Pump Priming

To Restart European Growth, Raise the Gas Tax

Solar renovations in Germany. Source: obs/E.ON Energie Deutschland GmbH/Fotolia/Simone Kraus
Solar renovations in Germany.
  • Why it matters

    Why it matters

    The institute’s plan would bolster Spain and Greece through a mixture of private capital, credit and subsidies to pay for energy efficient renovations.

  • Facts

    Facts

    • The gap in key euro zone economic output ranges from 0.7 percent for Germany to 9.3 percent in Greece.
    • The plan would require private capital and credit, and public financing that would not raise national debts.
    • An increase European gas taxes, the institute argued, could be absorbed by consumers and businesses.
  • Audio

    Audio

  • Pdf

The European Central Bank has exhausted its possibilities. The benchmark interest rate can’t go any lower and the central bank can’t do anymore to encourage banks to offer more generous credit beyond buying junk paper.

For companies to invest more, they need confidence in a growth-friendly environment – and only governments can provide that with structural reforms.

It would be better for European governments to come to an understanding over growth policies that do not endanger budget consolidation before the ECB fires its last shot and buys public and corporate bonds.

The plan we are proposing is a growth program with the goal of closing the existing negative output gap by tapping unused production potential.

Currently, there is a 2.7 percent underutilization of production capacity in the euro zone, according to the European Commission.

The numbers vary widely. The output gap in Greece, with 9.3 percent, is especially high, while in Germany, it is just 0.7 percent.

A growth program tailored to the range across European countries is needed.

 

Output Gap-Text-01 (1)

It has to fulfill six criteria: It must mobilize private capital; it must not violate agreed-to fiscal rules; it has to be targeted at countries with the largest output gaps; it has to be carried out quickly; it should benefit as many citizens as possible; and finally, it should support long-term political goals.

All six criteria would be fulfilled via a European-wide investment program for energy efficiency, through which private homes and small companies receive targeted subsidies for energy renovations. The program would mobilize many times the subsidy value in private capital and thereby have an immediate effect.

Additionally, it would have a widespread effect because all property owners in countries with high negative output gaps could use it. It would support the long-term goal of climate protection and free money for citizens and companies that they could use for other purchases.

Such a program would have a high multiplication factor, which means the resulting higher economic effect would be significantly more than the money originally invested. With this, four of the six criteria would be fulfilled.

It would be better for European governments to come to an understanding over growth policies that do not endanger budget consolidation before the ECB fires its last shot and buys public and corporate bonds.

The other two criteria are more difficult. Due to budget consolidation, the energy-efficiency program should not be financed with additional government borrowing, even though this would be the easiest – and with regard to the low interest rates – the most efficient way. Still, the subsidies should provide €100 billion over four years and if need be expanded by unused funds from the E.U. budget. This is needed for a sufficient stimulus effect.

With this in mind, our proposal calls for financing the program via an increase in energy taxes, especially a rise in gasoline taxes.

This additional fee would be uniformally implemented by participating E.U. countries and transferred to a special E.U. fund from which the subsidies would be paid. This would amount to around a 10 percent increase, based on an E.U.-wide energy tax income of €233 billion (2012).

Gasoline prices would hardly be more than they were two years ago. That would be doable.

To obtain a multiplication effect from the €100 billion, the subsidies have to be tied to a requirement that at least four times the subsidy amount come from private capital or credit and that it be invested in energy renovations.

The credit could come from favorable interest rate programs such as from the European Investment Bank. This would yield a total of at least €125 billion per year. That should be enough to increase economic growth in the European Union by a good 1 percentage point per year.

On top of that, the program would result in long-term reductions in energy consumption and the tax increase would raise the inflation rate.

It would truly be an all-purpose weapon.

Additionally the program would have a solidarity aspect: Energy consumers from Germany and other countries with nearly completely utilized production capacity would pay for efficiency improvements for those in Spain and Greece, stimulating their economies.

A few more cents at the pump is not too high a price for a stable Europe.

To contact the author: heilmann@handelsblatt.com.

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