In a world with too little growth and where most central banks continually miss their inflation targets, there is an acceptance that stimulus measures are not working as hoped. It has been left to the central banks and monetary policy to generate a wealth effect and discourage saving in a bid to promote investment and economic growth. Unfortunately, this has increased wealth inequality, while negative interest rates have had unintended consequences for both the banking sector and the savings industry. Something has to change.
There is growing acknowledgement that a coordinated and integrated approach to both monetary and fiscal policy is required to lift activity and prosperity to a higher and more self-sustaining level. Fiscal rectitude is of course required, but during times of growth and prosperity, not when economies are growing below their potential, with large output gaps.
Over the past few years, austerity has simply not worked. The trouble is that government debt levels are high and rising and there is fear of a political backlash if fiscal initiatives are enacted. With double digit levels of returns on capital available in many developed regions (this is not Japan of the nineties), governments need to think of spending as an investment in the future and a way to help catalyse commitments from the private sector.
Large economies, particularly those running a surplus, should certainly be taking advantage of low or even negative long-term interest rates to improve their productivity and competitive position in the longer term. There is still a stigma, however, to initiating such spending. One way around this is to use the changing public and business perception to climate change and green initiatives to legitimise the need for fiscal investment.
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Green bonds have come to the fore in recent years, offering investors the chance to make profitable investments while doing good. In their basic form, raising money that will be dedicated to a particular cause, while the investment is underwritten by the creditworthiness of the issuer itself, has been a great success. Why can’t such a simple principle be applied to government financing?
Currently, legislation in many regions prohibits the ring-fencing of funds, but this can be changed. There could be numerous benefits. Governments could raise socially acceptable funding for long-term investments, such as decarbonisation or adaptation initiatives to climate change. This could be particularly appropriate for projects that don’t have a steady and predictable cash-flow stream, such as costal erosion or flood protection, and are not ideally suited to private sector investment.
The electorate would see that spending is on dedicated projects where the funding is ring-fenced and fully accounted for. The governments themselves would be seen as taking a leading role in repositioning their country’s future and competitiveness, while institutional investors would have access to currently scarce long duration assets to help manage their liabilities.
A sustainable investment
Green bond financing would offer funding that could bridge election cycles and be dedicated to initiatives over decades. Governments have a unique opportunity to take advantage of the lowest possible funding costs to embark on projects that will need to be undertaken at some future point anyway. By bringing them forward they can stimulate economic activity and entice private investment flows. France, at least, seems to be moving in this direction.
I have no doubt that future generations will look back at the current negative interest rate environment and be baffled by why they was not used constructively to invest for the future, at a time where that future was uncertain precisely because of low growth and a lack of investment. While clearly such a green initiative will not in itself provide a sea change for global growth, it could stimulate a more proactive fiscal initiative that is currently missing.
Central bank asset purchases and monetary policy cannot be the only approach to break free from the legacy of the great financial crisis. Now is the time for governments to show their worth and commitment to positive growth initiatives and a greener future.