Climate ActionEurope

A European climate fund or a green golden rule

Zsolt Darvas is a Senior Fellow at Bruegel

There is a growing recognition that substantial public investment will be needed to meet the European Union’s climate targets. However, it will be impossible to increase green public investment while consolidating budget deficits when EU fiscal rules are reintroduced from 2023.

In a paper for the informal meeting of EU finance ministers in September 2021, Guntram Wolff and I proposed a green golden rule to exclude any increase in net green public investment from the fiscal indicators used to measure compliance with fiscal rules.

Others, like Luis Garicano, have proposed a new European climate investment fund (akin to the loan component of the Recovery and Resilience Facility, RRF) to provide loans to finance climate change mitigation and adaptation until 2050, which would not involve direct redistribution across EU countries.

In fact, the two proposals would be equivalent in terms of project selection, implementation and treatment in fiscal indicators and fiscal rules, providing that the green golden rule is well designed to avoid ‘greenwashing’ and the climate investment fund does not involve redistribution.

Green golden rule

A main criticism of the green golden rule proposal is that it might lead to ‘greenwashing’: governments might try to reclassify spending as ‘green’ to exempt it from fiscal rules. But such misbehaviour would be a characteristic of an uncontrolled version of the rule that nobody proposes. To avoid greenwashing, we propose that:

1. The Council of the EU should define a specific list of climate investments eligible for the green golden rule;

2. Each country should integrate a climate public investment plan into its annual Stability/Convergence Programme, specifying the items planned to be excluded from fiscal rules indicators according to the green golden rule;

3. The Commission would assess the plans and identify what spending can be excluded from fiscal rules, before making recommendations to the Council;

4. The Council would approve (or reject) the Commission’s recommendations;

5. National fiscal councils and audit offices, the European Commission, the European Court of Auditors and possibly other institutions would assess compliance with the green golden rule.

While there are some pragmatic options to mimic a green golden rule in the current EU fiscal framework, such as amending the so-called ‘investment clause’ and adjusting the medium-term objective for the structural balance, ultimately, elements of the 2011 Six-Pack legislation and the 2012 Treaty on Stability, Coordination and Governance (TSCG) should be revised to include a green golden rule.

An EU climate fund without direct redistribution

An EU climate fund would disburse cash to EU countries for green projects. If the fund is similar to the RRF, implementation would be practically identical to our green golden rule: the Council sets priorities, EU countries submit plans, the Commission assesses those plans, the Council approves (or rejects) them and various bodies oversee their execution.

If the fund does not involve direct redistribution, then spending and financing would count in national budget deficit and debt statistics and would thus be subject to fiscal constraints from 2023. A special decision could be made to exempt the deficits and debt related to projects financed by the fund, but this decision, and the associated legislative changes, would be the same at that needed for the green golden rule.

In explaining this I start by clarifying what no direct redistribution across EU countries means. There are two main options for this.

~The fund is financed by annual contributions without EU borrowing (like the regular EU budget): countries get back from the fund the exact amount they pay in. For example, in 2025, Germany borrows €10 billion on capital markets, pays €10 billion into the fund, receives €10 billion from the fund and spends this money on green projects.

~The fund borrows on capital markets, lends to EU countries, and later they repay the loan to the EU, which is used by the EU to repay borrowing from the market (as with RRF loans).

Because the first option appears somewhat odd, existing proposals focus on the second option. Nevertheless, both options result in the same treatment of the resulting climate spending in deficit and debt indicators and for the purposes of the fiscal rules. Another possible way of funding would be to collect new own resources for the climate fund (we’ll return to this issue at the end).

Recall how spending financed by the RRF is treated for statistical purposes: in line with the European System of Accounts and a Council legal option, in September 2021, Eurostat concluded that national spending financed by RRF grants will not be included in national deficit and debt indicators, but spending financed by RRF loans will.

The justification for excluding RRF grants is that EU borrowing to finance these grants should not be counted as member-state debt because “there is no match between the grants received from the RRF by the individual member states and the amounts that potentially will have to be repaid by each individual member state, as the two elements are calculated on the basis of different criteria” and “there is great uncertainty on what amount each member state will be liable for” (paragraph 38 of the Eurostat guidance).

