The Dirtiest on the Bloc - An analysis of the compatibility of the EU fiscal rules with Bulgaria's climate finance gap

Abstract

In light of the significant requirement to scale up public investment to finance the green transition, the ongoing reform of the EU's Stability and Growth Pact has sparked a debate on the need to establish an EU common fiscal capacity. Since most arguments in favour revolve around debt sustainability, given the constraints facing several Member States in increasing debt-financed public investment because of their explosive debt, this discussion is highly political. To bring an alternative and less political argument to the table, this study conducts a quantitative case study of Bulgaria, the poorest country in the EU, but also its dirtiest economy. Through a numerical illustration of three distinct scenarios, different combinations of fiscal tools are tested to assess whether Bulgaria can raise enough resources to bridge its climate investment gap without requiring additional funds guaranteed by all EU Member States. While this research finds that Bulgaria has enough fiscal space to do so, its troubled political and administrative context is suspected to be a deterrent for the country to unlock it. Thus, the arbitrary nature of the EU’s numerical values dictating fiscal discipline is confirmed to be fundamentally inconsistent with the urgency to meet its ambitious climate targets.