Regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act, one can debate whether the “glass is half empty or half full,” but the verdict may not be known for years.  If the Act is the beginning of the end of years of laissez-faire and deregulation, then ultimately the verdict will be positive.  In the 1930s, the New Deal legislation was not accomplished through one law, but through a series of laws and regulatory measures.

I fully understand Jeff Madrick’s critique. The Act’s approach is far from being perfect, as it focuses more on plugging holes than on creating a new paradigm for financial markets. But, it has several redeeming features: reducing proprietary trading by banks; shifting an important part of derivative trading to central counterparties; providing consumer protections; and requiring reporting by extractive industries in ways that can significantly advance transparency.

European reforms are still nascent. Many laws are still in the pipeline – quarrelling between member state governments and the European Parliament has postponed the timetable for passage. In addition, reforms face opposition everywhere, especially from the financial services lobby.  To top things off, the European Union struggles with its inadequate institutional structure when it comes to dealing with the financial crisis.

Therefore, Europe is still battling over whether the new European supervisory agencies will have only weak coordinating functions or enforcement powers.  Member state governments, mainly in Britain, but also in Germany, are unwilling to transfer the necessary powers and competencies to the European level.  Still more ridiculous is the fact that the planned supervisory authorities for banks, insurance companies and securities will probably be set up in different countries – thus weakening their capacity to work together closely. This demonstrates how national egotism impedes rational solutions.

The US reform – even with its weaknesses – puts pressure on the European Union to follow suit. The Dodd-Frank-Act is a clear sign to European countries and others that their corporate subsidiaries in the US will be imperiled if they fail to adopt similar provisions.

Without a doubt, one of the disappointing facts is that the compromise struck in the US Congress does not include the levy on banks intended to raise up to $90 billion. The intention — to make the institutions responsible for the crisis foot the bill for it — was not realized and taxpayers are left “holding the bag.” Comparable resistance to proposals is evident in Europe.  For instance, some European governments are blocking the introduction of a European Financial Transaction Tax. To me, this is, together with the loopholes in the Volcker rule, the clearest example of how powerful banks fend off reform.

The priorities for the future are clear. In my opinion, we have to work more intensively on the root cause of weak legislation – namely, regulatory capture and lobbying. We find ourselves trapped in a vicious circle: As long as the financial sector retains its influence on financial market reform, regulators will not enact and enforce the desired rules. But to reduce this influence, we would need financial market reform to diminish the sector’s grip on its regulators. As the Dodd-Frank Act opens the way for hundreds of new rules to be set by the regulators within the next 6 to 36 months, a large part of the work still lies ahead and its quality will depend very much on how much regulators conform to the industry’s will.

In Europe, lawmakers of all the major political parties called out for help in countering the power of the financial services industry. As this “call” states, it is fine if  “[financial] companies make their point of view known and have discussions on a regular basis with legislators. But it seems to us that the asymmetry between the power of this lobbying activity and the lack of counter-expertise poses a danger to democracy. Indeed, this lobbying activity should be balanced by that of others. [...] As European elected officials in charge of financial and banking regulations, we therefore call on civil society (NGOs, trade unions, academic researchers, think-tanks…) to organize to create one (or more) non-governmental organization(s) capable of developing a counter-expertise on activities carried out on financial markets by the major operators (banks, insurance companies, hedge funds, etc …) and to convey effectively this analysis to the media. [...]“.  We hope for a strong response to this call.

As of Friday, July 2, Mr. Wulff became Germany’s new Federal President, the state’s highest office. The election electrified the German public even though the German President has little power and is chosen by the members of the German Parliament and representatives of each of the sixteen states rather than by public vote.

It has been a long time since the German public was as captivated as they were by Mr. Wulff’s opponent, Mr. Gauck.  Despite the great enthusiasm for his candidacy, he was, at last, defeated by the conservative majority of electoral delegates.  But one can learn a lot from Gauck’s one-month campaign: He was able to inspire people to become politically active.  Broad-based activism is needed to transform society and achieve a socially and ecologically sustainable economy.

But let us start at the beginning: The election of a new President had become necessary because the predecessor, Mr. Köhler, submitted his resignation, which was effective at the end of May. The liberal-conservative majority rushed to identify a candidate who would fit into their system’s internal balance of power.  Mr. Wolff – a conservative prime minister of the state of Lower Saxony who, until then, was not famous for charisma, rhetoric or inspirational ideas – fit their criteria.