Thus, since there is redistribution (“different criteria”) and it is impossible to calculate the expected value of national liability to the repayment of EU debt in 2028-2058 (“uncertainty” – see my Policy Contribution on this issue), EU debt used to finance the grants constitutes only “a contingent liability for the Union budgetary planning”, but not a national debt (paragraph 42).

The national budget deficit is defined as the net borrowing of the government and thus spending from RRF grants does not matter for deficits: countries record a revenue (payment received from RRF) and an expenditure (national expenditure financed by the RRF), which is called “the principle of the EU flows neutrality on the general government net lending/net borrowing” in the statistical jargon (paragraph 28).

Thus, by blurring the liability that EU countries have for repaying the EU debt, the financing of RRF grants does not appear in national debt and deficit statistics and is thus exempt from EU fiscal rules.

This is different for spending financed by RRF loans: Eurostat concluded that these loans should be recorded as national debt and thus expenditure financed by that debt increases national budget deficits (paragraphs 43-45 of the Eurostat guidance). So, spending financed by RRF loans is not exempt from fiscal rules.

A non-redistributive EU climate fund and a well-designed green golden rule would be equivalent in terms of project selection and implementation procedures. The treatment of related spending and consequent borrowing in national fiscal indicators and in the EU’s fiscal framework would be the same

An EU climate fund would be recorded in the same way as the RRF.

The 2015 treatment of national contributions to the European Fund for Strategic Investments (EFSI) would not apply to an EU climate fund. In 2015, the Commission noted that “Two aspects need to be distinguished here: i) whether these contributions are recorded statistically as deficit and/or debt, in line with the established definitions of the European System of Account (ESA); and ii) the way in which the Commission will take account of such contributions in its assessment of compliance with the Pact.”

How contributions are recorded is left to the independent Eurostat, though the Commission suggested that if a country borrows to fund the contribution, this will increase government debt. This in turn increases the budget deficit.

For the compliance assessment, the Commission decided that the initial contributions to EFSI are one-off measures, and thus they will not be accounted for in the structural balance (because, by definition, the structural balance does not include exceptional one-off measures).

The Commission also noted that an excessive deficit procedure would not be launched if non-compliance with the 3% deficit criterion results only from EFSI contributions, if the excess over the 3% reference value is small and is expected to be temporary, in line with Treaty provisions.

A similar conclusion was reached for non-respect of the debt criterion. The regular national co-financing of projects also co-financed by EFSI is to be included in the structural balance, but such national co-financing could be considered for the so-called ‘investment clause’, which allows temporary deviations from the medium-term objective for the structural balance, or from the adjustment path toward it, for a temporary period under rather strict conditions (see our assessment of the investment clause in section 3.2.2. here).

A European climate fund would be in place for decades and therefore national contributions to it cannot be considered as exceptional one-off measures. In the same vein, breaching the 3% deficit threshold would not be temporary if it lasts for decades.

The investment clause could potentially be considered for expenditures financed by the EU climate fund, but in its 2015 approved form, the investment clause is based on very strict conditions that probably no country would meet after 2023.

Furthermore, the allowed maximum initial 0.5% of GDP temporary deviation, which should be corrected in four years, would be too tiny to make a difference. The investment clause could theoretically be revised by a Commission Communication, yet the Commission already struggled to find a legal base for this narrow investment clause in 2015.

Exempting green public spending from the structural balance for decades might not be possible under the current legal framework. Yet if a creative legal interpretation can be found, it could apply to spending via both an EU climate fund and a green golden rule.

Thus, our proposed green golden rule and an EU climate investment fund without direct redistribution would be equivalent in terms of project selection and implementation, and in terms of treatment in fiscal indicators and in the fiscal framework.

EU borrowing would make a difference

As with RRF loans, EU countries jointly guarantee the repayment of EU debt so the EU can borrow at a lower interest rate than more than half of its member states.

Since the EU lends to its members at its actual borrowing cost, some could cut interest payments by borrowing from the EU instead of borrowing from the market. By underwriting EU borrowing, more creditworthy EU countries implicitly subsidise those countries that borrow from the EU, by running the risk of that they default on their liability to the EU.

