This article wants to provide food for thought on what a long-term economic policy could look like. Building on both the promises and disappointments experienced with projects such as the Energiewende in Germany, the Green New Deal, and the environmental program of the Biden administration, the course on which we have embarked involves continuous struggle in the face of adversity. The challenge is to craft a strategic approach that can set the course for long-term success – with regard to the climate crisis, increasing inequality, the loss of biodiversity, and creating financial stability.
This article serves as lead article for the dossier ‘Making the great turnaround work: Economic policy for a just and green transition’.
The back-to-back impact of the Covid-19 pandemic, the escalation of tensions between the West and China, and the war in Ukraine mark a new era. So far, it has been interpreted primarily in terms of foreign policy and geopolitics. However, the war also marks a qualitative break that has been in the making for a long time: The economies of the Global North are being shaken out of a long era of stability. Our customary practices are increasingly under attack. The financial crisis of 2007-2008, the euro crisis of 2010-2013, the Covid-19 crisis of 2020, and now the war in Ukraine. Welcome to the era of crises, in which the exception becomes the norm.
This new quality has immediate consequences. Governments increasingly have to react quickly and effectively to crises. Their actions resemble a series of sprints: back-to-back all-night meetings in which hordes of officials and politicians forge rescue measures for Greece, draft recovery packages for the corona pandemic, or find answers for exploding gas prices. Time is always short. It is not the policy cycle that determines priorities, but the crisis of the moment.
How to win the marathon?
The crucial question in this era is how to not lose sight of long-term goals and the marathon ahead. The long-term challenges have lost none of their significance – be it climate breakdown, species extinction, the increase in inequality, or demographic change. On the contrary, they harbour enormous crisis potential in themselves. In January 2022, the World Economic Forum identified planetary warming, extreme droughts, and the biodiversity crisis as the three most important risks for the next decade in its Global Risks Report. Even the Pentagon classifies climate change as a national security risk.
Tackling these challenges requires stamina. The political response is not a sprint but a marathon. Year after year, the world needs to find somewhere in the order of €3-4 trillion in new investment to address climate change. Over decades, the one-way fossil-fuelled production structure will have to give way to a circular economy based on renewable energies. Whole sectors and regions will have to reinvent themselves. Conflicts will increase, and with them the need for political mediation.
The role of economic policy in achieving long-term goals
It is important that governments look for the right immediate responses to the Ukraine war. Still, policy needs to prepare for the fact that this crisis will not be the last. So far, there has been a lack of an economic policy approach that is able to integrate the ability to sprint with the stamina to run a marathon.
For a long time, economic policy assumed that markets are capable of meeting complex challenges. The ability of markets to distribute scarce resources efficiently in the sense of increasing material wealth seemed superior to everything else. But today it is becoming apparent that the globalised and deregulated capitalism built on this assumption is increasingly reaching its limits.
Not only did deregulated financial markets trigger crises, be it the financial crisis or the resulting euro crisis. In general, without appropriate regulation, globalised capitalism still remains incapable of pursuing long-term goals beyond the increase of financial wealth. There may be few successes, such as the Emissions Trading Scheme in the European Union (EU) or promising attempts to deprive fossil industries of investment. On a broad scale, the internalisation of external climate costs still fails, mainly due to politico-economic hurdles. The market is not neutral – its operating conditions are shaped by incumbent interest groups. And this is said without the internalisation of ecological costs beyond climate change even being on the agenda.
Long-term projects such as the energy transition are not driven by markets but by active industrial policy. It was the interplay of regulated feed-in tariffs, research funding, subsidies, and planning security that initially pushed down the costs of renewable energies in Germany, until others such as China jumped on board.
In addition, the Covid-19 crisis has revealed how surprisingly vulnerable the coordination capacity of globalised markets has become. A local Covid outbreak in China is now leading to production losses in Germany via just-in-time production and overextended global supply chains. Resilience as a long-term goal does not feature in the optimisation function of markets. An appalling lack of resilience is also the key element of the energy crisis in Europe triggered by the dependence of some European countries on Russian energy imports.
