiency measures.
Most firms do not do green investments.
When asked why, only 13 per cent or so cite lack of profitability.
Same for access to finance.
60 per cent simply say green investments are not a priority.
Yet evidence also suggests that a “nudge” can change that.
Firms that have experienced losses due to extreme weather – floods for instance – are much more likely to think green.
Indeed, customer pressure can also be effective in giving firms a nudge they need.
Or a nudge could also come from government regulations.
EBRD and the green economy
The green economy is an area where EBRD has been very active for a long time.
We made a commitment to promote ‘environmentally sound and sustainable development’ at the time of our creation 30 years ago.
And last autumn we announced the goal of becoming a majority green bank, ensuring that more than half our investments are green, by 2025.
We were almost there in 2019, but with the crisis it was reduced which shows the tension between short term and long term.
Working in a challenging region
In the regions where the EBRD operates – Emerging Europe, Central Asia, and now also the Eastern and Southern Mediterranean – we face a particular challenge.
These economies started the 1990s with very high levels of pollution.
This was one of the unfortunate legacies of central planning.
The economic models used by central planners typically disregarded environmental and transportation costs.
Over the years, economies in the region have made remarkable progress.
They have roughly halved greenhouse gas emissions per unit of production.
And yet EBRD economies remain roughly one third more polluting than emerging markets with comparable levels of per capita income.
Working with partner banks
So there is a lot to do.
One very effective tool to help firms think green in our regions are targeted credit lines.
This is an area where the EBRD has done much work in partnership with more than 140 partner banks in 25 countries.
Under our green economy financing facilities, we have provided more than 300 green credit lines to our partner banks for on-lending to smaller businesses green projects.
This way we have reached out to almost 200’000 (two hundred thousand) small and medium-sized enterprises since 2006.
Through these projects, we helped achieve emissions reductions of more than 8 million tons of CO2 per annum.
Working with municipalities
Another very important area of work for all of us is that of creating greener, liveable cities.
Cities are where growth and innovation happen and where people move.
Yet they are also major sources of environmental degradation and pollution.
And the investment we make in cities determines the path of their development for centuries.
With this in mind, we have been working on green city action plans with 45 cities.
These plans cover areas from public transport (frequently, via the purchase of electrical vehicles and renewing old bus fleets) to the rehabilitation of district heating to waste management.
Local priorities are driving this agenda, also thanks to citizens’ demands.
A lot of work on-going also on aligning to the Paris Agreement. Together with the EIB, e.g. on joint methodologies.
For several of EBRD’s countries of operations seeking to move onto a green, low-carbon trajectory adjustment costs need to be managed through a ‘just transition’.
For this reason we are partnering with Governments in the EU and beyond, such as in the Western Balkans and Ukraine, to support them in the preparation of Just Transition Plans.
Green and smart: Concluding remarks
Greening our economies is the most urgent challenge we face in the post-covid world.
It is also one area where real change can only come from the private sector.
Governments and international organisations have to show leadership.
They need to appreciate the urgent need for action and strongly nudge firms towards it.
This requires many coordinated steps.
Pricing energy and emissions differently.
Introducing globally harmonised standards and regulations for environmental protection and reporting.
Providing targeted financing instruments.
Supporting equity markets to encourage green innovation.
And creating liveable, greener cities
To name but a few.
The world is crying out for leadership here.
I believe that Europe can and must continue to provide that leadership, including beyond its borders.
It is collectively the largest donor and contributor to aid and sustainable development around the world.
It is very good that the US will re-join.
Thank you for your attention and I will be happy to take a couple of questions.