This risk is probably not high, not least because no EU country has ever defaulted on an EU liability and the share of EU climate fund related debt would be small compared with total national debt. But nevertheless there is a risk.

An EU climate fund offering only loans might not incur significant demand. First, some EU countries can borrow at a cheaper rate than the EU, so borrowing from the EU would lead to a financial loss. Second, demand for RRF loans was moderate: only seven countries decided to borrow from the RRF, and of these seven, only three borrowed the full available amounts. The other four only borrowed about one-third or less than what was available.

In contrast, a green golden rule could be utilised by all EU countries.

But an EU climate fund could result in positive reputational effects (demonstrating the EU’s determination to act together) and beneficial financial market development resulting from more EU debt (see a nice assessment here), which would not be the case with a green golden rule.

An EU climate fund with direct redistribution

Direct redistribution via an EU climate fund would lead to different statistical treatment, especially if the fund is financed by long-term borrowing.

Like RRF grants, the different criteria used for allocating the cross-country grants from the fund and cross-country contributions to the fund, and the uncertainty about how much each country should pay into the fund in the future, would likely lead to the conclusion that expenditures financed by the fund would not constitute national deficit and debt.

Is there a rationale for redistribution? And would there be political will for that? The answer to the first question is not clear-cut. The climate is global and the marginal benefit of additional climate spending by a net-payer country could be higher in low-income countries outside of the EU than in another EU country.

On the other hand, fostering the achievement of EU climate goals, which could also strengthen EU climate leadership, and making fiscally weaker EU countries more fiscally sustainable would be positives for the EU. Highly-indebted EU countries might not be able to finance the necessary public climate investment. Furthermore, climate is a systemic risk that has asymmetric effects on EU countries.

The second question is political, and I do not wish to speculate on it.

Nevertheless, if the goals are to limit redistribution, exclude climate spending from fiscal rules and avoid changing fiscal-rule legislation, a trick would be to design a climate fund so it involves only ‘little’ redistribution.

For example, the criteria for allocating the grants from the fund would primarily depend on GNI, but would include other indicators as well. The future repayment of the resulting EU debt would depend only on GNI.

Thus, there would not be a direct match between the grants received from the climate fund by individual countries and the amounts that potentially will have to be repaid by each individual member state, so Eurostat might conclude that the consequent EU borrowing should not be counted in national debts and deficits.

An EU climate fund financed by new own resources

I make two observations for this option. First, it is already hard to find new own resources for the regular EU budget and Next Generation EU.

Second, a new own resource for the EU budget implies that the same revenue does not accrue to national budgets, thus increasing national budget deficits.

For example, if the revenues from the European Commission’s plan to redirect to the EU some of the reallocated taxes from the world’s largest companies and some of the revenues from the EU emissions trading system, then member states will not receive these tax revenues. Thus, national budget deficits are going to be larger, all else being equal.

The only exceptions are resources countries cannot levy, like the proposed carbon border adjustment, but it’s unlikely that such a source would provide a sizeable contribution to an EU climate fund.


A non-redistributive EU climate fund and a well-designed green golden rule would be equivalent in terms of project selection and implementation procedures. The treatment of related spending and consequent borrowing in national fiscal indicators and in the EU’s fiscal framework would be the same.

New regulations would be needed to set up both the climate fund and the green golden rule. Special legislation would be needed to exempt the subsequent climate expenditures from EU fiscal rules in both cases.

The main difference would be that an EU climate fund financed by EU borrowing would create an indirect subsidy going from more creditworthy to less creditworthy countries in the form of reduced interest costs, due to the joint guarantee of EU borrowing.

A new climate fund and EU borrowing might bring positive reputational effects and benefits for financial market development. The demand for loans from an EU climate fund could be low, while a green golden rule could be applied by all EU countries.

A climate fund financed by EU borrowing with redistributive effects across countries would likely result in the exclusion of the fund’s activities from national fiscal indicators and EU fiscal rules.

This post was written with the financial support of the European Climate Foundation, and was first published on Bruegel.