The future has never been more uncertain, and that has more to do with the climate than the business cycle, argues Paul De Grauwe, one of Belgium’s top economists. “Not inflation, but climate is the biggest challenge we face today,” he said. “The entire market system could perish.”
The European Central Bank - whose policy-setting council meets this Thursday - faces a dilemma. If it wants to effectively fight inflation, it will have to raise interest rates, which in turn will lead to a recession. And if the ECB wants to avoid a recession, it has to accept inflation. Paul De Grauwe, professor at the London School of Economics and Political Sciences, outlined that dichotomy to Belgian financial intermediaries on Thursday at BZB-Fedafin conference in Brussels.
“So it is not surprising that the ECB is applying the brakes. As a result, there is now a lot of uncertainty about inflation and the business cycle. But we will get out of that, because the ECB has all the means at its disposal to defuse such a crisis,” he said.
‘Market system could perish’
The economist’s main concern is climate change, not inflation and the impending recession. “Not inflation, but climate is the biggest challenge we face today. Global warming and the destruction of nature will cause new shocks, which we will find difficult to control and which also threaten the financial system.”
“Indeed, the entire market system could perish as a result,” said De Grauwe. Because along with climate shocks, calls for government intervention will increase. “Whenever an economy is hit by big shocks that trigger existential crises, people want the government to act. This can easily give rise to authoritarian political systems that block the entire market system. So the climate crisis not only has the potential to put great pressure on the financial sector, but immediately on the whole free market.”
Public investments essential
Nevertheless, the economist said, it is clear what needs to be done. For a start, the environmental impact must be factored into the prices of products and services. And there needs to be much more investment in public infrastructure.
“Public investments are essential in the transition to a green economy. Such investments do not create cash flow, making them unattractive to private investors. The government has to take that on,” he said.
Those investments cost dearly, of course, and inevitably the government has to look for more revenue, think additional taxes for polluting companies or for the very high-income earners. “Environmental policy can only work if it is accompanied by redistributive social policies, because many of the energy measures will be felt most heavily by low-income earners.”
Democracy endangered
The economist also sees dangers for democracy. “One of the reasons why climate policy is so difficult is that there is still a lot of disinformation circulating. We see small groups of people with very large resources exerting such influence on the media that it even endangers democracy.”
Paul De Grauwe (Uccle, 18 July 1946) is a professor at the London School of Economics and Political Science and full professor emeritus at the Catholic University of Leuven. He is a former Belgian senator for the Flemish Liberal Party. He is one of Belgium’s best-known macroeconomists.
This article originally appeared in Dutch on InvestmentOfficer.be.