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ECB boss Lagarde questions the central principle

D.he President of the European Central Bank (ECB) has expressed doubts as to whether the principle of so-called market neutrality always makes sense in the case of monetary policy bond purchases. The principle states that the central banks of the Eurosystem should structure their bond purchases, known as “QE” (“quantitative easing”), in such a way that they do not distort the market and neither individual countries nor companies are given preference.

Lagarde now raised the question during an online event of the financial initiative of the United Nations Environment Program (“UNEP FI”) whether the central bank would also have to follow this principle if it wanted to campaign for more climate protection – or whether it would then possibly prefer ” green corporate bonds should be allowed.

“Given the examples of market failure, we should ask ourselves whether market neutrality should really be the principle guiding the management of our monetary policy portfolio,” said Lagarde. Financial markets are obviously not in a position to measure and price the risks alone, she explained. Central bankers should wonder if they were not taking excessive risk by trusting that markets were pricing environmental risk correctly.

Do not ignore climate protection

The ECB President put her statements into perspective, however, by putting this assessment up for discussion, as it were: “I am not judging that it should no longer be the case, but it justifies the question, and that is something that we will discuss in the course of our strategy review will investigate. “

ECB President Lagarde and ECB Executive Board member Isabel Schnabel had repeatedly said in the past that climate change could bring risks that could also jeopardize the ECB’s goal of price stability – for this reason alone, the central bank could not ignore the issue of climate protection.

“Market neutrality” – that is an argument that other central bankers want to use to protect themselves from political influence. At least some members of the Governing Council seem to be concerned that if the central bank no longer buys bonds evenly, the wishes of politicians could become ever greater as to which criteria should be taken into account.

“Tangible risks for price stability”

Once it buys paper from companies that do a lot for the climate, it could arouse the desire of politicians to later buy paper from companies that create jobs or advance technical progress. At some point monetary policy will turn into industrial policy, say the critics. The focus on only one goal, price stability, is important for avoiding conflicting goals – and for the independence of the central bank.

Lagarde had said on an earlier occasion that what it hopes to achieve is for the central bank to become more active in the area of ​​”green” bonds, a sector that itself will grow significantly. The ECB President specified this. Many bonds that the central bank acquired as part of its bond purchase programs were government bonds. With these, one cannot make a good distinction between “greenish” and “not so green”: Buy government bonds and then it is up to the politicians in the governments to decide how closely they stick to what they signed in the Paris Climate Agreement would have.

It is different with corporate bonds, where one can now distinguish between the “brown”, the “not so brown”, the “green” and the “very green”. Around 40 percent of “green” bonds around the world are issued in euros. “That gives an impression of how strong this market share is,” said Lagarde. The ECB is buying around 20 percent of the available green bonds.

Behind this, among other things, are “green” bonds from the European Investment Bank (EIB). Lagarde emphasized that they did not want to introduce a second monetary policy objective alongside price stability. But climate change, if not taken care of, could hit the economy in ways that pose risks to price stability. “Both are intrinsically related and connected,” said Lagarde.

ECB Executive Board member Isabel Schnabel explained in July why, from your point of view, climate policy could be part of monetary policy: “One can assume that, if it is not dealt with quickly, climate change will hit the economy in a way that poses tangible risks to itself price stability in the medium and long term. “

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