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Rebuilding a broken world: a new consensus on global finance

 We must urgently reform our global financial architecture to align with the Paris Agreement. The intertwined crises of debt, climate change, energy, and financial instability are tightening their grip on the world. When these culminate into cataclysms, we should not disguise the injustice.  

Last summer, devastating floods in Pakistan killed thousands and disrupted the lives of 33 million people. This disaster was not ‘natural’: it was amplified by decades of fossil fuel extraction, way beyond the Indus River. ¹ As the UN Secretary General Antonio Guterres plainly put it, it was also proof of a “morally bankrupt global financial system” – of a debt cycle channeling more money to creditors than to safe and stable societies. ²

Pakistan’s suffering is a common responsibility. If we fail to act, it will be a common, widespread, and foretold catastrophe. The IPCC’s latest report warns that 3.3 to 3.6 billion people currently live in areas “highly vulnerable” to extreme impacts, or nearly half of the world’s population. ³ Our financial architecture is not geared for these challenges. According to the International Energy Agency (IEA), achieving carbon neutrality by 2050 requires tripling clean energy investment worldwide to $4 trillion each year by 2030. ⁴

This financing could pave the way for a clean energy system that places us on a safer trajectory, but it doesn’t account for the costs of climate shocks already set in motion. Nor does that trillion-dollar amount evaluate geopolitics: besides ‘stranded assets’, we are beginning to weigh the outsized power of ‘stranded petrostates’, ⁵ as well as Russia’s intention to strengthen its exposed position as a major fossil fuel exporter by weaponizing energy and commodity supply chains. This has further emboldened OPEC to adopt a more defiant stance vis-à-vis the United States, and with it the fundamentals of a global dollar-based system, starting with the currency’s role in energy markets. ⁶

In short, dismantling our reliance on fossil fuels and addressing the threats they have created — in our atmosphere and in our geopolitics — is the historical challenge we are facing. At any rate, building scenarios is not really where the problem lies. In our global governance regime, assessing costs and locating money are nebulous — and quite separate — pursuits. Putting a price tag on the solution poses a further, central problem of macroeconomics: what will that money cost?  

For this reason, debt emerges as the most alarming indicator of our collective inability to pull together and respond — and underscores its injustice to local populations. We allow the international financial architecture to prioritise narrow, and deeply uneven, macrofinancial stabilisation over pillars of human security like healthcare, education, clean energy, and climate-resilient infrastructure.  
Pakistan’s crippling debt has led it to enter its 23rd IMF loan arrangement (and 14th bailout), a record exceeded only by Argentina. This debt trap scenario is set to worsen, with IMF data putting 53 countries, representing one in five people worldwide, on the path to debt distress. ⁷  Here again, Pakistan’s plight foreshadows a global trend. While the world’s fifth most-populous country struggles — as does the recovery programs imposed upon it, time and again, by the World Bank and IMF — to cope with the triple challenges of debt sustainability, climate impacts and the energy transition, ⁸ its per capita performance on poverty is also stuttering: accounting for population growth, Pakistan has 3 million more people in poverty today than in 2018. ⁹

he world, too, is stumbling on its poverty reduction and Sustainable Development Goal (SDG) targets, straining to mobilise aid money, ¹⁰ while emitting more CO2 last year than any year in human history. ¹¹

The world does not lack for advanced technical proposals to adjust our international financial architecture: this paper will not rival them. Instead, what follows are some reflections on the journey travelled, the blind spots they expose, and some promising paths forward, rooted in the Paris Agreement.

First we will examine the path dependencies of our international financial system, rooted as it is in debt, dollars, and a reliance on fossil fuels, impacting global financial stability and a fundamental obstacle to climate action. Next, we will explore the evolution of climate change recognition as a major economic and financial risk over the last three decades, leading to the establishment of concrete climate goals and influencing the global political economy. Then, we will discuss the challenges posed by parallel economies, such as China’s de-dollarization efforts, and the impact of US policy changes on the multilateral system. Finally, we will consider potential solutions, including exploring new financial sources and promoting a Paris-aligned financial system on the road to COP30, in Brazil, in 2025.

This is a period of profound tension, and the ‘polycrisis’ is a time of unknowns. Yet the Paris Agreement has shown that even in moments of apparently intractable diplomatic stalemate, anything is possible. 

A ‘Washington Consensus’ rooted in debt, dollars, and comfortable with fossil

An accidental consensus?

In a way, the story of these blind spots is best told through the lens of the ‘Washington Consensus’. The term is, depending on the audience, meant as a liberal toolkit for growth, or as a critical account of US economic hegemony. Both interpretations are untethered from the original intention, and its specific roots in the post-Second World War story of debt, drilling and dollars. 