In contrast, his opponent Mr. Gauck accomplished what many people in German society considered impossible.  That is, he inspired a broad swath of the population with his speeches; he garnered wide support from the internet community; and he enlisted a significant number of people – who previously had never been politically active – to canvass for support of his leadership.   Sound familiar?

Indeed, Mr. Gauck was compared to Barack Obama more than once, and if the Federal President could be elected by popular vote, surveys suggest he most likely would have won. In the former GDR, Mr. Gauck – a Lutheran pastor – openly criticized the regime.   Then, he entered politics during the peaceful revolution that swept away the communist government and, in the 90′s, he was the head of the authority that investigated the crimes of the GDR’s secret police. His main message   was the need to build stronger links between citizens and the political leadership based on an ethic of freedom and responsibility. This doesn’t sound like a great campaign, does it? Indeed, it was the exact opposite of the kind of populist campaigning that marketing experts would prescribe. But it gathered momentum.

A German Newspaper wrote that, after hearing Mr. Gauck’s speeches, even those who disagreed with the content of his messages were usually impressed and newly inspired. Therefore, he was able to rally members of different political parties behind his campaign that did not propose changes of policy as much as changes of political culture and a renewal of informed public debate.

To learn from this approach, the proponents of a Green New Deal need advocates to listen to public debate and inspire people to re-think their positions and actively participate in shaping the future of our society.   We need politicians who will encourage debate on the German lifestyle, including its patterns of consumption and production.  If we only count on experts, elites and technocrats to shape the future, there will be insufficient consensus or political backing in German society for proposals to undertake the necessary transition to a sustainable society.

In other words, populist short-termism is likely to defeat the initiatives of those political leaders who call for more assistance for developing countries, more environmental protection or stricter emission caps to guard against climate change, unless there is a vital public debate, strong participation of citizens in the formation of public opinion, and an inclusive style of policy making.

When people turn away from politics, we lose support for our struggle against large corporations that defend their short term profits at the cost of future damage for the environment and our society.

The Gauck campaign demonstrates that it is possible to renew German democracy in ways that are urgently needed. Of course, no single person can fulfill this process.  It is an arduous process to gain and maintain the kind of momentum and dedication that is needed to build a political base for   transformation of society.  But, we now see that this is possible.

Thus, seen from a progressive point of view, the result of the election is not a happy ending, but the election process represents a success in developing a large, politically active base. This is necessary in order to organize majorities in the society to back dramatic policy changes in order to combat the crises of climate, finance and poverty.

In many places, including Germany, the idea of a Green New Deal continues to be criticized from the well-known conservative angle and, more recently, from a progressive perspective as well.  For instance, in a recently published book, “Green Capitalism: Crisis, Climate Change and Unchecked Growth,” the authors — Stephan Kaufmann and Tadzio Müller — equate the Green New Deal with the idea of “Green Capitalism.”  Coming from a progressive perspective, they claim that these concepts only provide an ecological basis for perpetuating the existing and highly problematic economic system.

This new critique of the Green New Deal is not valid because it fails to understand that the Green New Deal does not entail a simple “greenwashing” of the existing system. In fact, the project would profoundly transform our economy and society.

The global Green New Deal is an imperative.  Why?

First, the existing economic system has led to devastating financial and economic crises.  And, all over the world, the quantitatively huge and qualitatively unique rescue packages being implemented do little, if anything, to contain the risk of new crises spawned by excessive national debt and new speculative bubbles.

Second, the current economic system destroys the climate and endangers the rich diversity of species. The TEEB-Study on biodiversity sets forth alarming estimates of the costs of eliminating natural capital.  For instance, as much as $5 trillion and $50 billion are lost due to destruction of forests and overfishing, respectively. These numbers show a dramatic trend towards the irretrievable destruction of the ecosystems that sustain lives and livelihoods.

And third, the system of finance-driven globalization destroys our societies because it leads to crises of poverty and distribution. How can anyone accept an economic model that allows one billion people to starve? The gap between rich and poor continues to grow in industrialized countries as well as developing countries.  In industrialized countries, the middle classes are shrinking and the earnings of most workers are declining, while at the same time, the incomes of the already rich continue to grow.

