The homes we live in are by far the world’s biggest asset class, representing worth €150 trillion, or 20 times the amount of gold ever mined. As such, they are too big to fail, writes Brook Riley.
This week the 27 European heads of state are discussing the Commission’s proposal for a €1.85 trillion COVID-19 recovery budget. It is a huge sum: €1.1 trillion from the member states themselves and €750 billion to be borrowed on the capital markets. But it is dwarfed by something which is all around us and which we take for granted: buildings.
The homes we live in are by far the world’s biggest asset class. Altogether they are worth €150 trillion, more than 20 times all the gold ever mined. They are fundamental for our wellbeing. With or without COVID-19, we spend most of our time indoors.
But the buildings where we live and work are also the largest contributor to climate change. In the EU, over a third of greenhouse gas emissions come from buildings, mostly from heating. Taken together, this makes buildings Europe’s most valuable financial asset and at the same time its biggest environmental liability.
This is the sort of mega-challenge which the new EU budget is supposed to address. ‘There is no vaccine for climate change’ said President von der Leyen, when making the case for a green recovery. And to its credit, the Commission includes a pledge in its budget proposal to at least double building renovation rates. This is vital to delivering the EU goal of becoming climate neutral by 2050.
But so far there is no matching financial commitment – no specific funding line for renovation.
It wasn’t supposed to be like this. A note written by advisors of Frans Timmermans, the executive vice-president in charge of climate action, was leaked a few days before the release of the Commission’s budget proposal. The note called for a €90 billion renovation financing facility. Meanwhile the Commission’s official economic analysis – published with the rest of the proposal on May 27th – estimates an extra €185 billion per year is needed to make Europe’s buildings energy efficient. The renovation facility was plainly intended to help close that financing gap, but was not included in the final proposal.
Sources say von der Leyen faced immense pressure to propose a flexible budget to speed up spending. Nobody denies a renovation fund will benefit citizens and the planet. But the thinking apparently is that governments’ short-term priority is to balance their own budgets – and for that they need all the economic activity and tax revenues they can get. If renovation can compete with other options to spend EU funds as quickly as possible, so much the better. If not, too bad. Then too, the Commission’s proposal needs unanimous approval from the 27 member states. Removing details tends to speed up negotiations.
But this is to forget that the €750 billion top-up fund, called Next Generation EU, will be borrowed money. Member states – meaning taxpayers – will have to pay it back. In return for decades of debt Europeans must get their money’s worth. Crucially, money invested in energy efficiency generates savings that will help pay off that debt.
It is true that very large scale building renovation programmes can come with challenges. Projects must be identified and grouped together, funding arranged, contractors and materials sourced, over and over again. But this is why a renovation financing facility makes so much sense: it provides a sense of mission and the organisational capacity to deliver huge socio-economic and environmental benefits.
The paradox is that it is much easier and quicker to spend EU funds on bailouts than it is to live up to the Commission’s motto to ‘repair and prepare for the next generation’. But more than airlines, more than the car industry, buildings are too big to fail.