Let us start by stating that what the expression — pioneered by British economist John Williamson in 1989 — refers to was not a consensus and that it did not originate in Washington. He himself never imagined that he “was coining a term that would become a war cry in ideological debates for more than a decade.” ¹² Rather, he sought to empirically describe an emergent economic policy agenda arising from Latin America’s debt crises of the 1980s with the endorsement of the IMF, World Bank and US Treasury. In that sense, it is more helpful to understand the birth of the Washington Consensus as the result of “intellectual effervescence” in Latin America during that decade, rooted in those specific economic circumstances, namely a gradual shift away from principles of capital accumulation, beliefs that market failures would hinder growth, and that markets would not “function well” in these countries. ¹³

It was, in that sense, a rejoinder to decades of strands of dependency theory, arguments for a proactive state, strong industrial policy, import substitution, price controls and tariffs – all of which ensured robust growth in the 1960s and 70s. ¹⁴  By the 1980s, however, the oil shocks of 1973 and 1979 and the US Federal Reserve’s attempts to battle dollar inflation by raising interest rates created global whiplash in dollar-indebted economies – and exposed Latin America’s “dangerous accumulation of domestic vulnerabilities”, ¹⁵ foremost among them the heavy borrowing required to finance oil rents, import substitution, and maintain those high levels of public spending. These were the circumstances for the beginnings of a “robust intellectual and ideological current” ¹⁶ in favour of free markets and democracy, and the prevailing mood behind Williamson’s original intention in 1989, whereby the Washington Consensus described ten policies amounting to three big ideas: “stabilise, privatise and liberalise.” ¹⁷

The path dependencies of debt, drilling and dollars

Highlighting the connection between oil shocks and the international system’s toolkit for sovereign debt crises helps to identify the path dependency — in our political economy and in our global governance system — to three fundamental problems in our limited ability to address today’s polycrisis.

First, the evolution of the Bretton Woods system to tangle the globalisation of the dollar with the emergence of an oil-dollar nexus has contributed to exposing many economies around the world to the impact of rate hikes by the US Federal Reserve and other changes in US economic policy, leaving them highly vulnerable to rises in energy and other commodity prices. The decision at Bretton Woods in 1944 to build the international financial architecture using a dollar-based system began to fray after the 1971 decision by the Nixon administration to suspend the gold to dollar peg in favour of floating exchange rates. The resulting move by OPEC to use the dollar as the de facto currency for the oil trade – all while oil intensity of the global economy reached its peak ¹⁸ – laid the foundations for what followed: by the early 1980s, the ensuing global oil shocks led oil exporting countries to accumulate US dollars and embark upon ‘petrodollar recycling’, investing in US securities and contributing to the conjunction of a debt-based system, cyclical debt crises, and a dollar-centric regime of floating exchange rates – all factors in Latin America’s lost decade.

Second, the leverage amassed by the US and other major creditor countries. While the Bretton Woods system delivered historic growth and poverty reduction in several regions of the world, it benefited first and foremost the economies who now make up the Paris Club of sovereign creditors. This path dependency has reduced the incentive to find more multilateral and equitable frameworks to handle debt burdens. The emergence of informal Paris Club procedures in the 1950s — before the explosion of sovereign debt in the 1980s further highlights blind spots in the institutional design of the international financial architecture. The persistence of Paris Club procedures after the 1980s, all while trade liberalisation produced historic growth and the emergence of new sources of geo-economic power in the BRICS, has deepened the problem.

It is revealing that ad hoc Paris Club procedures have persisted all while momentum has grown to support the idea of more formal multilateral arrangements — though only at intervals, and so far unsuccessfully. Persistent debt distress through the 1990s led to the IMF and World Bank’s launch of the Heavily Indebted Poor Countries (HIPC) Initiative in 1996, and the G20’s emergence as the foremost multilateral arena for the debt agenda, prompted by the Asian financial crisis of 1998. Debt cancellation became a cause célèbre during the 2000s, and the then G8’s launch of the Multilateral Debt Relief Initiative (MDRI) in 2005 created an additional layer of ad hoc response to provide relief to acute debt crises. While these initiatives have written off hundreds of billions in sovereign debt, they have not solved the world’s debt problem, which — like our CO2 emissions — continues to break records. ¹⁹

Third, the failure to anticipate the emergence of a debt-climate nexus, despite oil’s core role as both a global economic engine and a singular contributor to climate change. The establishment of a climate governance regime from the 1970s until today was – strikingly, and tellingly — a process which developed while climate science progressed primarily in public institutions as well as in the research departments of western oil majors, who deployed potent disinformation and delay tactics, all while concealing their findings.

As an under-appreciated consequence, the slowness with which the international system eventually reached the Paris Agreement in 2015 has contributed to the steepness of the investment gap required to address the crisis, fuelling profound tensions surrounding financing issues and climate justice. For instance, despite presenting some of the most climate-vulnerable risk profiles in the world, small island developing states today spend nearly 20 times more on debt servicing than they do on climate finance. ²⁰

A macro-critical risk in a multipolar world

From the cost of action to the cost of inaction

The Kyoto Protocol in 1997,, represented a significant step towards tackling climate change. Economists played a key role in conceiving what could be a new international legal instrument centred around the idea of a global “carbon budget”, defined by the work of climate modellers synthesised in the IPCC reports. Based on these assumptions, economists then proposed that the best way to achieve global emissions reductions was to establish a price for carbon and cap the possible amounts of emissions. 

