This is the first Finance Newsletter after a short, COVID-19 break.

The past few months have highlighted issues and challenges that were there before the pandemic, but have gained increased importance and urgency. Climate change is one example, as well as the need for reliable/accessible financing for European companies through well-functioning capital markets. Another issue that the pandemic has really underlined is how much we all depend on digital technology. This is true of digital finance as well. Digitalisation has been vital for guaranteeing business continuity, and digital payments have helped people make essential daily purchases while staying socially distanced. So, it is clear that digital is the future of finance. For this reason, this issue is dedicated to digital finance, and includes an interview with Marius Jurgilas, board member at the Bank of Lithuania and an article about the European Commission’s recent digital finance outreach project.

But first, an interview with Executive Vice-President Valdis Dombrovskis on the EU response to the Coronavirus crisis and the impact it will have on DG FISMA policies.

What solidarity has the EU shown to member countries that were hard-hit by the Coronavirus crisis?

Well, first of course the health-care response, where we were coordinating the work of the Member States, for instance organising joint procurement of medical material and managing cross-border supplies of critical goods. There has been a lot of solidarity since the Eurogroup agreed a €540 billion package to provide a threefold safety net – for workers, companies and Member States – back in April.  We put forward the SURE program, to support workers through short-time work schemes – providing funding for Member States to help companies to keep their workforce and ensure workers do not lose their jobs; the ESM’s Pandemic Crisis Support to finance healthcare costs; and the European Investment Bank pan-European guarantee fund, to support in particular SMEs.

Another successful coordination effort led by the EU was the worldwide pledging marathon for a global response to the Coronavirus. This was launched by President Ursula von der Leyen in early May to help develop and ensure fair access to Coronavirus vaccines for all. Pledges raised by this campaign stand at €15.9 billion.

Europe is now moving into a longer-term recovery phase and our economies will need more assistance to rebound. This is why the European Commission proposed a recovery plan, Next Generation EU, worth €750 billion, to help our economy get back on its feet. Last month’s marathon summit upheld this level of ambition and the headline figure remains unchanged.

This comes on top of the EU’s €1.07 trillion multiannual budget for the next seven years, to give us a combined financial firepower of €1.82 trillion.

Will this crisis affect the implementation of the European Green Deal?  

We cannot delay the Green Deal, climate change is still a reality. Our goal of climate neutrality by 2050 remains as valid as ever – as do our Paris commitments for 2030. In fact, the Green Deal offers an opportunity to have a sustainable recovery – to make much-needed environmental improvements an integral part of the economic recovery. The EU summit agreed on a 30% climate-mainstreaming goal in the next EU multiannual budget and recovery plan. However, given the scale of the challenge, public finance alone will not be enough. The private sector will have to play a role too. In particular, sustainable finance, one of the flagship priorities of the EU, will be a key driver of a green, resilient and inclusive European recovery.

The renewed sustainable finance strategy, which will be adopted later this year, will be an integral part of the EU’s response to the financial challenges stemming from both the Covid-19 and the climate/environmental crises. The strategy will aim to: create a strong basis to support and facilitate sustainable investment; increase opportunities for individuals, companies and financial institutions to have a positive impact on society and the environment; and fully integrate and manage climate and environmental risks into the financial system.

What will be done to support SMEs and start-ups?

We are actually focusing a lot on ensuring that small businesses and start-ups receive all the support and financing they need to get through this difficult period. First of all, we are providing flexibility for Member States from a state aid point of view to support their companies, which are in difficulty due to the Covid-19 crisis. In addition, there are a number of programs at European level: the EIB is establishing a pan-European guarantee fund that will mobilise up to €200 billion, mainly to support SMEs; the European Investment Fund is providing €8 billion in financing to at least 100,000 SMEs based on reprioritised EU budget resources. Our economic strategy is to preserve as much as possible the productive capacity of the European economy and for this we need to support our companies and SMEs in particular.

And how do you see the role of capital markets in this?

Capital markets and the Capital Markets Union will be fundamental for our economic recovery. More than ever, companies need to be able to access a broad choice of alternative sources of market-based financing, anywhere in the EU. This is especially true for smaller operations. In July, we presented a capital markets recovery package. The package forms part of the overall post-Covid-19 recovery strategy. It proposes targeted changes to capital market rules to ensure that capital markets can support the recovery by facilitating investments in the economy, allowing for the rapid re-capitalization of businesses, and increasing banks’ capacity to finance the recovery.

We will present the CMU action plan after the summer. Topics such as SMEs’ access to finance, market infrastructure, retail investor participation as well as reducing cross-border barriers will be at the heart of our vision.

To what extent will the stimulus packages be in line with the taxonomy regulation on sustainable finance?

When working on the economic recovery, we will stick to our long-term objectives and ensure that this recovery happens in line with the principles of the Green Deal. That is where the EU taxonomy on sustainable economic activities will come in. The taxonomy regulation entered into force on 12 July and the classification system will be the basis for ecolabels for retail financial products, as well as green mortgages. I think that the taxonomy, as well as a Green Bond Standard, are important tools that could be used also by the public sector to support a green recovery.   

What did we learn from previous crises that will make our response better this time?

First of all, we are much better equipped in terms of crisis response tools. We have the European Stability Mechanism, which is there to provide support to countries in difficulty. The European Central Bank is using its monetary policy tools. We have a much better coordination of our fiscal and macro-economic policies. We have the elements of the banking union in place, which ensures that banks are in a stronger position and better able to play a role in the recovery.

Albert Einstein famously said: “In the middle of difficulty lies opportunity”. The financial crisis showed us the importance of building up economic resilience and the resilience of the financial system. Now, we need to take this new crisis as an opportunity – an opportunity to act together and create a more sustainable, digital, resilient and inclusive Europe.