Note: You can Download the UNEP Inquiry report launched at the World Economic Forum in Davos from HERE
For most part, these diligent professionals - finance ministers, central bankers, regulators and investors do not consider climate change to fall within their job description and mandate. This remarkable compartmentalisation has been reinforced by the failure of climate activists to reach out to financial policymakers.
However, there are signs that things are changing and changing fast.
Mounting evidence of climate change and increasing estimates of how large a financial, economic and human development impact this will have is making it ever harder even for the most conservative central bankers so forswear responsibility. Financial regulators have begun to seriously think through the financial impact of stranded assets. Finance ministries are waking up to the extensive cost of fossil fuel subsidies and the tremendous opportunity offered by carbon and other environmental taxes. Long-term investors such as sovereign wealth funds are waking up not just to the financial risks posed by exposure to fossil fuel investments, but also to the tremendous financial opportunities offered by renewables and energy efficiency.
The excessive austerity that was imposed on Greece as a condition for the bailout made the debt problem worse, not better, by shrinking Greek GDP by a quarter, even as Greece cut down essential services to finance the build up of a primary surplus. The bailout package was not just financially unsustainable, but also economically wrong-headed, politically tone-deaf and socially callous. It has turned what was an aspiring first world country with third world institutions into a third world country with third world institutions. It has led to enormous personal suffering, triggered the rise of neo-Nazi movements, lain waste to productive capacity and created a cohort of the unemployed and the unemployable - a lost generation.
It has stretched Greece’s social fabric to a breaking point and perverted the democratic rights of citizens by vetoing their political choices. What is remarkable is not that Greeks have voted for Syriza, a new anti-establishment party that vows to get a better deal for Greek people, take on the powerful Greek oligarchy and stand up to Germany and the Eurozone. What is remarkable is that it took so long for them to do so.
Today the ECB has finally arrived as a truly “European” Central Bank. It has acted against political opposition to deliver what is by most measures an ambitious programme of quantitative easing. The programme exceeded the predictions of most market participants and analysts, and it lies at the edge of our optimistic predictions.
In short, Mario Draghi has finally delivered on his “Whatever it Takes” pledge. But suffice to say that this QE will not, by itself, be sufficient to deliver on the ECB’s own target. The ECB has finally, if belatedly, done its part. Now its time for the Eurozone to relax the fiscal constraint.
The programme is as open ended in terms of delivering on the ECB’s core target of inflation “close to but under 2%”, as it was politically possible for the ECB to be and promises action all the way into September 2016.
The ECB will announce broad outlines of a programme of Quantitative Easing today. The programme itself will focus on the ECB buying large quantities of financial assets, mostly Eurozone sovereign bonds, with freshly created money. The actual purchases will start in March and more details of the programme are likely to follow over the next few weeks.
What is the objective of this programme?
The stated objective of the programme is to increase Eurozone inflation from the dismally low level of 0.6% (in 2014) towards the ECB target of “close to but below 2%”. In December, inflation in the Eurozone actually turned negative at - 0.3% and longer-term market expectations of inflation have also been falling for several months now.
The ECB hopes that the QE will also have a direct impact on increasing investment and consumption in the Eurozone and thus help give a boost to growth. The combination of higher real growth as well as higher inflation, the ECB hopes, will also help improve the sustainability of debt in the troubled countries in the Eurozone.
Two particularly pernicious and inter-related challenges confront the global financial system. On the one hand, pools of trillions of dollars of savings, particularly in OECD economies, are trapped in sub-optimal investments earning poor returns. On the other, many developing countries face a serious shortage of capital, even for investments that can generate high financial and economic return. The world’s financial system fails to intermediate between the two at any scale. This leads to several perverse consequences.
Long-term investors from rich countries, such as pension funds and insurance firms, have crowded mostly into developed country bonds and stocks. Even truly unconstrained investors such as the giant Norwegian sovereign wealth fund have ninety percent or more of their portfolio invested in such assets. Total allocation to developing countries remains far below the more than 40% (and growing) share of global GDP that they now command. Allocation to unlisted assets in developing countries, which often lack the deep liquid markets that characterize OECD economies, is negligible. Perversely, large pools of savings in developing economies, particularly sovereign wealth funds and foreign exchange reserves, are also after the same listed securities in developed economies.