As global temperatures rise at an accelerating rate, climate change and the policies aimed at mitigating its effects are poised to leave an indelible signature on economic outcomes. Yet, as recently observed in the euro area, these outcomes can be shifted in a more positive direction. Momentum within the euro area for addressing climate change grew in 2019, and the Covid pandemic only added to the political impetus.
Fiscal packages aimed at addressing climate change, such as the European Green Deal and the more recent European recovery fund, known as Next Generation EU, have the potential to provide a 2% boost to the level of euro area GDP by 2024. The momentum has extended to monetary policy as well—the ECB’s ongoing monetary policy review, the completion of which is now on hold until mid-2021, incorporates climate change as part of its overall policy framework review.
Europe’s comprehensive commitment to address climate change is becoming increasing ingrained across the region, unlikely to be derailed by political changes. The implications extend beyond the continent as it provides Europe’s key trading partners with a strong incentive to adopt similar commitments in order to retain access to the region. The investment implications may be significant as well and include reduced fragmentation risk, support for the euro’s recent appreciation, stable peripheral bond spreads to Bunds, and improved credit fundamentals in key sectors.