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Green Banking: is the ECB beating around the bush? 

20 May 2022, 16:00

Executive Summary

In late December 2021, the European Commission published the updated version of the EU Taxonomy, an ambitious document on which a number of experts and scientists worked. The EU Taxonomy was drafted in order to accelerate the change toward carbon neutrality, in line with the ‘Fit for 55’ and aims to shift to flow of the capital towards sustainable investments. Moreover, it was thought of as a tool to prevent greenwashing and levelling up the playing field among the national governments as well as private banks and investment funds to have clarity on what is a sustainable investment. Despite the very ambitious plans, the Taxonomy now proposes to label gas and nuclear energy or biomass as sustainable activities.

In this discussion, professor Clément Fontan, professor of European Economic Policy at UcLouvain, supported us to guide the discussions with citizens to discuss the complex road to the EU Taxonomy and the relation with European Central Bank and its efforts to “green” the European Financial Sector, and we asked to what extent are these efforts still a business as usual practice or finally a step towards a structural change. We delved into the role of the European Central Bank as such and will discuss the effects that the ECB has and will have on national policy-making, and collected thoughts on green banking. 



1) Central bankers and distribution: an uneasy relationship

Since the 1980’s the Central Bank independence template spreads like wildfire

  • Promotes a narrow vision of central banking by historical standards: sole focus on price stability and high level of independence

  • Claims that monetary policy is neutral on the middle and long term

  • Labour division with inflation-obsessed central banks and political authorities correcting the distribution ex-post

  • CBs perceived as apolitical because the goal of monetary policy is narrow and consensual and the means to attain it are benign


But, the CB reaction to the GFC put this model under stress

  • Ballooning balance-sheets

  • new monetary instruments with distributive implications

  • “Unfortunately, since the crisis began, increasing attention has been drawn to the fact that many of the policies that central banks have followed do have clear distribution implications. This has invited increased government scrutiny of what central banks do, thus constituting a threat to central bank independence” (group of Thirty Fundamentals of Central Banking: Lessons from the crisis)


2) The enviromental dimension of asset purchases

Since 2015, ECB has been purchasing corporate debt by following a “market neutral” strategy.

  • CBs attempt to minimise their impact on relative prices by purchasing the whole market of corporate debt.

  • But large carbon intensive MFs dominate corporate securities market (bias)

  • the neutrality strategy means that the ECB reproduces that bias


Political controversies

  • The ECB helped Wlkswagen after the cheating controversies

  • the ECB is buying debt of Total, Shell, Ryanair as we speak

  • One of the only topic leading to transpartisan alliance of MEPs


3) Green Central bank: Tolls and legitimacy

Central banks are at the apex of financial systems because of monopoly of issuance of the safest asset

  • they set the rules of financial exchanges

  • influence allocation of credit

  • supervisory role


Using monetary policy as a green technology

  • Prudential/promotional motives (mitigation of risks vs promoting economic adaptation)

  • Information (climate stress test) / incentives (conditional lending / quotas (loan ration)

  • Central bank / public banks / regulatory agencies / governments


Tensions on the legitimacy of green central banking

  • Climate insensitivity could threaten central banking independence because of break with expectations of politicians and the public at large.

  • Climate sensitivity leds to distributive choices, which are ill-suited to central bank legitimacy


4) Overcoming the dilemma: a new proposal 

Both sides fail to address the fundamental dilemma of green central banking

  • “conservatives” are right to say that central banks don’t have the legitimacy to adress green distributive issues

  • “progressists” are right to say that we need to depart from the status quo


Modifying the central bank mandate is not sufficient

  • central bank mandates are always vague for good reasons

  • central banks will still have to make arbitrary choices without legitimacy to do so


Building new channels of coordination

  • template: western Europe under Bretton Woods and South East Asia

  • Mild reforms needed: comply or explain with MEPs, taxonomy, more coordination with EIB

  • Stronger reforms: European credit committee. Tension between epistemic diversity and policymaking efficiency 


5) What the European Central Bank does today is a at odds with their traditional justifications under the CBI template

  • while the ECB do not have the legitimacy to endorse this new role, the status quo is not an option

  • Building new channels of coordination would provide the ECB the legitimacy they need to assume the distributive effects linked with this new role


6) Going forward

  • without political efforts, technocratic structures of governance won’t be a silver bullet

  • the coming back of inflation-fighting priorities show the limits of the actual systems

  • Despite Schnabel’s effort to link the two objectives with the concept of greenflation, the ECB seems to come back to its pavlovian reflex of rising rates.

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