The Kyoto Protocol was also notable because it proposed a specific quantity of emissions needed to be reduced. At that time, there was discussion of rather modest reductions, to the tune of 8% to 10% over 8 years, a far cry from what we need to accomplish today.

In 2006, Nicholas Stern and the work of the Stern Review ²¹ sought to question some commonly held assumptions in climate change studies. He specifically challenged the cost-benefit approach and the discount rate used to evaluate the cost of damage caused by climate change. According to Stern, most of the economic work at the time was incorrectly based on the idea that societies would be wealthier in the future and would thus better equip themselves to manage the costs of climate change. This perspective dominated economic discourse until the financial crisis of 2008-2009.

The inflection point of the global financial crisis

This context helps to better understand the failure of COP15 in Copenhagen in 2009, exposing one of the deeper fractures in the multilateral system: taking place amid the immediate aftershocks of the global financial crisis, when the US and the West’s economic power was profoundly rattled, it could be read as the moment when the BRICS — and particularly China — whose share of global GDP had more than doubled in the preceding decade, were rejecting the negotiations framework imposed by the Danish presidency, especially any limits on their sovereign ability to decide their own pathway to curbing emissions. This illustrated the start of an era where no single hegemon could dominate global governance norms.

More broadly, COP15 can be read as a tilt in the power balance between the G8 and the G20, and the recognized obsolescence of the Washington Consensus settlement. It is no coincidence that the South Korean presidency of the G20, in 2010, felt the need to launch a ‘Seoul Consensus’ (which never quite captured the imagination), a month after it also agreed historic quota and governance reforms of the IMF to rebalance shares and voting power in favour of Brazil, China, India and Russia. ²² The US Congress’ effective veto over IMF reforms means these did not take effect until 2016.

The evolution of economic approach surrounding the climate crisis, which tracked both our institutions’ improving comprehension of the problem’s severity and the emergence of increasingly multipolar power dynamics in UNFCCC climate negotiations, both consolidated some powerful red lines around nations’ sovereignty over their decarbonization pathways, while delaying the world’s ability to agree a mode of response.

It was from the failure of COP15 onwards that the discussion started to shift, eventually culminating in the Paris Agreement of 2015. During the Copenhagen COP in 2009, countries from the ‘global North’ pledged to generate $100 billion in climate finance starting from 2020, to be directed towards the rest of the world’s climate action needs. This commitment, reaffirmed at COP21 in Paris, enabled the transition from a mandatory framework for emission reductions (limited to developed countries as outlined in the Kyoto Agreement) to a voluntary, collaborative, and worldwide system centred on national emission reduction strategies, known as nationally determined contributions (NDCs).

The Paris Agreement also enshrines a warming limit of 1.5°C and the fact that emissions reductions must be drastic, with the goal of achieving a balance of sources and sinks by 2050, otherwise known as the net-zero goal. This new perspective also explicitly considered the costs of inaction in the face of climate change: in 2015, unlike in Copenhagen in 2009, all political leaders acknowledged the damage caused by climate change in their public statements. This context also contributed to the uneven socialisation of climate risk among a broader set of economic actors, especially in the financial sector, and particularly the recognition that some climate impacts would be so significant as to be uninsurable. The year 2014, in the lead-up to Paris, was a particular inflection point here: signalled by Michael Bloomberg, Hank Paulson and Tom Steyer’s Risky Business report ²³ , and Mark Carney’s ‘tragedy of the horizon’ speech while governor of the Bank of England. ²⁴

In the same vein, then-IMF Managing Director Christine Lagarde’s description of climate change as a ‘macro critical’ ²⁵ issue marked a sea change in economic thinking, and directly influenced the inclusion in the Paris Agreement of Article 2.1(c) of the Paris Agreement, establishing the goal of making “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”, a potentially potent provision which continues to come up against the global political economy of fossil fuels today.

Public and private entities are producing fluid power dynamics in an unreconstructed institutional setting, inviting new bodies to fill the vacuum. For instance, the Network for Greening the Financial System (NGFS) was formed in 2017 by central banks and supervisors, while the Glasgow Financial Alliance for Net Zero (GFANZ), a collective of various investment-focused entities co-led by Mark Carney, was announced at COP26 in 2021. Though these voluntary initiatives reflect different views, they share a common concern — a growing disillusionment with the era of liberalised capital markets. Central banks and major financial institutions are starting to question the stability and effectiveness of current financial structures in addressing the climate crisis.

Climate governance, between multipolarity and fragmentation

Climate, energy and debt multipolarity

The instability of that system — rooted as it is in the parallel path dependencies of the Bretton Woods and climate governance regimes — is further called into question by the emergence of parallel economic systems and an emergent multipolar world.

