The ECB’s green fig leaf isn’t a pretty sight

Copyright: "Strategically placed apple leaves" by lierne is licensed under CC BY-NC 2.0

By Belgian MEP  Johan Van Overtveldt (Belgian Finance Minister between 2014 and 2018, Chairman of the European Parliament’s Budget Committee and Professor of Economics at the University of Hasselt)  

Both during the Global Financial Crisis of 2008 and during the current pandemic, central bankers have kept things afloat with great confidence, courage and creativity. Mankind owes them a great amount of gratitude for that. However, their extreme monetary policies – necessary to contain major crisis tsunamis – have been sustained relentlessly for almost a decade and a half now, and highly unpleasant side effects are becoming more apparent every day.

Financial markets are becoming increasingly addicted to the monetary drugs of extremely low interest rates and abundant liquidity. Private and public debt mountains are growing to unprecedented levels. Investment bubbles cause perpetual uncertainty as well as an extreme growth in inequality. Zombie corporations and banks are burdening growth, jobs and productivity. Moreover, continuous injections of monetary drugs make it all too easy for the political class to put serious reforms on the back burner.

And yet, central bankers feel compelled to take on even more tasks, despite the fact that their policy space has become smaller or even non-existent. In the United States, the Federal Reserve’s mission creep is mainly focused on equality and a more inclusive society. For the European Central Bank, it is on playing an active role in the fight against climate change.

Climate change

Of course, climate change is an important social issue. But so are youth unemployment, crime, cyber security, income inequality, poverty and the threats presented by the pandemic. Do all of these themes need to be explicitly included in the policy goals of the monetary strategy? Each social problem must be addressed at the appropriate level with the appropriate instruments. Monetary policy should deliver price stability and financial stability.

The argument often mentioned that the climate issue would lead to financial instability does not hold water. A military conflict between the US and China is guaranteed to undermine financial stability. Does preventing such a conflict therefore belong to the explicit goals of monetary policy? That’s not the case, is it?

Besides, today, the greatest threat to financial stability, and therefore to economic and social stability, are the policies of the European Central Bank (ECB) itself, and its monetary drugs. Despite all of the financial exuberance recently, there is a constant atmosphere of commotion and derailment. The latest report by the European Securities and Markets Authority (ESMA), which counts 200 pages, resembles one long warning. The question is not whether there will be a major turnaround in the markets – including the real estate market – but when and in what form.

Because of its core mission, the ECB should prepare a serious readjustment of its policies, especially now that the inflation threat has become quite concrete. The response provided by ECB chairwoman Christine Lagarde & co. that this would be a temporary upsurge in inflation is being called into question with every new statistics which appears. History proves that it is a titanic task to be able to wring inflation which is creeping out of the bottle back into it. And also crypto currencies require a focused approach from central banks, in order to avoid financial instability.

Despite those urgent tasks related to real monetary policy, the ECB is also overloading its plate with climate concerns. The recently appointed ECB director Frank Elderson plays a questionable role in this. For him, the climate issue takes precedence over everything else, which became clear during his hearing in the European Parliament. Elderson for example defends the easing of capital requirements for banks that engaging in “green lending”. That’s a guarantee for future trouble in the banking sector.

Is this concern to turn the climate battle into a major monetary policy goal widely shared? No. Someone like Jens Weidmann, the President of the German Bundesbank, who is also a member of the ECB Governing Council, has already expressed his explicit reservations on several occasions. Also other members have expressed serious reservations, but publicly, they are keeping their lips sealed.

The perfect excuse

There is another argument which is very much adhered to, but which remains unspoken: the climate urgency is a convenient way to hide that the ECB is in an increasingly impossible position. The climate discourse as a fig leaf, so to speak. That is not a pretty sight, but it is indicative of the many knots in which the ECB is getting increasingly caught as a result of the extreme monetary policies it has been conducting for years.

The climate discourse is furthermore the perfect excuse to continue this policy for even longer and even more intensely. However, the longer one continues on these monetary paths, the more severe the final reckoning will be.   

Originally published in Dutch by De Tijd, republished with permission.

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