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“The ECB at a time for decisions : our contribution to the strategic review

Wojtek Kalinowski & Hugues Chenet & Jézabel Couppey-Soubeyran, 5 February 2021

[English] [français]

As the ECB’s strategic review enters its decisive phase, two new Veblen notes show how central banks could strengthen their role in the ecological transition.

By including "environmental sustainability" in its strategic review, the European Central Bank (ECB) has signalled that it is taking seriously calls to integrate monetary policy into the fight against climate change, and more broadly against the ecological crisis threatening our societies and our economies. The time for decisions is fast approaching: the ECB is expected to conclude its strategic review in June 2021 and will probably announce its environmental strategy in the first months of 2021.

To contribute to this debate, the stakes of which are exceptional, we are publishing two notes on the role of central banks in ecological transition.

The first paper, by Wojtek Kalinowski & Hugues Chenet, proposes overcoming the obstacles that have so far prevented central banks and supervisory authorities from taking action: a continued strong commitment to the "neutrality" of monetary policies, a vain search for answers to the climate crisis in financial risk modelling, and finally a use of scenarios limited to purely quantitative exercises, such as climate stress tests. A more qualitative approach would allow the ECB to signal its determination to act as a precautionary measure, without waiting for climate risks to materialise. While a central bank cannot fight global warming on its own, it has many tools to succeed where "green finance" has failed. It should also be noted that the emergency measures adopted by the ECB in response to the Covid-19 crisis do not seem to have been calibrated using models as sophisticated as those proposed to combat climate change.

The second paper, produced by Jézabel Couppey-Soubeyran, proposes an overview of possible options for greening monetary policy, making environmental sustainability a fully-fledged objective of the ECB. On the one hand, the "light green" options: these consist in greening the conditions of access to liquidity and the asset purchases made by the ECB and are all feasible within the current institutional framework or by remaining true to its spirit. On the other hand, the "bright green option: this would be part of a green policy-mix, and would ensure green transition financing by the central bank without fuelling debt and preserving financial stability. This is the option that requires the most institutional changes, but would probably be the one that would make the most progress in the ecological transition.

In order to move towards "bright green", it will probably be necessary to first go through the shades of "light green", less for reasons of substance than in view of the institutional and political blockages that are not easy to remove. The note thus presents "small steps" with a constant institutional framework, the effectiveness of which remains to be determined, but which would allow the ECB to move forward as of now, in the framework of its strategic review, in the hope that they can set in motion a broader dynamic. It also proposes "bigger steps", which in our opinion would bring the ecological transition much further forward, but which would require major institutional changes, the decision on which lies not with the ECB but with the European and national parliaments, and which will therefore take time.

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