In effect, the 2007-2008 financial crisis was also the inflection point for China to redirect its excess capital away from Western financial markets and towards a “Chinese version of the Marshall plan” for investments in Asia, Africa, and Latin America, leading to the Belt and Road Initiative, which has lent an estimated $1 trillion over the last decade. This process has also led to the creation of the AIIB and BRICS Bank (now the New Development Bank), providing a major alternative to the World Bank for many states’ infrastructure needs (and generating highly opaque — but likely massive — volumes of debt in the process). ²⁶

China now represents about 20% of global GDP, 30% of CO² emissions, and is the world’s largest bilateral creditor. The AIIB — which primarily lends in dollars, but also in renminbi — and the inclusion of the renminbi in the IMF’s basket of Special Drawing Rights currencies in 2015 were key steps in China’s goal to globalise its currency.

While unlikely to displace the dollar’s dominance outright, this progression indicates the onset of currency multipolarity. China’s intention to ‘de-dollarize’ the global economy is clear. Today, the renminbi as a trade settlement currency has more than doubled in the last year, and is on track to surpass the euro in the next two years. The ‘petroyuan’ is also beginning to compete with the petrodollar, spurred in part by its facilitation of renminbi-invoiced oil trade with Russia. ²⁷

Macroeconomic turbulence and the new non-alignment

“Every night I ask myself why all countries have to base their trade on the dollar,” asked Lula recently in a speech to the BRICS-created New Development Bank in China, giving support to a greater role for the renminbi in the global economy ²⁸ — a major signal of the mood around the world’s emergent economies, who are also calling the multilateral system into question by expressing their non-alignment on Russia’s invasion of Ukraine. 

Non-alignment, in fact, could best be explained as a hedge for debt-vulnerable nations to retain their autonomy in a geopolitical context that increasingly exposes them to both commodity market volatility and a geopolitically charged range of creditors. As Mona Ali highlights, Russia is not only a major fossil fuel energy exporter, it is also a larger creditor to lower and middle-income countries than France and Germany. ²⁹

The internationalisation of China’s economy in the past decade coincided with several key moments in the emergent fragmentation of the international system, from Brexit, to the Trump presidency (including its withdrawal from the Paris Agreement and US-China trade war) to the Covid-19 pandemic and Russian invasion of Ukraine. 

Combined, these accumulated shocks have decisively changed the macroeconomic picture, defined today by surging energy and commodity prices, and persistent inflation impacting the cost of capital and, as we know, critical debt levels. ³⁰ These, in turn, are darkening the geopolitical picture.

A new Washington Consensus?
The Biden administration is reckoning with the future of US economic leadership. “Economic integration didn’t stop China from expanding its military ambitions in the region, or stop Russia from invading its democratic neighbours. Neither country had become more responsible or cooperative,” said National Security Advisor Jake Sullivan, in a notable speech in April 2023.

“This moment demands that we forge a new consensus,” he added, explicitly inviting the idea of a ‘new Washington Consensus’ to describe this doctrine.

Implicit in this new doctrine is an acknowledgment that the US dollar’s status, while still vastly dominant, is facing more questions than at any time since 1944. Thus the need for new domestic economic fundamentals for the dollar: its power, rooted as it is in the size of the US financial market, its centrality to the oil trade (and its price fluctuations), and its ability to allow for massive domestic trade deficits, have all conspired to make the US economy inherently inflationary — and the world more fragile.

In this sense, the Inflation Reduction Act could be read in a broader sense than the prevailing domestic narrative: not only a way to relieve the pressure on American households and businesses, but also the starting point in a new political economy of renewable energy, pulling the dollar away from the gravitational pull of oil and other fossil fuel sources. This gambit is a rational move in a world that needs to reduce its oil and other fossil fuel reliance drastically to rein in climate impacts. It is also a calculated way to enhance US competitiveness in a global market whose dynamics — and choke points — promise to be more tense.

A key question, however, is what this ‘new Washington Consensus’ means for multilateralism. The IRA, while displaying ambition and credibility on core decarbonisation objectives, has also exposed the US to accusations of protectionism and other ‘non-market’ approaches it has criticised China for deploying, raising the risk of “geo-economic fragmentation”, which IMF Managing Director Kristalina Georgieva has been warning against at every turn. ³¹

And with good reason: it is hard to see green standards and the race to Net-Zero can take hold in a world where major economies shut the door to each others’ markets, while ‘friendshoring’ allies into their own unique orbit. Accordingly, it is legitimate to ask – despite Sullivan’s assurances that this new consensus can “build a fairer, more durable global economic order” – to what extent there is political appetite in the US for reform of the Bretton Woods system, if this risks a perception of the US ceding its leadership role.

Fundamentally, the World Bank and IMF governance structures have contributed to resentment in our international financial architecture, amid a rapidly evolving global economic order beset by mounting climate impacts. The outsized influence of the US over the governance and direction of both institutions — ranging from its financial contribution, leadership, voting (and effective veto) power, and home country advantage — for ambitious institutional reform.

In parallel, the emergence of parallel entities like the AIIB and the New Development Bank clearly illustrates that non-Western finance and assorted geopolitical influence will be deployed elsewhere, with China’s explicit encouragement, and represents a very significant  balance sheet.

