ECB’s Wunsch: Europe’s Climate Transition Strategy More Credible Than US Inflation Reduction Act

13 February 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch on Tuesday said that the American Inflation Reduction Act (IRA) was inferior to Europe’s strategy in dealing with the climate transition, even if Europe had much room for improvement.

Wunsch, who heads the National Bank of Belgium, said at a session of EU Parliament on enhancing the EU’s growth potential that ‘Europe got it right. Its strategy is in my view more credible than the US IRA, which is incredibly costly and detrimental to the US trade partners.’

Still, in Europe, he criticised, ‘the debate has been largely framed as one of “finding” a lot of money, while at the same time reassuring citizens (and voters) that… it would not cost much’.

The stress on coming up with funding was misguided, he said. Rather, the question was one of what should be conceded priority in spending public money. He called for ‘credible and predictable’ regulations combined with carbon pricing as a way to incentivise the needed changes in behaviour.

Communication regarding the climate transition should be more candid, rather than trying to convince the populace that it could be a net plus in terms of employment and output, he said.

‘As a macroeconomist, it is my job to tell you that the climate transition is a negative “supply shock” that will reduce our growth potential’, he said. ‘So you heard me, this transition is not going to make us collectively richer.’

That there will be some winners from the transition does not change the fact that there will be plenty made economically worse off, he said. This should be stated, lest authorities lose credibility.

‘Without credibility, the first concrete signs of emerging problems will encourage popular anger and protests’, he said. ‘Just look at farmers...’

Authorities should also admit frankly that they don’t know what the transition will cost or exactly how the burden will be borne, and explain how they will address different scenarios, he continued.

It was increasingly expected that the costs would be like those of a major energy shock, with the key difference that these would be distributed over many years rather than a few weeks, he observed.

‘So I am one of those who believe that the aggregate shock to our collective wealth should be manageable’, he said.

‘But we should still do our homework on the “who will pay ?” part of the question’, he said. ‘This requires a granular, realistic, understanding of the costs per sector. But also of other political or technical constraints.’