Dear friends, dear interested,
At a Bundesbank conference on climate change and central banks on 29 October, Jens Weidmann, President of the Bundesbank and member of the Governing Council of the ECB, argued that the ECB’s monetary policy could not be used as a tool to the fight against climate change. He said that a monetary policy that pursues environmental objectives would quickly be overburdened and further questions about the independence of the ECB would arise. Private banks and financial supervisors should, however, keep a close eye on sustainability risks. The new President of the ECB, Christine Lagarde, who has her first working day today, had shown in a hearing before the European Parliament that she was open to a greener focus of the ECB’s monetary policy.
Weidmann’s arguments are not entirely sound as he argues against a role of the ECB’s monetary policy in the fight against climate change. He rightly calls on private banks and financial supervisors to take responsibility for climate protection, but denies monetary policy any responsibility. It’s true: CO2-intensive loans must be backed by private sector players with higher risk weights because they entail an additional default risk. However, bonds issued by companies with climate-damaging business models are also associated with higher risks in the ECB’s books. For this reason, the ECB should consistently price in climate risks in its refinancing transactions and bond purchases.
Even now, the ECB is by no means neutral when it comes to climate change. The bond purchasing programme is distorted in favour of CO2-intensive industries and thus indirectly subsidises climate-damaging companies. This is demonstrated by the following study: http://www.lse.ac.uk/GranthamInstitute/publication/the-climate-impact-of-quantitative-easing/
CO2-intensive companies often have a higher market capitalisation than sustainable companies and are established players in the financial market. Thus, the Eurosystem is only apparently neutral when it increasingly acquires bonds from companies with climate-damaging business models. In fact, however, it is a decision in favour of the status quo. That shows: The ECB’s monetary policy has an impact on the climate, so the central bank must face up to its responsibilities.
In a hearing before the European Parliament, the new head of the ECB, Christine Lagarde, declared her general openness to greening monetary policy. With his rejection of a green monetary policy, Weidmann has without necessity thrown down the gauntlet at the future ECB President Lagarde before she even took office. That is bad style. Lagarde’s general openness to a role for the ECB in climate protection is right, especially if it can be reconciled with the primary objective of price stability. Proposals for monetary policy contributions to the fight against climate change should be discussed seriously and not hastily discarded.
Link to the hearing with Christine Lagarde before the ECON Committee of the European Parliament with a positive statement on the possible green orientation of the ECB: https://www.europarl.europa.eu/ep-live/en/committees/video?event=20190904-1800-COMMITTEE-ECON
Link to Jens Weidmann’s speech: https://www.bundesbank.de/en/press/speeches/climate-change-and-central-banks-812618
With green European greetings,