The European Central Bank (ECB), through its monetary policy, has shaped the response to the Covid-19 pandemic – and, with it, the current state of the economy – more than any other EU institution.
Essentially endless amounts of cheap money under its Pandemic Emergency Purchase Program (PEPP) and negative interest loans to commercial banks (Targeted Long-Term Refinancing Operations, or TLTROs) prevented a financial crisis during the epidemic.
The current economic outlook is better than it has been for years, but its policies have had side effects as well. For example, low interest rates have led to house price inflation and the inflation of other financial assets. And his bond purchase also funded fossil fuel companies.
NGOs and MEPs have frequently called on the bank to develop monetary policies that promote a transition to the environment, instead of supporting fossil fuels.
But – as stipulated in European treaties – the ECB can design and implement a monetary policy independent of government interference, which has resulted in an organization that can more or less act on its own.
However, as economist and philosopher Jens van ‘t Klooster, postdoctoral researcher at the University of Louvain recently argued, greater coordination with democratic authorities may be preferable, especially in response to the climate crisis.
Fixing the climate is part of the mandate
In the study, van ‘t Klooster and Nik de Boer, assistant professor of constitutional law at the University of Amsterdam, question the bank’s emphasis on price stability and argue that it should instead coordinate its climate and monetary policies with governments.
And it can do this without changing the treaty, just by interpreting in more detail what the bank’s secondary mandate really means.
Under its treaty, the bank has two mandates that define its objectives.
The main mandate takes priority and instructs the bank to maintain price stability, which the ECB has established at an inflation level of 2%.
Its secondary mandate instructs the bank to “support general economic policies in the Union” – which are loosely defined as the promotion of social justice, economic growth, full employment and environmental quality.
According to de Boer and van ‘t Klooster, it is unclear how the bank is supposed to achieve these goals – because the secondary mandate does not rank the goals.
What also doesn’t help is that the ECB itself has only mentioned this secondary term 10 times in 21 years. âNeglecting the secondary mandate may be illegal, and in any case, it is undesirable,â says van ‘t Klooster.
“The ECB currently views climate change primarily as a threat to price stability, but you may wonder if this is the most direct or effective way to tackle the problem of climate change,” said de Boer told EUobserver.
In fact, on Thursday, November 25, executive member Frank Elderson did not describe the threat of climate change solely as a financial risk, but called it “the most defining problem for mankind.”
The ECB has already sounded the alarm on the fact that none of the 112 commercial banks supervised by the ECB “is on a trajectory compatible with Paris”.
But the bank neglects to fully address some of the economic, climatic and societal effects of monetary policy.
“Should the ECB buy fossil fuel bonds?” Should it do more against house price inflation? Why does it have 3,600 billion euros in public debt? These are questions that cannot be answered simply by saying: we are pursuing price stability, âvan ‘t said Klooster.
He points out that a new direction for coordination between the government and the central bank is suggested in a recent background study by the ECB.
Chiara Zilioli, and other members of the ECB’s Legal Services Directorate-General, argue that the European Council, the Council of Ministers and the European Parliament are primarily responsible for indicating the bank’s priorities.
Coordination with these EU institutions will help address the twin challenges of inflation and climate change.
Is inflation winning out over climate change?
With inflation peaking around the world, pressure on central banks to raise interest rates has intensified.
Christine Lagarde, the French president of the ECB, has so far ruled out an interest rate hike. But Australia, South Korea, New Zealand and other countries have already raised their rates.
Higher interest rates affect the entire economy, not just the high-priced sectors. It also increases borrowing costs for climate-related projects where investments are needed most.
“It would be very problematic if the increase in interest rates, to combat short-term price movements, hurt investments that conform to the green taxonomy,” van ‘t Klooster tweeted on Monday.
Green TLTROs are an example of what coordination between monetary and fiscal policies might look like.
This is an idea proposed by van ‘t Klooster, who wrote an article about it for the NGO Positive Money. Over the past year it has steadily gained popularity among economists and policy makers and is now starting to reach the political scene.
Like regular TLTROs, their green counterparts would provide negative interest loans to commercial banks, provided they lend to green projects like house isolation or clean energy start-ups – essentially protecting green investments against possible rate hikes.
Referring to the study, MEP Aurore Lalucq (S&D) recently told Lagarde “that there is no time to waste” and insisted on the need for green TLTROs “as a great tool. more effective against inflation “.
And although Lagarde made it clear that she had “pushed as much as she could in this direction” and did not want to “close the door on green TLTROs”, she said it was not yet something. something the board wanted to consider, “now” we have to be nimble and able to adjust as needed. “
Market neutrality hinders climate policy
The problem is that Green TLROs run up against the idea of ââmarket neutrality.
The concept of market neutrality itself is expected to be revisited in 2022, which could change the regulation of ideas (such as green TLTROs) that direct money to environmental investments.
The question remains whether the board has sufficient legal basis to decide what should prevail.
Climate change is too big to be left to the board of directors alone, van ‘t Klooster says, and the effects of monetary policy on society and the environment are too big.
“The world is not democratizing,” says van ‘t Klooster. “Moreover, ‘market neutrality’ only means buying more Shell bonds.”