Current situation
The world as we knew it has changed. It is evolving into something we are still in the process of determining and are yet far from having fully understood. The COVID-19 pandemic that is now gradually slowing to the point where some governments, in Europe along with a few states in North America, have started their “phase 4” deconfinement, enabling larger public gatherings and encouraging economic activity in a bid to kickstart their deeply impacted economies.
Many European and other governments have reacted similarly in interventionist ways to this pandemic, dedicating colossal amounts of money to both their public and private sectors. This was done in a bid to both soften and delay the blow that months of confinement would most certainly have had. Even the UK government, led by a Tory party who has traditionally followed non-interventionist, small state dogma, has now declared itself to be pursuing an interventionist agenda “unencumbered by dogma”[1].
But government financial intervention has come with ‘strings attached’ and we are beginning to see those strings being pulled.
Governance
- Air France has had to suspend flights connecting certain destinations in France under its €7 billion state-aid agreement in the name of the environment, and low-cost companies have been forbidden from covering those flight plans by the state.[2]
- Three quarters of the CAC 40’s leaders have already reduced or altogether cancelled their 2020 dividends following a call from the French government to do so for those who received state financial aid.[3]
- Lufthansa, by agreeing to a €9 billion bail-out deal with the German government, will see limits on future dividend payment and limits on management pay, with the government filling two seats on its supervisory board.[4]
- The UK government’s £1.6 billion funding and financing package agreed with the TfL came with strings attached, including the establishment of a COVID-19 task force comprising representatives of the government and TfL which, through its operational oversight, has resulted in central government intervention into the governance of a devolved function.[5]
We are seeing clear evidence of the powerful voice central governments are increasingly having in the governance of the private sector and in hitherto devolved elements of administration. On the other hand, we are also seeing some firms taking steps to distance themselves and assert their independence. IKEA, for instance, is said to be in touch with governments in nine countries about repaying the COVID-19 related financial aid[6].
Central Government Intervention: The Green Deal
Of course, every cloud has a silver lining, and the situation we are currently in is no different in one area in particular. The increased role of central government could be used to achieve something that has eluded the world for so long: putting CO2 emissions into structural decline.
In early July[7], the International Energy Agency (IEA) updated its three-year “Sustainable Recovery” plan that, if put in place, the IEA says will “revitalize economies and boost employment while making energy systems cleaner and more resilient”.
The IEA report analyses sector-by-sector over 30 specific energy measures that governments may wish to include in their post COVID-19 economic recovery plans. It draws on new IEA analysis of the direct and indirect jobs created by different measures and presents an assessment of the impact of those measures on global economic growth. Recovery plans need to be aligned with long-term national and global objectives on energy resilience and sustainable development, and it is essential that they focus on clean energy transitions if those are to be met.
Further strengthening the momentum that has grown behind the world’s transition to a greener and more sustainable energy sector, is the European ‘Green Deal’ and its target of decarbonizing the European economy and reaching net zero CO2 emissions to be achieved by 2050. In this prospect, the French Finance Minister has announced late July that France will dedicate €30b euros out of its €100b recovery plan to the energy transition laid out in the Green Deal, underlying the commitment member states are showing to this transition.
The effects of the ‘Green Deal’ will be far reaching. It will overhaul numerous sectors within our economic system, with energy production, transport, manufacturing, and heating to be the four pillars of this plan. The approximate cost of such a plan will be around €7 trillion, with an approximate 40-60 distribution where 40% would be targeted at funding the infrastructure investments needed, and the other 60% used for subsidies triggering the shift.
The interesting aspect of this plan however lies in its financing. While the approximate cost to implement it will be around 40% of the EU’s GDP, a little under half of this cost will be covered by private sector firms committing to this change and making the necessary infrastructure investments to create this sustainable climate. The EU has also already put forward recovery packages amounting to €1.85 trillion, with parts of these packages to be used for green deal related expenses.
It is obvious COVID-19, through its impact on the world’s economy and the subsequent influx of unprecedented recovery packages, has facilitated a quicker and stronger commitment to the energy transition. France, along with numerous other member states, will be dedicating huge amounts of money to this transition, and it is something few would have envisioned prior to COVID-19. In addition, the change in approach that governments, economists and financial institutions have had relative to such debts is worth noting. In the not too distant past, it was an absolute necessity for all European countries to limit their public deficit to 3% of their GDP, while the post COVID-19 era has shown countries are capable and willing to go far beyond that threshold. It will certainly facilitate the energy transition.
What next?
Governments, as a consequence of their COVID-19 responses, may find themselves as ‘accidental’ owners of multiple enterprises. While the intention of some governments may be to re-privatise as soon as possible, experience has shown that such process can often take longer than expected.
One of the growing concerns has been the easing of EU State aid rules. In normal circumstances, EU Member States are generally prevented from granting financial support to undertakings in a way that distorts competition and inter-state trade within the EU.
However, in recent months there have been a growing number of significant aid measures targeted at national companies that were particularly hit by the pandemic. While such State aid can fall under the exception provided byrticle 107(2)(b) TFEU (COVID-19 being an exceptional circumstance), it remains to be seen the extent to which such aid becomes the subject of legal challenge or, if implemented, has the effect of structurally distorting, longer term, the markets that the State aid rules were intended to protect.
While the legal consequences of COVID-related State aid, and its potential longer-term impact on competition, is uncertain, it is impossible to deny the impact that increasingly interventionist governments are having on the private sector and on its management and governance. The conjuncture of the IEA’s recovery plan, the EU’s ‘Green Deal’, along with the individual measures of each Member States may also be the opportunity of the century to truly kickstart the long-awaited energy transition, and reach the targets set by the Green Deal in a timely fashion.
Co-authored by Benjamin Carret
Footnotes
[1] 08.07.20 A Plan for Jobs speech , per Chancellor Rishi Sunak
[2] Aérien contre TGV : personne ne profitera de l’absence d’Air France
[3] Coronavirus : les trois quarts des géants du CAC 40 ont annulé ou réduit leurs dividendes
[4] Lufthansa agrees €9bn bailout with German government
[5] https://www.gov.uk/government/news/government-grants-transport-for-london-funding-package
[6] Ikea in talks with governments over returning furlough money
[7] Covid-19 and energy: setting the scene