To tackle these frightening developments, we cannot simply “green” the current capitalist system.  For instance, it is insufficient for people to adopt lifestyle changes, such as buying electric cars instead of fuel-driven ones or heating with wood chips instead of oil.   Since the current economic model is at a dead end, we need a comprehensive ecological and social transformation of the economy, a Green New Deal with three pillars which can:

1. effectively regulate the financial markets in order to restore their original function: serving real economic development;
2. ensure that the current economic system develops a “circular flow” based on renewable energy and recycling; and
3. establish social balance, on a local and a global level.

While the “Green Capitalism” model focuses exclusively on the second pillar, the Green New Deal explicitly has two additional dimensions.   The goal of the Green New Deal is not to rescue the global financial capitalism by giving it an ecological basis.  To the contrary, Roosevelt’s New Deal was chosen as a model because it not only regulated financial institutions, but also introduced the minimum wage, granted union rights (e.g., the freedom of strike), and implemented progressive taxation and social security.  Through such means, it altered the distribution of power and wealth.  The concept of “Green Capitalism” can be rejected since it would fail to alter either the distributive patterns of growth or the unchecked power of the financial markets.

In addition, the concept of the Green New Deal is far superior to an approach, suggested by some, that argues for lowering greenhouse gas emissions by shrinking the economy.   Indeed, a shrinking economy does lower levels of carbon emissions (witness the collapse of the Eastern European economies or during the current economic crisis), but it also leads to a significant rise in unemployment and an explosion of national debt.  Therefore, it is irresponsible to advocate for a constantly shrinking economy. The dilemma is that, while lower levels of economic growth may curb climate change, it intensifies the poverty crisis.  On the other hand, while higher levels of economic growth may help reduce poverty and improve distribution, it exacerbates the climate crisis.

To resolve the dilemma, we need to foster a model that bears in mind the ecological, economic, and social dimensions of economic development. Only a Green New Deal which transforms these three dimensions of policy can address the needs of a burgeoning number of vulnerable people who are consumed with fears about job insecurity, the adequacy of their retirement pension, or how to finance their children’s education or a medical procedure.

For the first time, the failure of our current economic system is obvious to the great majority of people.  History will judge us harshly if we allow this crisis to “go to waste” by failing to remodel our economies in sustainable ways. Otherwise, there may be a new type of crisis in the near future: a crisis that calls into question the legitimacy of our political systems.

The European Union is in dire need of new economic government arrangements as a consequence of forming the currency union and learning the lessons of the global financial and economic crisis. Tighter cooperation with regard to the economic policy is needed to ensure the success of the currency union.  But how might stronger cooperation be realized? To answer this question, one needs to scrutinize the prevailing governance of the Euro area in regard to two points: First, the inflation of consumer prices which is controlled by the European Central Bank (ECB) and, second, state expenditures, which are controlled by the European Commission in compliance with the European Stability and Growth Pact.  This governance arrangement creates two blind spots.

The first blind spot relates to private debt.  In recent years, the private debt soared in those Euro-countries which were most seriously hit by the economic crisis. For instance, Spain and Ireland accumulated private debt of more than 160 per cent of their gross domestic product (GDP). This rise inflated asset prices, especially the prices for real estate and financial assets. But the European Commission and ECB were not alarmed by these developments. To the contrary, prior to the crisis Spain and Ireland were heralded as shining examples with respect to their state expenditure levels which met the targets of the European Stability and Growth Pact.
But the crisis-stricken countries had only one way out – namely, to increase public expenditures in order to stimulate private consumption. This reaction to the crisis increased the public deficit and led to a breach of the Stability and Growth pact.  This situation illustrates why the ECB and the European Commission must overcome their dogmatic belief that, in a currency union, it is only public debt which causes difficulties.

The second blind spot of the current economic governance arrangements relates to the shifts in relative competitiveness among the EU member states. Germany’s competitiveness grew because, during the last ten years, harsh wage restraints were put into effect. But this caused a tremendous imbalance in the current account.  No one can rebuke Germany for its world champion status in exports due to the high quality products.  Yet, it’s not quite normal that wage restraints depress Germany’s demand for higher levels of imports.  A race to restrain wages isn’t a good idea for the Euro zone. In a strongly integrated economic zone, such as the European Union, the current accounts surplus of one group of countries is the current account deficit of another group of countries.

