August 15, 2019 / 10:43 AM / 10 days ago

Breakingviews - Germany would kill a few birds with one green bond

Greenpeace activists light a protest banner reading "end coal" with fire as the St. Lambertus church in the village of Immerath is being demolished for the expansion of the nearby opencast brown coal mine of German power supplier RWE, in Immerath, Germany January 8, 2018.

LONDON (Reuters Breakingviews) - Germany could kill several birds by issuing one green bond. Raising money solely to manage a shift away from fossil fuels would underscore Berlin’s focus on making the transition. It would also give eco-friendly finance a crucial political boost. And it makes economic sense.

Chancellor Angela Merkel’s coalition government wants Germany to stop using coal power by 2038, but knows the transition will have an outsized economic and social impact on certain parts of the economy and the country. It therefore plans to channel money to affected regions to help them manage the transition.

Some of the projects could be financed by issuing a green bond. Purists will quibble this is a misnomer if any of the money raised were to be spent on shifting away from fossil fuels rather than truly green projects. But a June report prepared for the European Commission by technical experts recommended sustainable finance classification systems include economic sectors that are not already low carbon to provide an incentive to help mitigate climate change.

Germany wouldn’t be the first sovereign with a triple-A credit rating to issue a green bond: Netherlands has already. But a sale by Europe’s largest economy would be a much bigger deal. It would show Berlin was serious about the shift away from coal and help promote green finance, which is already attracting major interest from issuers and investors.

And ideally, Merkel’s government would exclude green spending from the self-imposed national goal of balancing the budget. In theory, that’s unnecessary. The European Commission expects Germany’s budget surplus to be 1% of GDP this year and 0.8% of GDP next year. But some of that buffer is already earmarked for hard-to-reverse purposes such as school renovation, more social housing, and speedier internet infrastructure.

The catch is this would push up debt, and Germany’s constitution limits the amount of spending that can be financed with new issuance. But there is a degree of flexibility which should be fully used. After all, the European Commission forecasts German public debt will fall to 58.4% of GDP this year and decline further next year. Spending more to secure an environment-friendly future makes even more sense for an economy that is at grave risk of tipping into recession in the present.  

Breakingviews

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