In March 2020, the European Central Bank had to intervene massively to prevent a financial meltdown on top of the economic crisis caused by Covid-19. This is not a one-time phenomenon: over the past crisis-ridden decade, the scope and nature of the ECB’s interventions has expanded substantially. Such an interventionist stance has become a permanent feature of twenty-first-century central banks as they try to address new challenges and stabilize an ill-regulated financial system.
This motivated the recent online conference "Next Generation Central Banking : climate change, inequality, financial instability", which brought together academics, central bankers, think tanks, civil society activists and politicians in front of an audience of over 800 participants from all around the globe.
Drawing from the conference we conclude that central banks’ extensive interventions, however necessary to safeguard price and financial stability, also have significant side effects: they increase inequality and exacerbate the ecological crisis. It has been shown, for instance, that the ECB’s asset purchases have a bias to carbon-intensive companies. All of this shows that monetary policy is not neutral – and has never been. The ECB’s policy entails a wide range of choices. This considerable discretion calls for improving its democratic legitimacy and clarifying its mandate in light of the new requirements of today’s huge social and ecological challenges.
One of the reasons for central bank interventions is the inherent instability of the financial system. In order to take the ECB off the front lines and stabilize the financial system, shadow banks should be tightly regulated, thereby lessening the need for central bank intervention.
We welcome that central banks are starting to take climate risks into account, as part of their primary mandate of price and financial stability. The ECB must now integrate climate risks in its own monetary policy operations. But the ECB needs to go further: it needs to stop supporting high-carbon industries and align its entire monetary policy framework on the transition to a low-carbon economy, including its conventional policy such as repo lending against collateral and its unconventional policies such as corporate large-scale asset purchases (CSPP) or Targeted Longer-Term Refinancing Operations (TLTROs).
Current monetary policy relies almost exclusively on financial markets for its implementation and its transmission to the real economy. This has not proven very effective in achieving ECB’s inflation target in the past decade. Moreover, it has fuelled increases in asset prices, which have significantly worsened inequality. The ECB should acknowledge this and develop alternative options to reach the real economy more directly, and to better support the labour market and lower wages. This is key for a sustainable recovery in Europe after the COVID-19 crisis.
The macro financial regime we live in requires central banks to play an active role in markets, especially sovereign bond markets to meet their price stability mandate. However, this also defines governments’ fiscal space. As ECB board member Isabel Schnabel recently stressed, the current macroeconomic situation has rendered fiscal policy more important and effective than monetary policy and should therefore not be constrained by central bank decisions. This requires not just a redesign of the EU’s current fiscal framework, as a recent public letter argued extensively, but also a new mechanism of coordination between monetary and fiscal policy whose mandate is to secure the flourishing of an inclusive, stable and sustainable economy.
The ECB is a key actor in the EU’s economic policy, but it lacks clear renewed guidance in support of the EU’s core policies, in line with the EUs commitments under international law in the Paris Agreement. This is why, to add legitimacy for the ECB acting on its “secondary objectives”, a formal procedure should be developed by the European Parliament, specifying and prioritising the policy objectives that the ECB should pursue beyond its primary mandate.
The ECB is currently conducting its first strategy review in 17 years. Now is the time to establish a comprehensive agenda for the ECB in light of the social-ecological transformation towards a resilient, equitable and climate friendly economy.
Find below our conference conclusions
Bernard Bayot, Financité
Andrea Binder, Global Public Policy Institute Berlin
Ollivier Bodin, Greentervention
Benjamin Braun, Max Planck Institute for the Study of Societies
Frances Coppola, Author “The Case for People’s Quantitative Easing”
Hielke Van Doorslaer, Ghent Institute for International Studies
Daniela Gabor, UWE Bristol
Michael Jacobs, Sheffield Political Economy Research Institute, University of Sheffield
Stanislas Jourdan, Positive Money Europe
Wojtek Kalinowski, Veblen Institute for Economic Reforms
Jens van ‘t Klooster, KU Leuven and University of Amsterdam
Benoît Lallemand, Finance Watch
Frank van Lerven, New Economics Foundation
Giuseppe Mastruzzo, International University College of Turin
Matthieu Méaulle, Associate member, PHARE, Université Paris 1 Panthéon-Sorbonne
Pierre Monnin, Council on Economic Policies
Maria Nikolaidi, University of Greenwich
Saule Omarova, Cornell University
Paola D’Orazio, Ruhr University Bochum
Ronan Palmer, E3G
Michael Peters, Finanzwende
Josh Ryan-Collins, Institute for Innovation and Public Purpose, University College London
Gerhard Schick, Finanzwende
Paul Schreiber, Reclaim Finance
Carolyn Sissoko, UWE Bristol
Adam Tooze, Columbia University
Barbara Unmüßig, Heinrich-Böll-Stiftung
Frank Vanaerschot, FairFin
Alessia Del Vasto, Positive Money Europe
Luca Visentini, General Secretary, European Trade Union Confederation
Joscha Wullweber, Witten/Herdecke University