COP27 and the Overton Window of finance

In several ways, these dynamics came to a head at COP27 in Egypt, resulting in newfound political space to challenge the international financial architecture. 

The outcome — with significant discord regarding the protection of the 1.5°C threshold, and language regarding fossil fuel phase outs — reflected an emergent political economy of renewable energy trying to take hold while emboldened fossil fuel exporters pushed in the other direction. Climate justice continued its rise up the international agenda, with vulnerable countries finally prevailing in their campaign — with a late, unexpected US rally — to see the concept of ‘loss and damage’ formally recognised, and the creation of a fund to compensate them for devastating impacts.

We also witnessed a sea change in the finance debate, with a resolution to finally operationalise the Paris Agreement’s crucial provisions on rewiring the financial system. Will this produce clarity on the interplay of capital markets and state intervention – especially in a more fragmented world?

At any rate, the change from COP26 was significant: in Glasgow, the UK staked a big claim to advancing the leadership of private finance, including the unveiling of GFANZ. Mark Carney spoke of the alliance representing $130 trillion of assets under management dedicated to the green transition; an alliance effectively able to ‘reorient itself’ towards decarbonisation. By COP27 — with the intervening invasion of Ukraine, windfall profits for the fossil fuel industry, and many financial actors shying away from GFANZ if it entailed binding climate targets — that rhetoric had lost momentum. Even more, the attractiveness of investments in oil and gas has spurred a battle in some US republican led states against ESG criteria in the financial sector.

Outside the formal negotiation track, the Overton Window of international financial reform was shifting further. In a luminous and clarifying speech at COP27 (having likewise grabbed headlines at COP26), Mia Amor Mottley, the Prime Minister of Barbados, almost single-handedly brokened a global political impasse. Highlighting her own nation’s struggles with debt servicing and the increasingly untenable rates at which Barbados must borrow, all while facing ever-more violent hurricanes and a Covid-19 crisis, she painted a clear picture of the structural injustices of the climate and debt nexus.

The call for a “Bridgetown Agenda” captured the zeitgeist. Launched in Barbados and echoed by President Macron at both COP27 and the concurrent G20 summit, the agenda lays out a visionary reform agenda to include massive new issuances of Special Drawing Rights for the world’s adaptation and clean energy needs, as well as new, much-needed global levies on fossil fuel profits to finance the transition. 

Prompted by Prime Minister Mottley’s bold leadership, President Macron took the initiative of calling for the June Paris Summit to support the spirit — if not yet the policy detail —of the Bridgetown calls.

Where next for debt and climate multilateralism?

Building to — and through — the June summit

Expectations for the June summit are narrowing to some important — perhaps incremental — outcomes. 

First, in the interest of locating new sources of finance without new debt —particularly new levies related to the economics of the climate crisis — there is momentum for adopting a levy on shipping within the framework of the International Maritime Organization (IMO) by the end of 2024. This levy would serve as a crucial tool to address emissions from the shipping sector, which is a significant contributor to greenhouse gas emissions. Additionally, countries should set ambitious decarbonization targets for the industry by 2030.

Governments should also explore other tax options, such as levies on the oil and gas sector and aviation, with the aim of fostering equity while contributing to emissions reduction.

US Treasury Secretary Janet Yellen’s call for an ‘evolution’ of the World Bank — urging it to adjust its balance sheets and accept more risk to address the climate crisis and other significant threats — is making progress, with a roadmap to this end adopted at the 2023 Spring Meetings. Governments should use the upcoming summit to empower the newly appointed President of the World Bank, Ajay Banga, accordingly. This would help to establish the World Bank as the leading institution on climate change both at global and national levels, as well as support the recapitalization of the World Bank Group’s various agencies, further helping to orient and mobilise private finance in developing countries towards decarbonization.

Moreover, G20 countries should fulfil their pledges to re-channel $100 billion in SDRs to support sustainable development. This should include fully replenishing the IMF’s Resilience and Sustainability Trust (RST) and the Poverty Reduction and Growth Trust (PRGT). Governments should also support the momentum for rechanneling SDRs to MDBs through mechanisms like hybrid capital or SDR-linked bonds, helping to establish new norms for the volume and manner in which SDRs can be mobilised towards climate action.

Finally, governments should call upon the IMF to align itself with the Paris Agreement by 2025. This alignment should include the systematic integration of climate risks into the IMF’s surveillance activities and the integration of climate into its lending toolkit.

Encouraging a debt paradigm shift

These ‘deliverables’ could all provide important headroom to tackle our intertwined crises in a concerted and multilateral way. These would build on another recent positive development: the promise made by affluent countries back in 2009, in Copenhagen, to gather at least $100 billion annually for climate financing is finally on track to be fulfilled this year.

What next? A fundamental test for this one-off summit will be in the language of the chair summary : could it produce a ‘Paris Action Plan’, and lasting momentum for international financial reform, starting with new thinking and pledges on debt? 

Mindsets — if not yet policies — seem to be shifting. Recent IMF research ³² states that fiscal consolidation does not, on average, reduce debt-to-GDP ratios. This calls into question the established toolkit for debt-vulnerable countries — and the prevailing beliefs about austerity — in the pursuit of sustainable debt levels.

