The European Central Bank and Green Interaction. The Role of Christine Lagarde


Seminar Paper, 2020

41 Pages, Grade: 1,3


Excerpt

Table of Contents

A. Introduction: Are environmental considerations part of the ECB’s mandate?

B. Green interaction and price stability
I. Institutional ECB law
II. Economic theory behind price stability
III. Objectives of the ECB
1. Price stability, Art. 127 para. 1 sentence 1 TFEU
2. Support of general economic policy, Art. 127 para. 1 sentence 2 TFEU
a) Preliminaries
b) Distinction between monetary and economic policy
c) Application of the principle of proportionality
3. Principles underlying the objectives, Art. 127 para. 1 sentence 3 TFEU
4. Practical example
IV. Programmes of the ECB
1. Outright Monetary Transactions
2. Asset Purchase Programmes
a) Preliminaries
b) Risks of the APP
c) APPs in operation
V. Areas of green interaction to be conducted by the ECB
1. Preliminaries
2. Advisory powers, Art. 4 and 6 ECB Statute
3. Financial stability and prudential supervision
4. Purchase of green bonds
a) Purchase of green bonds within existing APPs
b) New Green Bond Purchase Programme
5. Green money printing
6. Excursus: Regulation (EU) 2020/852 - Taxonomy
VI. Comparison with other central banks
1. Preliminaries
2. Bank of England
3. The People’s Bank of China

C. Conclusion: Christine Lagarde intra vires!

Table of Figures

Figure 1: IS Curve

Figure 2: Increase in government spending

Figure 3: LM Curve

Figure 4: Increase of the monetary supply

Figure 5: IS/LM Equilibrium

Figure 6: Situation during the corona pandemic

Figure 7: ECB increases the monetary supply

Table of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

A. Introduction: Are environmental considerations part of the ECB’s mandate?

In 2015, 190 parties have committed themselves to the Paris Agreement1. This agreement aims to limit global warming to well below 2 degrees. Climate change is one of the greatest challenges of our time and many nations have drawn up their own climate protection plans to limit their emissions. However, since climate change is a global challenge, international cooperation is more effective, if not necessary. In December 2019, EU Commission President Ursula von der Leyen proved her commitment to environmental friendliness by announcing the European Green Deal in terms of which no more net greenhouse gas emissions are to be released in the EU by 2050. Von der Leyen is supported by the President of the European Central Bank (ECB) Christine Lagarde. "I hope that this objective can be supported by all European institutions - within their mandates."2 stated Christine Lagarde on von der Leyen's presentation on the European Green Deal objective. Christine Lagarde wants to reorient the ECB's strategy and find answers to how the ECB could react to future developments such as climate change.3 In the summer of 2020, she concretized this and announced that she would examine all the operations of the central bank "to see if they are combating climate change"4. But how far can Christine Lagarde press forward with her climate protection goals, could the ECB be acting ultra vires under Christine Lagarde?

In this paper this currently very polarising question, especially among economists and EU lawyers, is discussed. First of all, the composition and economic functioning of the ECB are briefly outlined and its mandate, with reference to recent case law, is described. In order to answer the question of whether the ECB is allowed to pursue green monetary policy, a look on the ECB programmes of recent years and thus their understanding of its mandate is taken. To conclude, different areas in which the ECB could follow a green vision are outlined. For a comparative perspective, the environmental activism of the Bank of England and the People’s Bank of China is examined.

B. Green interaction and price stability

I. Institutional ECB law

How exactly is the ECB composed and is the ECB the same as the European System of Central Banks? This section briefly describes the composition of the Governing Council of the ECB. The Union's monetary policy is not conducted by the euro Member States on their own but by the ECB together with the national central banks. The association of the ECB with the national central banks is usually referred to as the ESCB (European System of Central Banks), Art. 282 para. 1 TFEU. Only the ECB has the power to authorise euro spending and acts independently of the national governments (see Art. 282 para. 3 TFEU). This independence is intended to ensure that the ECB does not support national policies at the expense of price levels. This point will be discussed in more detail later. Art. 283 TFEU describes the composition of the Governing Council of the ECB: It consists of the Executive Board of the ECB and the Governors of all the national central banks of the Member States. The Executive Board consists of the President, his deputy and four other members. Current president of the ECB is Christine Lagarde who took office in 2019. The members of the Executive Board are elected by the European Council for a term of eight years. They may not be re-elected. The intention of a long­term mandate is that the ECB should always keep an eye on the long-term development of the Union. Through the long term of office and the lack of possibility to be re-elected, the independence of the members is to be ensured.

II. Economic theory behind price stability

To understand the extent to which the ECB can influence the domestic economy, a macroeconomic model is presented below. First, the basic features of the IS/LM model are presented.

The IS/LM model is a central concept of macroeconomics and brings the goods and money market together into a social equilibrium. In economics, the consequences of a measure are often classified in short-, medium- and long-term categories. This model attempts to outline the short term effects of fiscal and monetary policy.

