Today, on 8 July 2021, the European Central Bank (ECB) presented the outcome of its Strategy Review. Over 18 months, the ECB had reviewed all elements of its monetary policy, trying to take into account the views of a broad range of stakeholders. The final decision was taken by the Governing Council yesterday. Initially, the finalisation of the review had only been expected for September. The current review was the first formal overhaul of the ECB’s monetary policy since the last review in 2003. Greens have been trying to strengthen the ECB‘s commitment to fighting climate change as well as to take better account of inflation in housing prices.
The ECB will continue to target 2% inflation but from now on in a symmetric fashion. Previously, the ECB’s target had been below, but close to, 2% and therefore more vague. Moreover, the ECB wants owner-occupied housing to become part of Eurostat’s Harmonised Index of Consumer Prices in the future. Currently, owner-occupied housing is ignored in inflation measurement, leading to a severe underestimation of the cost of housing. In the meantime, the ECB will include the cost of owner-occupied housing in its wider set of supplementary inflation indicators. To support the EU’s economic policy strategy – the EU Green Deal – the ECB has adopted a climate-related action plan. In particular, the ECB will integrate climate change and related policies into its models, require sustainability disclosures for collateral and asset purchases and conduct system-wide climate change stress tests. Furthermore, it will challenge rating agencies that do not adequately take into account climate change risks. Most notably, the ECB will consider climate change risks in its collateral framework and align its private sector asset purchases with the goals of the Paris agreement, correcting for the carbon bias of financial markets.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The ECB’s monetary policy will become greener and more closely aligned with the daily experience of European citizens. The symmetric inflation target is not the big news today. The target has hardly changed. Also the newly calibrated inflation target is considerably lower than the inflation achieved by the good old Bundesbank. There is no reason to believe the ECB will stop acting if relevant inflation pressure materializes in the real world rather than in the minds of over-nervous observers.
It is just common sense that the ECB no longer turns a blind eye on the exploding house prices across Europe. 70% of all Europeans live in self-owned property. Their cost of living has so far been ignored in official inflation numbers. This threatened to create a disconnect between ECB communication and the daily experience of European citizens. We Greens have therefore been calling for an integration of owner-occupied housing in inflation measurement. Inflation numbers will in the future better reflect the living conditions of European citizens.
It is very welcome that the ECB tackles the issue of credit ratings that underestimate environmental risks. Until this day, even the biggest polluters with monolithic business models entirely based on fossil fuels continue to receive positive credit ratings. Taking the Paris goals and the EU Green Deal seriously, financial instruments of these companies should no longer be eligible for collateral postings and asset purchases under the ECB’s rules. The ECB must compensate for this market failure in the rating market and challenge the big rating agencies with its own assessments.”
MEP Ernest Urtasun of the Greens/EFA group commented:
“The climate measures announced today are a good first step, we see some positive elements in the roadmap presented, there is no way back for climate policies in the ECB. The ECB will take into account climate change in their policy regarding models, stats, stress-tests, collateral framework, purchases of bonds or disclosure requirements. This means climate change is included in the banking supervision arm as well as in the standard monetary policy toolkit and the QE.
However, the review falls short in ambition and sense of urgency to fight the climate emergency. Regarding the reduction of carbon assets, it sets a framework that emphasises risks that the climate crisis poses to the financial sector, but does not take action to tackle lending in the carbon economy, which accelerates the climate crisis. The ECB’s lending policy is not targeted and we do not have green TLTROs, which was a long awaited demand. We also expected more regarding market neutrality, after strong statements by President Lagarde. The ECB only commits to present proposals for alternative benchmarks in 2022.”
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Today’s communication of the ECB on the outcome of its Strategy Review:
https://www.ecb.europa.eu/home/search/review/html/index.en.html
New climate-related action plan of the ECB:
https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html
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