Beyond the summit, ongoing debt discussions with the likes of Sri Lanka, Ghana, Pakistan, Kenya, and many other countries in danger of debt distress provide as many opportunities to enhance efforts towards debt restructuring and forgiveness. 

Separately, there is also momentum towards innovative solutions such as green debt swaps. Ecuador, for example, just completed the biggest ever debt-for-nature swap, helping to finance conservation efforts of the Galapagos Islands valued at $1.6 billion ³³ . In the MENA region, a UN initiative, supported by philanthropies, will involve civil society in the process of identifying avenues for debt swaps to support SDG goals. ³⁴

A role for Europe: building norms around the Paris Agreement 

At any rate, creditors do recognize the urgent need for innovative approaches to debt relief and restructuring. China is signalling some openness for greater debt diplomacy, as shown by its debt relief to 17 countries in 2022 ³⁵ and progress towards a recent agreement with Zambia. The negotiation, co-chaired by China and France under the aegis of the Club of Paris, is evidence that spaces for constructive discussion are possible. 

There is a clear role for Europe to play. For starters, debt restructuring under the G20 Common Framework, as well as increased dialogue between key creditors like China and the Paris Club, could reduce the need for IMF interventions, improve debt sustainability, foster trust and help to lower borrowing costs.

On the climate front, the clearest opportunity for continued progress lies in Brazil’s renewed climate leadership after the election of Lula. The Brazilian government sees its 2024 presidency of the G20, with its bid to host COP30 in 2025, as a sequence to catalyse climate multilateralism. Since the 1992 Rio Conventions, Brazil has enjoyed a great reputation as a bridge builder in environmental diplomacy, and this sequence can indeed serve as the runway to next big ‘ambition COP’, as well as a moment to restore the trust of emerging market economies and climate vulnerable countries in the international financial architecture. 

This could be the moment to begin the move towards a more decentralised system, grounded in the norms and standards provided by the Paris Agreement.

Until we see progress on debt, fiscal space for countries largely depends on concessional financing ³⁶ , grants, and SDRs. The recent Stern-Songwe report evaluates the need of developing and emerging market countries to an additional $1 trillion a year in external financing. In an adverse macroeconomic landscape, this puts even greater pressure on Overseas Development Aid (ODA) budgets across the competing requirements of mitigation, adaptation — and now loss and damage too — while the quantities pledged remain vastly insufficient. At the Spring Meetings, the World Bank agreed to tweak its balance sheet to release around $5 billion in additional lending.

This is a positive step – but a modest one. While Bretton Woods institutions’ reform is essential, this slow pace underscores the need for urgent concurrent strategies, including a more decentralised and regionalized financial structure based on Paris-aligned norms. Europe, particularly with the help of the European Investment Bank (EIB), is in a unique position to lead this shift towards a climate-centric financial system that could be shared as well by the AIIB and the New Development Bank.

Such a sea change in thinking would benefit European climate leadership, as well as the global discourse on climate finance and debt in general. Given Europe’s clear leadership role as a ‘first mover’ in shaping the world’s climate ambition, this move could stimulate a much-needed shakeup within the global financial institution system while facilitating the enhanced release of capital to countries in need.

Reforming development finance: a springboard?

Sharing much of the diagnosis and spirit of Bridgetown, a recent paper by the Agence Française de Développement (AFD) ³⁷ offers a valuable and slightly different starting point. The authors propose an overhaul of the ODA and the climate finance architecture by 2025, with a compelling framework to do so. 

In their telling, the global path dependency of international aid has entered the ‘age of consequences’ — in other words, of our many blind spots and path dependencies described in this paper colliding with the reality of climate impacts.

n the process, the shifting concept of ODA has stretched  the finance mobilised under its mandate, all while (paradoxically) consolidating ODA’s role as a tool of state policy. The rise of the BRICs, the increase in greenhouse gas emissions and the shift from Millennium Development Goals to the more sweeping SDGs are only a few factors in this transformation, which further highlights the importance of finding a new decentralised taxonomy for what type of finance can best serve a given aim.

As part of this conceptual ‘merger’, aid would be divided into two parts: the first focused on the most climate vulnerable and focused on ‘traditional’ ODA objectives and historic donors. The second on decarbonisation, aiming to bring in more actors more reflective of our multipolar reality, and greater reliance on tools like debt cancellations and swaps, with specific private financing targets. 

“The Paris Agreement has set the timetable: we must redefine the framework and contributors of climate finance by 2025,” the authors write. “Let us take the opportunity to redefine development finance at the same time.”

This framework — and the negotiation required to operationalise it — would also help to allocate national and regional priorities to their relevant financial institutions, reducing overlap and duplication. This, too, is a promising agenda for Europe to support, in the interest of a Paris-aligned devolution of our financial system.

Conclusion: resetting the debt debate?

