The ECB is no longer the ECB

Copyright: "ECB" by SolvencyIIWire is licensed under CC BY 2.0

By Alex Sassen Van Elsloo, a Dutch finance expert and research consultant

When the euro was being designed, a lot was already wrong. The designers had political goals in mind and they had very little understanding of economics and financial markets. Fortunately, the Weimar trauma of the Germans was that strong that they made sure the ECB was established on a proper footing – incidentally, without Germany’s guilt about World War II, the euro would never have been created. The ECB was designed as a Bundesbank at the European level, with strict rules and one mandate: stable low inflation – max 2%. This month, however, that Bundesbank design has been ditched.

This, of course, does not come out of the blue. The ECB has already deviated from the original Germanic path since 2008 as it has been heading in a more Southern direction. Earlier this month, the ECB took another step: its inflation target is now aiming for an average level of inflation of 2%. That means that inflation is allowed to exceed 2% in the next few years, because we have had very low inflation in recent years.

A green wave

However, also some kind of “Green wave” has hit the ECB. The ECB now sees itself as an institution tasked to save the climate – something which I wonder should perhaps require Treaty change.

This would be a difficult change to sell, if it weren’t for the fact that the financial spin doctors have come up with arguments that are completely accepted by the people that matter.

One such argument is that companies that do not respond to climate change would run an increased risk of bankruptcy. If there is less water available, or if temperatures increase a few degrees, or if storage rooms are flooded due to exceptional rainfall, business operations could suffer. If that’s the case, one would suppose that companies would adapt to it swiftly, or risk bankruptcy, but the ECB thinks differently. And the experts? They apparently consider these arguments to be valid and it is all fine with them.

As a result, instead of simply trusting that companies will adapt to new circumstances, they are now being forced to take measures.

Promoting “green” projects in the context of risk weighting

One of these measures involves risk weighting. Banks must set aside capital for their outstanding loans. Risk Weighted Assets (RWA) rules determine the minimum amount of capital that must be held by banks. The assets – let’s say the loans the bank has outstanding – are weighted according to risk. For example, many government bonds have zero risk weighting – because governments want to keep borrowing cheaply, but that’s a story for another time. The riskier the corporate loans, the more capital the bank needs to set aside, something which is expensive and which comes at the expense of the bank’s profitability.

In the future, the ECB may use the RWA system to promote “green” projects and penalize “grey” projects/companies. By significantly increasing the risk weighting for “grey” projects – which means that banks need to hold more capital buffers for this – and by decreasing that for “green” projects, banks are basically forced to lend money easily to “green” companies and projects, but not to the “grey” ones.

Favoring Green bonds

Another way for the ECB to enforce the “Green Transition” is to favor Green bonds (debt). Different values can be assigned to these so-called Green Bonds as collateral. For example, bonds are often used as collateral by banks when forgiving loans to consumers and companies. The capital that needs to be set aside for this purpose can also be a portfolio of bonds. The ECB is able to change the collateral criteria, so to increase the value of Green Bonds as compared to Grey ones, when these serve as collateral. This pushes up demand from financial institutions for Green Bonds and it reduces demand for Grey ones.

The effect of this change in demand is that the interest rate on Gray debt will rise and the interest rate on Green will fall. This will therefore make Green projects and companies even easier to finance. The reverse is true for the Grey companies. 

Adapting QE

Furthermore, the ECB is also planning to adapt its bonds purchasing program (QE), whereby it would then use its “printed” money to buy more green than grey bonds. This once again has the effect of lowering interest rates on Green debt, as it raises interest rates on Gray debt.


Taken together, these three measures – and there are many more opportunities for the ECB to enforce the Green Transition – are more than sufficient to have a huge impact on businesses and consumers and therefore on the economy. Many entrepreneurs – and politicians – underestimate the direct impact of these measures on their businesses; it will be a life and death struggle, as a lack of financing or financing that is too expensive means bankruptcy for many businesses.

The indirect consequences of these measures are also significant; prices will rise, profit margins will shrink and volumes will ultimately fall because the forced allocation of capital will lead to less bang for your buck than what’s the case in the current economic system. This is something politicians don’t have a clue about, as they are blinded by ideals and/or personal interests. There is no such thing as a free lunch and the Green Transition is going to cost a huge amount of money, something which will eventually show up in prices and volumes.

This also demonstrates that the ECB really is no longer the ECB anymore. The Green Transition is primarily a political project, so the ECB’s new mandate to also combat climate change is evidence that any pretense of political independence of the ECB has now been trashed. The ECB has been transformed from a Bundesbank-style independent central bank into a purely political instrument, in the hands of a totalitarian elite. Even the USSR could learn a thing or two from this.

Originally published in Dutch by

Disclaimer: will under no circumstance be held legally responsible or liable for the content of any article appearing on the website, as only the author of an article is legally responsible for that, also in accordance with the terms of use.