The European Central Bank: You all need to spend half a trillion euros to prevent a disaster that will make the planet uninhabitable.
Also the European Central Bank: We’d love to help, you understand, but we’re legally required to only make things worse. Let us know when you’ve done it, ok?
The ECB is getting increasingly panicky at Europe’s lack of progress with the green transition, an issue Christine Lagarde put at the center of its agenda when she took over as president. Essentially, it faces two distinct but related problems — both of them scary.
Firstly, it has no clear idea how it can accommodate the massive increase in spending across the economy required by the green transition. Indeed, its own record sequence of interest rate hikes has made an already daunting task impossibly expensive, and its insistence on a quick reduction of budget deficits is further restricting Europe’s options.
“With interest rates at a record level there is a lot of difficulty raising investments for the green transition, so it’s a bit of a contradictory goal,” said Rasmus Andresen, an MEP with the German Greens party. “A lot of companies are quite afraid, because they have a lot of investments they need to make.”
Those companies also grouse that the ECB’s own inability to keep inflation under control has made things much worse.
“The ECB should always focus on its narrow mandate — that is, to keep prices stable — and it failed,” complained one executive representing a large federation of struggling small firms in Germany. “If they’d raised rates earlier, probably inflation would have been curbed earlier — which would have made it easier to transition.”
Surging finance and construction costs have exposed existing weaknesses at individual companies, such as wind turbine maker Siemens Energy. But even Europe’s strongest borrowers are struggling to square the circle. Last week, Germany’s plans for €60 billion in green spending were deemed unconstitutional by the country’s top court. Italy’s budget is also straining under billions of euros in outstanding loans for a costly green tax credit scheme.
The ECB’s first instinct is to deflect the conversation away from inconvenient truths about the cost of high interest rates, preferring to highlight structural obstacles over which it has less influence. Lagarde returned last Friday to the theme of Europe’s stalled Capital Markets Union project as one of the causes of the failure to mobilized private capital for the transition.
In September, meanwhile, she had hinted in an interview with La Tribune that common borrowing at EU level could be a way out of the fiscal straitjacket.
“If there is any area where Europeans should borrow collectively, invest and share the burden as equally as possible, it’s the fight against climate change,” she said.
Pushing the financial stability envelope
Its second problem is closer to home. As supervisor of the region’s biggest lenders, the ECB has typically seen climate change first and foremost as a financial stability issue. If, for example, extreme weather destroys agricultural or tourism businesses and makes insurance prohibitively expensive, that can bring down the banks that lend to them and cause all manner of economic destruction. As with other central banks in Europe, it argues that it can’t guarantee price stability (its primary mandate) without ensuring the financial sort.
But even in the financial sector, where it has more powerful tools at its disposal than rhetoric and moral suasion, it is struggling to get its message across.
In a speech last week, the ECB’s climate czar Frank Elderson lamented that after three years of signaling from the ECB, not one of the banks it supervises fully meets Frankfurt’s expectations for understanding and accounting for Climate and Environmental risks. Bloomberg reported on Tuesday that the ECB is now preparing to fine 20 banks that have missed an interim deadline for preparing such work, which needs to be completed by the end of next year.
“This is not just some flower-power tree-hugging exercise,” Elderson told a panel in Milan last month, with evident impatience. “This is real economics, real financial stability, real banking supervision.”
Mission creep
Critics argue that Lagarde’s initiative of dragging the ECB into the climate change debate represents an overly broad interpretation of its authority. On paper, it has two legal mandates: the first, to maintain price stability, and the second, to support EU economic policies — so long as they don’t undermine the first.
Unease extends into the bank’s own upper echelons. One member of the ECB’s governing council, speaking on condition of anonymity, complained that Elderson — whose speeches are often more emotional and impassioned than those of the average technocrat — was “fixated” on that secondary objective. Elderson, for his part, always insists that his analysis is not only justified, but demanded, by the bank’s mandate.
The bank’s efforts to ‘green’ monetary policy, however, have largely run into the sand. During the pandemic, the ECB tried to tilt the playing field in favor of “green” borrowers by reinvesting its portfolio of corporate bonds into those with superior environmental performance.
Since last year, however, it has ceased net purchases, effectively ending support through that channel. It has also resisted calls to divest from fossil fuel emitters like Italian energy giant Eni, arguing that staying invested in those companies provides an incentive for them to transition.
The ECB also risks bumping up against legal issues here if it violates market neutrality too much. Skewing the marketplace in favor of specific players is something for elected governments, not the central bank. Belgian National Bank Governor Pierre Wunsch warned earlier this year that the bank was “flirting with autonomous policy-making.”
(For his pains, Wunsch is now being targeted by pressure groups who are petitioning Belgium’s King Philippe not to reappoint him as governor when his term ends in December.)
“The ECB is a technical institution, it’s not there to make political choices,” said Daniel Gros, the director of the Centre for European Policy Studies.
However, as Meyrick Chapman, a portfolio manager at Hedge Analytics, puts it, “the magic of the infinitely expandable mandate … is that the ECB can do anything.”