Prime Minister Mottley has given voice to a shared hope. For decades, the status quo has exacerbated inequalities and undermined faith in our multilateral system. There have been disjointed attempts at reform in the past, but today we have the outlines of a consensus, brought upon us by this “polycrisis.” ³⁸ As the diagnosis goes: our current international financial architecture is at once unjust, ill-equipped, insufficiently accountable, and harmful to our planetary boundaries. Our current trajectory harms our security in every sense. 

Discussions on the scope and breadth of these reforms are predictably more divided. This sets the scene for the Paris summit, a precious moment in a rare sequence of political possibility. As we approach the halfway point of the SDGs as well as the first Global Stocktake under the Paris Agreement, the debate on reforming the international financial architecture cannot happen in isolation, nor can we allow it to fail.

Moreover, the sheer diversity of proposals — from the G20, to the Bridgetown Initiative, to those of the US Treasury Secretary Janet Yellen, to name but some — offers an opportunity to broaden and democratise this debate, all while global crises provoke the merging of macro-financial debates with those on debt, climate, biodiversity, health, and global public goods in general.

Ultimately, we need record finance without overwhelming debt. We need it firmly wired towards our climate goals. And we need a multilateral system which fosters trust, reaching beyond the narrow bounds of state sovereignty.

This calls, too, for a deep rethink of the nature of debt in our financial system. And this must start at home.

The 2010s Eurozone crisis served as a stark reminder of the cost of borrowing to the citizens  — who, when their leaders face a default, are sidelined from the decision-making process. This historical pattern of ‘debt, drilling, and dollars’ could be countered with a straightforward solution: democracy.
Europe, meanwhile, still needs to balance its Green Deal investment plans with a viable deficit consolidation strategy of its own, underscoring the need to redefine the global conversation on debt and borrowing. As economist Mona Ali notes, the US Federal Reserve has recently expanded its balance sheet by $300 billion and swiftly managed banking sector turbulence at significant state expense. This kind of flexibility contrasts with the average IMF program. ³⁹

Europe is uniquely positioned to lead this policy thinking. A guiding question must be how public spending — particularly the trillions needed for the climate crisis — should be included in any deficit target. 

By design, such targets induce a short-term view that is fundamentally incompatible with the trillions needed, and with the time horizon required to deliver upon net-zero commitments, as well as tremendous inequities between holders of reserve currencies and the rest of the world, whom, in turn, will be the least protected against the most violent climate impacts. No debt-to-GDP ratio can shield people from ‘climate carnage.’

In that regard, it would be beneficial to rethink how green investments feature in the accounting of sovereign debt, as Darvas and Wolff have proposed in the context of European fiscal rules. Likewise, it makes little sense to pass over urgent climate investments because they do not fit a given fiscal straitjacket. As Pisani-Ferry put it succinctly, “climate investment is a powerful argument for letting governments go into debt, because the usual intergenerational objection does not apply”. Indeed, “governments may choose to go into financial debt to be able to pay down climate debt”. ⁴⁰

The following paradox clarifies the way forward: on one hand, we must finance trillion-dollar decarbonization and adjust to climate impacts swiftly, while navigating seemingly unsustainable debt burdens and rising borrowing costs. On the other hand, the IMF is the first to remind us that the longer we wait, the higher the costs, not just because fossil fuel reliance and climate impacts aggravate the spiral, but because the volumes of investment needed need decisive and credible policies for inflation expectations to remain anchored.

By contrast, with proper coordination, transitioning to a greener economy could create a lasting system more resistant to inflationary pressures. ⁴¹ This shift could also liberate the global economy from fossil fuel rent volatility and enhance energy security. While fossil fuel interests and ‘stranded petrostates’ may make the journey towards a post-fossil landscape difficult, we must envision a multipolar era of clean energy.

Finally, this transition comes with unknowns for economists to grapple with.

The highest on the agenda being the geopolitical implications of sourcing critical minerals and other green supply chains, with profound questions for human rights and social justice. Much like the challenge of inflation expectations, it is clear that a green transition which neglects to bring communities along will fail.

We may also be under-evaluating  the upsides. Green investments are not conventionally seen as countercyclical or major growth drivers. However, IMF research indicates that the public investment multiplier for green sectors could be 2 to 7 times higher than for other sectors, influencing economic growth, public finances, and global growth dynamics. ⁴²

Most urgently, we must consider the unknowns of potential disasters and uncertainty in economic models, as urged by the Bridgetown Agenda. Climate change’s devastating effects — storms, floods, large-scale fires — are no longer exceptions; they are becoming the norm. As PM Mottley’s advisor and Bridgetown architect, Avinash Persaud, plainly puts it: “climate change is an uninsurable event.”

Last summer’s extreme climate impacts didn’t single out Pakistan. Megacities in China screeched to a halt due to power outages. Rising seas eroded the soil beneath coastal rail lines in the US, leading to permanent closures. Rivers in southern Europe ran dry, and farmers faced the driest weather in 1,200 years. 

We can afford prosperity, safety and peace. What we can’t afford — or survive — are outdated assumptions.