The IS curve (Investment-Savings) describes the equilibrium on the goods market. It describes the relationship between the interest rate and the national income (GDP). It is intended to show how the savings investment behaviour of individuals in an economy is influenced by interest rates. The functional equation of the IS curve is also better known as the Gross Domestic Product (GDP) usage calculation and is as follows:

Figure 1: IS Curve

Abbildung in dieser Leseprobe nicht enthalten

The Y stands for the total output of an economy, which is the sum of private consumption investments and government spending . In an open economy, the balance of trade is also taken into account. The GDP is plotted on the abscissa of the coordinate system and the interest rate on the ordinate. The graph shows that production has a negative correlation with interest. If the interest rate increases from to , the economic production of aud decreases. This can be imagined as follows: If savings are rewarded with high interest rates, the incentives for investment decrease. If interest rates fall, however, the incentives for saving are also lost.5

Figure 2: Increase in government spending

Abbildung in dieser Leseprobe nicht enthalten

How would the IS curve shift if the state now decided to increase government spending? From the equation above, it can be seen that an increase in government spending by units will lead to an increase in production by units; in other words, the curve will shift parallel to the right. This scenario is outlined in Figure 2. For a given interest rate , an increase in government expenditure will increase output from to . Thus, the first part of the IS/LM model has been described.6

Figure 3: LM Curve

Abbildung in dieser Leseprobe nicht enthalten

The curve (Liquidity preference-Money supply) shows the balance on the money market. The equation illustrates the relationship between the demand for money and the interest rate. Its equation is simplified as follows:

stands for the national income/GDP in the distribution calculation. stands for the money supply and for the price level. accordingly stands for the real gross domestic product. In figure 3 the positive correlation between the national income and the interest rate can be seen. According to this, the interest rate increases when the national income increases. This becomes more understandable if one realizes that an increase of the national income means an increasing demand for money.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: Increase of the monetary supply

An increasing demand with the same supply is accompanied by increasing prices on the market and the price of money. So, the price of money, also called interest, rises. If a central bank now decides to increase the money supply , the national income will also increase at a given interest rate according to our previous equation. Now that the goods market and the money market have been defined in more detail, the combination of the both functions results in the I model.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5: IS/LM Equilibrium

In a traditional economy, the goods and money markets result in an overall social balance.7 The question may be asked which measures politicians can use to influence it. Due to the pandemic, the current economic situation is a good opportunity to show how to fight a crisis. Through the IS/LM model, it can be seen that the balance can be influenced by both fiscal and monetary policy.

Abbildung in dieser Leseprobe nicht enthalten

Figure 6: Situation during the corona pandemic

Due to the current pandemic, productions have come to a standstill worldwide and many people are losing their jobs. This has led to a decline in production and private consumption worldwide. Graphically this can be seen in the left shift of the IS curve and a new macroeconomic balance. The GDP now shows a negative growth from to . This is also accompanied by a declining national income. On the one hand, the state can now try to compensate for the loss of private consumption by increasing public spending. This scenario is illustrated by the green arrow in Figure 6. The German economic stimulus package can be well placed in this figure. Another possibility to get out of the crisis in the short term would be to increase monetary policy.

Abbildung in dieser Leseprobe nicht enthalten

Figure 7: ECB increases the monetary supply

The euro countries have transferred this mandate to the ECB, which is why only the ECB has any influence on the money supply. Due to the pandemic, the equilibrium is at . In order to return to the old production level, the money supply can now be increased so that the LM curve shifts to the right. Graphically, a new intersection between the red IS and the new LM curve can be observed. This new equilibrium point reaches the old production level before the crisis. An increase in the money supply has also been announced by the ECB.8 The current monetary policy is thus an attempt to help the economy get back on its feet. In reality, a mix of fiscal policy and monetary policy is often found. Thus, the influence of the ECB should have become clear. It is still questionable why it was mentioned at the beginning of the chapter that this is a model for the short term. To understand why the model cannot be applied one-to-one to the medium term, it is important to note that the IS/LM model does not take inflation into account, which may occur in the medium term. This is a further reason why the ECB must be an independent institution which is not obliged to follow suit with the political organs of the EU. By increasing the money supply, the value of existing money will also decrease. Increasing supply leads to sinking prices. This is also the main danger that can arise from monetary policy.9 On the one hand, an economy can stimulate the economy in the short term by controlling the money supply; on the other hand, there is always the risk of inflation. Every central bank finds itself in this area of tension. The extent to which central banks and the ECB can theoretically influence the economy has been described so far. The following section takes a closer look at the mandate of the ECB and its priorities.