For its member states, the Commission’s key indicator must be the trade balance. As soon as the imbalances exceed three percent of gross domestic product, the Commission must begin a process of surveillance and – if necessary – reap the political consequences. Where the deficit or surplus exceeds 5 per cent of the GDP the surveillance process should be obligatory. Today, for example, Greece’s current account deficit with other European states (14.4 per cent of its GDP in 2008) forces only the Greek government to act. But, as a German politician I have to admit, the German surplus (7 per cent of GDP in 2008) necessitates a change in German policy as well.

There are also institutional gaps to be filled. George Soros is right when he states: “It is clear what is needed: more intrusive monitoring and institutional arrangements.” To achieve this, a reliable and a verifiable data base is needed because, at this point, Eurostat is dependent on the national reports from the member states. Soros is also right when he reminds us that a currency union needs a central bank and a finance ministry. Of course, in the institutional context of the European Union, we would not think about the creation of such an institution in the first place. But it is crucial to establish at the European level the competences that a finance ministry possesses: taxation, control of a budget that can be adapted in times of crisis, the right to implement and enforce the economic policy guidelines, and the organization of financial transfers between parts of the Union.

Whereas the union requires closer co-operation among member states, the need for unanimity in decision-making makes political progress very difficult in matters such as the Eurostat problem and the move toward more binding economic policy guidelines.  While European leaders are considering the levying of EU-wide taxes and the strengthening of the fiscal policy role by increasing the European budget, these matters are still on the side lines of the political debate.  Still, one should not expect that closer economic policy co-operation by member states, in and of itself, will be sufficient to avoid a breaking up of the currency union in the long run.

The issues raised here require a bold political move…a complete turnaround in the economic policy of the European Union. But a turnaround is needed if we want to avoid further crises in the European Currency Union.

According to UNDP, limiting global warming to less than 2° Celsius above the pre-industrial era is estimated to require about $250 billion a year in additional investment to “green” the world economy in 2010-2015.  Governments would be wise to meet this target by investing in low-carbon development – particularly since the cost of the alternative is much more expensive.  However, high and rising government debts will significantly preclude this path.

In order to avoid climate catastrophe, we need to focus on the role of private finance in climate change.  At present, the level of private investment in renewable energy is only a “drop in the bucket” compared to overall investment levels.  It is urgent that more private capital be channeled into financing sustainable technologies, eco-funds or energy efficiency initiatives in order to fight against climate change.  However, the majority of banks are making a negligible contribution to the promotion of sustainable investment strategies.  Indeed, private investors are often unaware of “green investment” options, since banks do not usually include such funds in their portfolios and, when they do, clients are seldom informed about them.

The financial crisis could be the window of opportunity to change this situation – assuming that governments are willing to provide banks with incentives to change.  Governments are well-positioned to carve out a more constructive role for banks — not only because they are spending billions of Euros and Dollars in rescue packages, but also because they are frequently becoming  bank shareholders  with voting powers commensurate to their holdings.   Bearing in mind the fact that all developed country governments are wielding high-flying rhetoric about the need to fight climate change, it would make sense if – as bank shareholders – they set out sustainable investment priorities for banks.  The report “Financing Objectives 2020 – Mobilising Private Capital” (Sustainable Banking and Public Policy Consortium) correctly points out that “it is certainly within the interest of governments to ensure that overall State interests along a broader set of metrics are also represented in the banks’ lending and investment policies.”  It seems self-evident that mitigating climate change is an “overall State interest.”

In response to the financial crisis, some governments – not all and not enough – have formulated economic stimulus packages that support climate-friendly technology sectors.  Nevertheless, governments have usually relinquished their power to shift the priorities of “their” banks through, for instance, voting on shareholder resolutions or appointing a member of the Board of Directors.  This power should be exercised not only in regard to investments of existing capital but also  in efforts to leverage more “green” private capital through improved consultation with prospective investors.

When it comes to shaping a new, sustainable banking system, governments are not only able to exercise influence through their shareholding, but also by implementing effective laws and policies to finance green technologies.  The international debate on regulation of financial markets neglects the significant potential of such strategies.  However, positive examples exist.   France and the Netherlands have established green savings accounts and lending programs.  This is a beginning, but more is needed.   Banks should also be required to report on the climate impacts of their investments.  Incentive and subsidy mechanisms must complement bank policies.  And last, not least, public money, e.g.,  public pension funds, should to be invested following sustainability criteria – everything else contradicts the efforts taken by national governments to fight climate crisis. In the end, greening the financial sector has a lot to do with policy coherence.