1. «Climate change likely increased extreme monsoon rainfall, flooding highly vulnerable communities in Pakistan», World weather attribution, 14 septembre 2022. 
2. «Guterres urges radical global finance shake-up to help Pakistan after deadly floods», Nations-Unies, 9 janvier 2023. 
3.  Sixième rapport d’évaluation du GIEC, Rapport de synthèse, mars 2023.
4. World Energy Outlook 2021, Agence internationale de l’énergie, octobre 2021.
5. Kate Mackenzie, Tim Sahay, «Stranded Countries and Stranded Assets», Phenomenal World, 23 mars 2023.
6. Gillian Tett, «Prepare for a multipolar currency world», Financial Times, 30 mars 2023.
7. «The 53 fragile emerging economies», The Economist, 20 juillet 2022.
8. Seb Kennedy, «Zombie pipelines taunt Pakistan», Energy flux, 14 avril 2023.
9. Poverty and Equity Briefs – Pakistan, Banque mondiale, avril 2023.
10. «Aid in 2021: Key facts about official development assistance», development initiatives, février 2023.
11. «CO2 Emissions in 2022», Agence internationale de l’énergie, mars 2023.
12. John Williamson, «From Reform Agenda to Damaged Brand Name – A short history of the Washington Consensus and suggestions for what to do next», FMI, septembre 2003. 
13. Nancy Birdsall, Augusto de la Torre et Felipe Valencia Caicedo, «The Washington Consensus: Assessing a Damaged Brand», Center for global development, mai 2010.
14. Nancy Birdsall, Augusto de la Torre et Felipe Valencia Caicedo, «The Washington Consensus: Assessing a Damaged Brand», Center for global development, mai 2010.
15. ibid.
16. ibid.
17. Dani Rodrik, «Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform», Journal of Economic Literature, vol. XLIV (décembre 2006), pp. 973–98.
18. Christof Rühl, «Oil Intensity: The Curiously Steady Decline of Oil in GDP», Center on Global Energy policy, 9 septembre 2021
19. Vitor Gaspar, Paulo Medas, Roberto Perrelli, «Riding the Global Debt Rollercoaster», Blog du FMI, 12 décembre 2022.
20. «Small island developing states (SIDS) have spent 18 times more in debt repayments than they receive in climate finance, says new research», eurodad, 11 octobre 2022.
21. Stern Review on the Economics of Climate Change, octobre 2006.
22. «IMF Survey: G-20 Ministers Agree ‘Historic’ Reforms in IMF Governance», FMI, 23 octobre 2010.
23. Disponible à cette adresse.
24. Breaking the tragedy of the horizon – climate change and financial stability – speech by Mark Carney», Bank of England, 29 septembre 2015.
25. Lifting the Small Boats,” Speech by Christine Lagarde, Managing Director, IMF, 15 Juin 2015.
26. James Kynge, «China hit by surge in Belt and Road bad loans», Financial Times, 16 avril 2023.
27. Phyllis Papadavid, «The Renminbi’s Rise and its Accelerated Use in Global Trade Finance», Asia House, 22 mai 2023.
28. Joe Leahy et Hudson Lockett, «Brazil’s Lula calls for end to dollar trade dominance», Financial Times, 13 avril 2023. 
29. «Ali: Deweaponize the Dollar», Progressive International, 17 avril 2023.
30. «G-20 Background Note on the Macroeconomic Impact of Food and Energy Insecurity», FMI, mars 2023.
31. Kristalina Georgieva, Gita Gopinath, Ceyla Pazarbasioglu, «Why We Must Resist Geoeconomic Fragmentation—And How», Blod du FMi, 22 mai 2022.
32. World Economic Outlook, FMI, avril 2023.
33. Rodrigo Campos et Marc Jones, «Ecuador frees cash for Galapagos conservation with $1.6 billion bond buyback», Reuters, 5 mai 2023.
34. «Open Society Announces $1.7 Million to Support Middle East and North Africa Debt Swap for Sustainable Development», Open Society Foundations, 15 mars 2023. 
35. «China to Waive Some Africa Loans, Offer $10 Billion in IMF Funds», Bloomberg, 23 août 2022.
36. «Finance for climate action: scaling up investment for climate and development», London School of Economics, 8 novembre 2022.
37. «Official Development Assistance at the Age of Consequences», Agence française de développement, octobre 2022.
38. Adam Tooze, «Welcome to the world of the polycrisis», Financial Times, 28 octobre 2022.
39. Mona Ali, «Reforming the IMF», Phenomenal world, 13 mai 2023.
40. Jean Pisani-Ferry, «21-20 Climate Policy is Macroeconomic Policy, and the Implications Will Be Significant», Peterson Institute for International Economics, août 2021. 
41. Warwick McKibbin, Maximilian Konradt et Beatrice Weder di Mauro, «Climate Policies and Monetary Policies in the Euro Area», Banque centrale européenne, 2021.
42. Nicoletta Batini, Mario di Serio, Matteo Fragetta, et Giovanni Melina «Building Back Better: How Big Are Green Spending Multipliers?», FMI, 19 mars 2021.