Last but not least, the corona crisis and the current energy crisis have brought the perverse structural features of markets ever more clearly to light: Markets distribute goods primarily to those who can pay, not to those who need them most. This mechanism may make sense for many goods and services. But with basic goods such as energy, food, or mobility, the interplay of supply and demand quickly reaches its limits. Speculation generates wealth at the expense of the essential needs of ordinary people. This is the reason why governments are now massively intervening in markets in the wake of the energy crisis, be it through price restrictions, energy subsidies, or reduced prices for public transport. In the crisis, it is thanks to government interventions that political meltdowns do not happen. The state steps in when the markets fail.
A new relationship between market and state
At a time when the public debate is focussed on the immediate next sprint, let us ask what an alternative might look like, one in which markets serve the long-term goals and profits of the marathon.
For this, we do not need to throw the baby out with the bathwater. Just because markets have clear weaknesses does not mean they are not part of the solution. Markets are good at efficiently allocating resources to the most productive suppliers of goods and services, thereby spurring productivity increases. That way businesses can produce the things that they know best. Car manufacturers produce cars, and supermarkets sell groceries. However, when we talk about the long term, we are not talking about supermarket shopping. We are talking about the biggest investment projects the world has ever seen. What markets need in order to unfold their potential on these scales is planning security. Much capital investment is long-term; its course is the marathon, not the sprint. But it is difficult to raise funding if the future is too uncertain, and thus the risk too great. This was already a problem before the Covid-19 pandemic and the Ukraine war. Entering the age of crises exacerbates the situation.
It is precisely this uncertainty that requires the state and an active economic policy that counters uncertainty with certainty and clarity.
On the one side, politics has the ability to formulate a vision that sets the course. By setting the socio-political goals to which the market economy should contribute, politics creates clarity about where to make worthwhile investments. Markets can develop through investment if security is created and if the state channels expectations, thereby creating confidence that there will also be successful business models in a future economy.
Those who think in the long term win the marathon. Those who object and say that this means investing in inefficient ideas and technologies forget that efficiency is not an exogenously given quantity. Efficiency is created precisely when massive investments are made in new technologies and the state removes the obstacles to this. For example, only forward-looking education and labour-market policies create the qualifications that are needed in the long term for people to invest in new technologies: from specialists for heat pumps to experts for recycling lithium batteries to installers of solar systems. The framework provided by clear government commitments unleashes the power of market-driven problem-solving.
On the other side, politics must create a basis for political stability. For this to happen, it is above all lower-income groups and regions that have been left behind that should benefit from the visions formulated. They need the new jobs just as much as those who lose their jobs in the course of the transition processes. For this, the state must create incentives and regulate. Politics must not hide the costs and burdens under the cover of a narrative in which everyone becomes an apparent winner. It must name the burdens clearly and courageously. The challenge is to build coalitions that ensure that the costs are borne above all by strong shoulders and are thus sustainable. Solidarity is a close cousin of sustainability.
An understanding of the state as a guarantor of planning security – for people as well as for markets – is by no means to be understood as a regression to a planned economy. Rather, it means a purposeful orientation of the economy towards long-term goals: resilience, social security, and ecological sustainability. It redefines the relationship between the market and the state so that competing in successive sprints does not deflect us from the challenge of the marathon.
Policy approaches for a new era
The very first thing that is needed is a restructuring of the state itself. The state of the neoliberal era was self-limiting and modest in its capacities. In contrast, we need a state that is capable of acting and sees itself as a driver of transformation.
In recent months, we have developed a series of analyses and proposals on how to achieve this, based on regular digital exchanges with experts on both sides of the Atlantic. They explain what a long-term policy approach would mean for the interplay of fiscal, monetary, industrial, labour market, and social policies.
Jonathan Barth and Michael Jacobs begin with a brief overview of the various debates on what the economy of the future might look like – from green and inclusive growth to post-growth and degrowth. In order to alleviate the growth debate, they propose a synthesis in which they combine the core elements of the different approaches in a policy programme. Economic policy in this sense should focus directly on ensuring a decent standard of living for all, with an emphasis on reducing inequalities and improving individual and social well-being.
This raises the question of how economic policy in general can be directed towards these long-term goals and how it is possible to mobilise investments for this purpose. Frank van Lerven addresses the issue from the perspective of fiscal policy. He explains the importance of European debt rules in mobilising investment for climate policy and preventing a new wave of austerity in Europe.
