A coalition of civil society organizations and prominent academics is urging the European Central Bank (ECB) to revamp its monetary policy framework as part of its forthcoming strategic review, especially focusing on sustainability. The coalition asserts the existing strategy obstructs price stability, largely because it overlooks climate change's inflationary impacts and Europe’s dependence on fossil fuels.
Pointing to last year's gas price shocks as evidence, the coalition argues the ECB's climate-agnostic tightening of monetary policy has negatively impacted capital-intensive green investments, thereby worsening long-term inflation. "Although governments should lead on environmental policies, the ECB has a responsibility to support the green transition to uphold its mandate," stated the coalition in their open letter to the ECB's governing council.
The letter featured prominent names, including Dirk Bezemer, professor of economics at the University of Groningen, who emphasizes the need for the ECB to implement “a new and improved climate roadmap.” This sentiment is echoed by Clarisse Murphy from Reclaim Finance, who asserted the urgency of the situation, emphasizing, "The ECB can, should and must act when itcomes to climate change and nature degradation. They have the tools to do it and they have the mandate to do it, so what are they waiting for?" Their remarks underline the coalition's claim for action.
Despite acknowledging some progress by the ECB, the coalition criticized the central bank for insufficient implementation. For example, the premature cessation of green tilting within its corporate bond portfolio due to the halting of reinvestments under the asset purchase programme. Critics have contended proactive green monetary measures may overstep traditional central bank mandates, yet the coalition firmly believes such actions fall well within the ECB's authority. They highlighted the counterproductive effects of uniform interest rate hikes as responses to inflation exacerbated by fossil fuels.
Jordi Schröder Bosch from Positive Money, another co-author of the manifesto, noted, "The response to an inflation bout induced by our reliance on fossil fuels is to hinder the green transition, which increases the frequency of inflation shocks caused by fossil fuel dependency." This analysis raises questions about the sustainability of current responses.
Jens van ‘t Klooster, assistant professor at the University of Amsterdam and one of the signatories, highlighted the unfortunate irony of Europe's fossil fuel reliance. "If you cut off investments in renewable energy, you’re making the continent more vulnerable to inflation rather than fighting it," he argued, illustrating the cyclical nature of economic vulnerability relating to energy sources.
The coalition's manifesto, entitled Stability Through Sustainability, outlines three specific measures they believe the ECB should adopt: the introduction of green refinancing operations by the end of 2025, embedding climate factors within the collateral framework by excluding harmful activities, and realigning asset purchases with climate objectives through strategic portfolio reallocations.
While the manifesto recognized the importance of investing during transitional periods, such as hard-to-abate sectors, Murphy insisted on exclusion policies against consistently harmful activities like fossil fuel expansion. "Such exclusions are easy to implement, feasible with current data, and represent a necessary first step," she remarked, citing how current market practices alone are inadequate.
Cautioning against ignoring nature degradation, the group stressed the importance of precautionary measures, even if current data is imperfect. The coalition's alarmist findings note 95% of upstream oil and gas companies are still advancing their operations, indicating systemic issues within the market.
To date, the ECB has yet to respond formally to these recommendations, which highlights the urgency of the situation. Murphy warned, "If you choose to ignore science, you’re merely succumbing to political pressures." She implored the bank not only to recognize the risks but to take assertive steps, guiding the financial system toward supporting ecological transitions.
Overall, the ECB's upcoming strategic review is poised to become a focal point for discussions about integrating climate factors within its framework. The coalition's efforts represent both pressure and opportunities as financial and environmental realities become increasingly intertwined. The ECB faces significant scrutiny as it deliberates policies impacting economies and the broader climate.