Will the ECB adopt the Greenpeace statute?
Not just green. Here are the differences between the ECB and the Fed. Giuseppe Liturri's analysis
On Monday in Stockholm we witnessed a verbal confrontation between the two most important central bankers in the world. Two diametrically opposed ideas on the role of the central bank and its independence have been confronted. Themes that appear distant from the daily experience of citizens, but which instead determine decisive effects on our standard of living, our unemployment, our incomes and wages. Inside the headquarters of the Swedish central bank – where numerous and prestigious exponents of the central banks of the G20 countries had gathered for a symposium – we witnessed, on the one hand, the "green" delirium of Isabel Schnabel of the ECB and, on the On the other hand, Fed President Jerome Powell underlined what a central banker can, and above all cannot, do and with " we are not and will never be responsible for political decisions on the climate" , he taught his German colleague a lesson.
The independence of central banks was discussed and the result was to note that the worst concerns about the effects of the choices that the ECB is preparing to make are unfortunately well founded. As if it didn't have enough difficulty in achieving the sole objective of price stability, we learned from ECB executive board member Schnabel that the ideological intoxication of ecological transition has completely impregnated even the walls of the Eurotower. The fight against inflation serves to avoid damaging the ecological transition which requires price stability and therefore from Frankfurt there will be no hesitation in continuing the rate hike policy "at a sustained pace". The important thing is to march together towards the magnificent and progressive fortunes of the fight against climate change and in favor of decarbonisation. Never mind if wages fail to grow, a few million more unemployed will remain on the ground and we will record yet another recession, albeit a slight one, we hope.
It fell to Powell to recall the limited range of action of an institution that has precise mandate constraints. On the contrary, it is precisely independence in monetary policy decisions that must induce the central banker not to go off the rails and not to pursue the objectives and battles of democratically elected bodies. If this were to happen, it would be precisely independence that would be weakened.
Instead in Frankfurt they have no fears. Starting from the assumption that price stability is an absolute value to defend which, Schnabel argued that the rise in interest rates will compress demand and lead to the containment of inflation, also by acting on the expectations of consumers and businesses. Assuming and not granting that this cause-effect relationship works well and in a reasonable time, the reasoning could have stopped here.
Instead, an incredible panegyric has started on objectives that should be the strict competence of democratically elected institutions. According to Schnabel, higher rates will make investments in renewable energy less profitable in the ecological transition, but this cannot constitute a "scapegoat" to delay such investments. Indeed, it is only by containing inflation that the transition can be successful. In fact, price stability "is a precondition for a sustainable transformation of our economy". Furthermore, “inflation won't go down on its own” and failing to act now could force us to act even harder in the future, with even worse impacts on investments.
It does not pay, the "red" highlighted the importance of the role of government budgetary policy in guiding the green transition. But it again backfired when it went so far as to say that governments "must end dependence on fossil fuels." Service orders are now arriving from Frankfurt.
The dramatic aspect is that Schnabel is well aware of the limitation of her mandate, but has tried to find a legal cover using the secondary objective constituted by "support for EU economic policies". But if they have consistently failed to achieve the headline goal for ten years, wouldn't it be wise to be less ambitious and do less and better?
In order to promote the green transition, the ECB is willing to intervene heavily in the composition of the corporate bonds it holds in its portfolio, favoring the issuers most sensitive to "green". Too bad that the risk of so-called "greenwashing" has been raised for some time, a classic coat of green paint to cheer investors. The same thing on the more delicate front of public bonds, for which there are fears of a dangerous rebalancing in favor of the government bonds of countries more inclined towards decarbonisation.
Powell arrived hours after this dangerous dream, with a lecture on democracy and the limited but important role of central banks. Whose independence is justified by the need to isolate monetary policy decisions from short-term political conveniences. But this must remain an exception, because important policy decisions are the responsibility of democratically elected bodies and the Fed must refrain from addressing other issues of social importance. All the more because the problem of climate change is so relevant from a distribution point of view that only an elected body can deal with it. It would therefore be "inappropriate" to use monetary policy tools for this purpose.
From independence of the ECB to dependence on governments is a moment and on Monday we had a worrying demonstration. And more could follow soon.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/la-bce-adottera-lo-statuto-di-greenpeace/ on Sat, 14 Jan 2023 08:40:34 +0000.