In addition, Daniela Gabor looks at the monetary policy side and the role of central banks. Her focus is not only on the possibilities but also the limitations of central banks in achieving long-term policy goals such as greening the economy.
Carolyn Sissoko provides the framework for these two contributions, arguing that it is precisely the interplay of fiscal and monetary policy that is needed to make a green transformation a success.
This is followed by the question of what investments can be used for and what accompanying policies are needed to make the marathon a success.
Peter Victor offers an important distinction at the interface of economic and environmental policy. He distinguishes between additional/non-additional and productivity-enhancing/non-productivity-enhancing investments in the course of the green transformation. He thus offers a blueprint for the fiscal policy effects of climate policy.
Antonio Andreoni goes into more detail on the importance of industrial policy. In his view, the key to orienting economic activity towards long-term goals lies in the interplay between the instruments of public financing, public procurement, and standard-setting.
Jochen Markard frames the debate from the perspective of the sustainability transition studies. Policy should be guided by six overarching criteria to make decarbonisation a success: i) target system transformations and radical innovation rather than incremental change, ii) prioritise effectiveness, that is, address the largest emissions first, iii) develop context-sensitive policy mixes tailored to specific sectors and places, iv) adapt policies to different transition phases, v) react to unforeseen developments (policy learning), and vi) account for resistance and political feasibility.
As background, J.W. Mason critically questions some of the basic assumptions of economic policy, especially with regard to solving long-term problems such as climate change, and explains how an investment-centred analysis of the economy comes to different conclusions than a price-centred analysis.
However, the call for certainty of direction for investment and economic development, which shines through in all the contributions, is not devoid of the need for political stability. Here, combating inequalities and ensuring adequate living standards are essential.
Daniel Driscoll and Mark Blyth shed light on the distribution of the benefits and burdens between the shoulders of low-income individuals and powerful financial players. Briefly, how can policy encourage private-sector investment without capital once again getting everything it wants at the expense of everyone else?
Jakob Hafele and Claudius Gräbner-Radkowitsch look at another important distributional conflict – that between European peripheries and centres, outlying regions, and economically strong regions. They identify a possible fault line across the EU that may determine whether Europe achieves its goal of becoming the first climate-neutral continent.
Anna Coote then provides the socio-political flanking for the series. With the “social guarantee”, she formulates a proposal of what progressive politics can look like, one that puts interpersonal relationships and the way we care for each other at the centre. When policy-makers think about investment, it is not just about climate. It is also about strengthening the social infrastructure on which the rest of the economy depends.
Both the sprint and the marathon start with a first step
With this series, we want to provide food for thought on what a long-term economic policy could look like. We need to build on both the promises and disappointments experienced with projects such as the Energiewende in Germany, the Green New Deal, and the environmental programme of the Biden administration. The course on which we have embarked involves continuous struggle in the face of adversity. The challenge is to craft a strategic approach that can set the course for long-term success – with regard to the climate crisis, increasing inequality, the loss of biodiversity, and creating financial stability. In every response to crises, politics has the opportunity to redefine the relationship between the market and the state – in a form that is sustainable in the long term or in one that aims at short-term damage mitigation. Our task is to pick the former rather than the latter.
Read more articles of the dossier ‘Making the great turnaround work: Economic policy for a just and green transition’.
 World Economic Forum (2022), The Global Risks Report 2022 17th Edition,
 Department of Defense, Office of the Undersecretary for Policy (Strategy, Plans, and Capabilities) (2021),
Department of Defense Climate Risk Analysis, https://media.defense.gov/2021/Oct/21/2002877353/-1/-1/0/DOD-CLIMATE-RISK-ANALYSIS-FINAL.PDF.
 D. Cullenward and D.G. Victor (2020), Making Climate Policy Work, Hoboken, NJ: John Wiley & Sons.
 M. Mazzucato, K. Rainer, and J. Ryan-Collins (2020), “Challenge-driven Innovation Policy: Towards a New Policy Toolkit”, Journal of Industry, Competition and Trade 20(2): 421-437.