Favoring green assets would imply a departure from the market neutrality that ensures maximum monetary-policy effectiveness. It would also cross another red line by turning the ECB into the implementer of a policy for which it has no other mandate besides the general clause that, subject to maintaining price stability, the central bank supports the policies of the European Union.
To orthodox critics, this is anathema. The Hoover Institution’s John Cochrane (who is no climate-change denier) accuses the ECB of engaging in self-defined mission creep. Bundesbank President Jens Weidmann is notably unenthusiastic. And the Fed itself is much more cautious than its European counterpart regarding climate action.
It is no accident that both the Fed and the ECB are venturing into new terrain. With inflation having vanished, at least temporarily, neither institution wants to be the high priest of a forgotten deity. Their quasi-parallel moves are indicative of the tectonic shifts currently affecting civil societies, and illustrate the desire of independent policy institutions to remain attuned to social preferences in order to retain their legitimacy.
But these moves entail risks. The Fed is now caught in a bind between its own commitment to testing the lower limits of unemployment and the disregard of President Joe Biden’s administration for the dangers of providing too much economic stimulus. It may have tied its hands at the wrong moment.
As for the ECB, the financial-stability justification for greening its policies is only partly convincing. After all, green bubbles are a threat, too. And there is also financial-stability risk in extending credit to firms that invest in decarbonized technology on the assumption that governments will set the carbon price high enough to make these investments profitable in the future. Governments often fall short of fulfilling their promises.
This is not to say that central banks should do nothing. Inequality and the climate emergency are immense challenges that policy institutions cannot overlook. But explicitly amending the central banks’ missions would be preferable to letting monetary policymakers decide how their tasks should evolve.
This especially applies to the ECB, which has an extremely narrow price-stability mandate under the Treaty on the Functioning of the EU (the Fed, in addressing inequality, arguably remains within its mandate). Because EU treaties are so difficult to amend, the ECB is right to explore and experiment. But decisions about what aims the institution serves should ultimately rest with its principals – the member states.
Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel and a Senior Non-Resident Fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.