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October 25, 2019

We should listen to what Mario Draghi is saying about the future of the euro

European newspapers are saying their good-byes to Mario Draghi, who gave his farewell press conference as ECB president yesterday. We will focus on his forward-looking reflections on the future of the eurozone, which we think are very important. As he's still ECB president, he is naturally cautious. We hope, and expect, that after an extended post-retirement purdah, he will become more explicit in his public pronouncements. But even what he said yesterday gave us some insights into this thinking.

Since Draghi had pretty much exhausted the policy arsenal at the previous meeting, there wasn't much new yesterday, but he was more interesting on the future of the eurozone. Asked whether he expected governments with fiscal space to heed the ECB's call for timely and effective action, he answers that the effectiveness depends on whether fiscal stimulus will spill over from the countries that can apply it to countries that need it. He believes that national fiscal policy has only limited spillovers across borders. In the long-run, the spill-over effect will depend on progress towards a central fiscal capacity for the eurozone with a genuine capacity to stabilise the economy over the economic cycle. That in turn will require changes to the governance of the institutions that are created to carry out that central fiscal function. At the national level, the German debt brake is an example of an issue of governance that may stand in the way.

This is probably as much as Draghi could say without stepping outside his mandate as ECB president and on everyone else's toes. But the direction of travel is clear. His remarks put him on one end of the policy debate at the top of the eurozone, advocating a large central fiscal capacity with a countercyclical stabilisation function. But he is also clearly mindful of the political and institutional obstacles that need to be overcome.

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October 25, 2019

Kurz focusses on Greens after other parties dropped out

Coalition building in today's world is no longer only about which party is the most compatible politically and numerically. It is also about how well a coalition reflects society's concerns. The Greens emerged as the new go-to party in this respect. After their stellar rise in the Austrian elections, they are in pole position for a coalition government despite their differences with the conservatives.

The ÖVP expect talks to continue for weeks amid a vast array of political differences. Sebastian Kurz still won't talk about government building, these are just exploratory talks to evaluate common ground. A minority government is still possible if there is no agreement. But the Greens are the only party still left for coalition government talks.

What happened to the other parties? The Socialists dropped out of the race already after the first round. Voters have no appetite for a grand coalition, and neither did the politicians. The liberal Neos left the table after round two, Der Standard reports. They may have been compatible with the ÖVP on economic policies, but when it comes to socio-political subjects the Greens fit the bill better. In any case the numbers won't add up, as the two parties would not have a majority together. Kurz might still count on them in parliament if he needs large majorities for his reform project. But not as a coalition partner. 

What happened to the former coalition partner, the far-right FPÖ? They are out of the picture too. The party is currently torn by internal divisions between old and new leadership that could end up with former leader Heinz-Christian Strache breaking away. Each side blames the other for the electoral setback that reduced their vote share from 26% to 16%. Another point of contention has been the party's decision to deny Strache's wife a place on their ticket. Strache is still influential with a large number of party members. He could end up like Jörg Haider, the party’s most successful vote-winner, who split from the FPO in 2005 after an electoral setback triggered dissent over his position in the party, writes the FT

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October 25, 2019

Is sustainable investment just a matter of deepening capital markets?

Sustainable development is a big policy topic right now. There is no question that the investment needs to meet the UN's sustainable development goals are huge. A typical stance by policymakers is that the public sector will not be able to mobilise sufficient investment, and this implies the need for deepening global financial markets for sustainable investment. This seems to be central to the approach adopted by the European Commission in its newfangled International Platform on Sustainable Finance.

The final chapter of the IMF's financial stability report also focuses on sustainable finance. What does this have to do with financial stability? The IMF focuses on two sorts of risks related to climate change. The first is the direct physical risks resulting from catastrophic weather events and economic disruption resulting from changing climate trends. The second is the fact that a transition to a low-carbon economy will have major economic costs including the loss of value of so-called stranded assets - those that are valuable in a high-carbon economy but not in a low-carbon economy.

One way to address these risks is to make them a factor in prudent investment governance before they fully materialise, by introducing reporting requirements and clear metrics on environmental social and governance factors. This would encourage the collection of data, and allow an expansion of the universe of sustainable investment opportunities. 

There is an ongoing attempt to establish sustainable-labelled debt. Its growth trend is typical of how a new product gains market share, but it is still too slow. Global issuance of green, social or sustainable bonds is on track to reach $250bn globally in 2019. But this is less than just the European Union needs to invest by itself to reach the targets. The European Commission, in launching its IPSF initiative, estimates the EU's own needs are at between €175bn and €290bn of additional investment each year. Issuance of Green bonds in Europe is expected to exceed €75bn this year. 

This is why the idea that all that's needed are deeper capital markets is flawed. It seems to rely on the idea that there is idle or badly invested capital that can be redirected to sustainable goals given the right incentives. The main incentive that is missing for private investment is the long-term direction and the reduced uncertainty provided by stable regulation and the kind of large-scale public investment that governments labouring under fiscal rules simply cannot undertake.

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