The dispute over green monetary policy
Should the ECB also use its power for the climate? The dispute over this fundamental question is boiling up again. Some economists see this as jeopardizing price stability in two ways: An analysis.
EA smoldering dispute gets new momentum: The past week was marked by an unusually intensive exchange of arguments about a future “greener” direction of monetary policy. Not only did the environmental protection organization Greenpeace draw attention to its criticism of the current policy of the central bank with a spectacular action with gliders on the ECB skyscraper in Frankfurt on Wednesday. On the same day, the economically liberal “Kronberger Kreis” dealt with the issue, and there especially Volker Wieland, who is also on the German Economic Advisory Council. On Thursday, ECB President Christine Lagarde, the top representative of the central bank, declared her position on this issue.
It is about an important decision: Should the central bank, which has a lot of power and influence through its monetary policy, currently above all the trillion dollar bond purchases, also use it for climate protection?
Greenpeace and many other non-governmental organizations, but also some economic research institutions, are pushing in this direction. The opposite position is: the central bank has been given a lot of power by the states of Europe. Apart from certain reporting requirements, it is largely independent. This independence was granted in order to be free from any pressure from politics to ensure price stability – but not to pursue other political goals. Supporting the EU’s economic policy was also offered to her as a task. But only as a secondary goal if the first, maintaining price stability, is not impaired by it.
Conflict with the goal of price stability
Volker Wieland, Professor of Monetary Economics in Frankfurt, described on Thursday the danger that a greener monetary policy could pose to price stability with two constellations. One argument had already been put forward several times, and Bundesbank President Jens Weidmann also likes to use it: If the ECB now buys large quantities of green bonds, especially from companies, it will be difficult if the central bank at some point separates from its bond portfolios for monetary policy reasons want.
If you are sitting on huge amounts of bonds after the Corona crisis, which is already becoming apparent, then you will have to get rid of them at some point. According to all announcements by the central bank, this is the case when inflation begins to rise again. If, however, the ECB has bought a significant part of the bonds because it wants to support climate-friendly companies with this purchase, and the climate issue has not yet been resolved at the time of a possible rise in inflation, there is a conflict of objectives: should it keep the bonds and possibly buy more to protect the climate – or should it reduce stocks to ensure price stability?
It is certainly not impossible to find compromises. But this conflict of goals is a central argument why Wieland, Weidmann and a whole range of other economists are critical of green bond purchases. You emphasize that climate protection is of course incredibly important; only if it is the states and the EU that have good instruments for this, such as emissions trading or CO2 pricing. The central bank would therefore have more secondary tasks, for example it could push for greater consideration of climate risks in the ratings for corporate bonds and in banking supervision.