III. Objectives of the ECB

1. Price stability, Art. 127 para. 1 sentence 1 TFEU

It is questionable how the ECB's mandate looks like according to the legal opinion and in which areas it sets its priorities. The main task of the ECB is listed in Art. 127 para. 1 sentence 1 TFEU. Accordingly, the primary objective of the ESCB is to maintain price stability. The ECB should aim for an inflation rate of just under 2%. This explains why the ECB may not support other member states by increasing the money supply if this could endanger price stability. Furthermore, the ECB should conduct its monetary policy independently of the national states (Art. 130 TFEU and Art. 282 para. 3 TFEU) and, in accordance with Art. 123 TFEU, may not provide direct public financing to member states in crisis. On the one hand, this is intended to maintain the budgetary discipline of the member states and on the other hand to protect the internal market from inflation. Already with the Maastricht Treaties, these measures were intended to prevent a debt union.

2. Support of general economic policy, Art. 127 para. 1 sentence 2 TFEU

a) Preliminaries

According to Art. 127 para. 1 sentence 2 TFEU, the ESCB shall assist the general economic policies in the Union in order to contribute to the achievement of the objectives laid down in Art. 3 TEU,10 these being inter alia economic growth and environmental protection. This is re­iterated in Art. 282 para. 2 sentence 2 TFEU and in Art. 2 ECB Statute11.

Apparent from the wording of Art. 127 para. 1 TFEU, the ESCB may not pursue its own economic policy, but solely support the economic policy of others.12 Furthermore, the ESCB shall support the general economic policies in the Union, and not solely of the Union. Thereby, it is stressed that the ESCB may as well support the economic policy of member states and not only of the EU itself.13 In doing so, the ESCB may select appropriate type and means of such support.14 While supporting the general economic policy, the ESCB may not lose sight of its primary goal being price stability.15 Any economic measure hindering price stability must therefore not be supported.

While Art. 127 TFEU suggests a competence to act economically, the ECB Statute lacks any reference in Artt. 3.1, 9.2 and 12.1 to specific economic tasks, except for the general objective of support of economic policies in Art. 2. Moreover, ECB programs are usually issued under the price stability objective, with the PEPP being the exception, as stated in Reasoning Nr. 3 and Nr. 4 ECB 2020/1716.

While Art. 127 para. 6 TFEU sets out a special legislative procedure for granting the ECB further tasks, this may not be construed to prevent the conferral of further tasks on the ECB by invoking general competence norms such as Art. 114 TFEU.17

b) Distinction between monetary and economic policy

The Treaties do not define monetary policy, but only give reference to its objective being price stability and its instruments to be employed.18 Therefore, the adherence to price stability is the main, if not sole, criterion to be used in order to ascertain whether a monetary policy measure is at hand.19 Price stability is determined with reference to the Harmonised Index of Consumer Prices (HICP) which ought to be close, but below, 2% over the medium term.20 Moreover, if the instruments employed are such as provided for monetary policy (such as in Art. 12 ECB Statute), there exists a rebuttable presumption that it is indeed a monetary policy measure.21 Apparent from the principle of fiscal discipline (Art. 123 TFEU) and the no-bailout- rule (Art. 125 TFEU), financial stability is a key element of monetary policy.22 Economic policy also lacks a clear-cut definition, however, it appears to be based on the close coordination of economic policies of Member States, on the internal market and on common objectives, Art. 119 para. 1 TFEU.23

From examination of Art. 127 para. 1 TFEU, the CJEU concludes that the Treaties never envisaged an absolute separation between monetary and economic policy.24 In contrast thereto, the FCC notes that monetary policy is within the exclusive competence of the Union in terms of Art. 3 para. 1 lit. c TFEU while the economic policy is a coordination competence in terms of Art. 5 para. 1 TFEU. Following the FCC’s opinion, based on the different competence levels, there must be a separation between these policy areas.25 Otherwise, the EU would be entitled to act without competence in policy areas just because the EU has competence in a policy area adjacent thereto. Furthermore, it has been asserted that monetary policy is a sub-part of economic policy.26

In regard to the objective of stability of the euro area, as invoked as monetary policy by the ECB, it has been argued that a potential exit of a member state in itself does not threaten price stability, as such an exit could anyways not be prevented,27 but may only have indirect effects on price stability which ought to be disregarded.28

Furthermore, it is argued that measures not purely focused on price stability may still be regarded as monetary, as in certain areas the ECB is forced to enact prima facie economic measures due to lack of EU regulation and of coordination.29 Moreover, an economic measure may be restricted through conditions in such a way that it reverts back to being a monetary measure.30

The overall tenet in CJEU jurisprudence is that a monetary policy measure may not be equalled to an economic policy measure simply because it has indirect effect on economic objectives.31 The assertion that knowingly accepted and foreseeable effects cannot be regarded as indirect but should lead to a reclassification was rejected by the CJEU, as economic effects are intrinsic to monetary measures.32 While the latter is certainly true,33 to blankly ignore all arising economic effects cannot comply with the principle of proportionality in terms of Art. 5 para. 4 TEU, as further explained below.

As noted above, the CJEU categorizes any measure as being monetary in nature, irrelevant of any indirect economic effects thereof. Generally, due to the highly technocratic nature of central banking, the CJEU grants a wide discretion for implementation of the Union’s monetary policy to the ECB.34

The approach of the CJEU to qualification of a measure is under critique, inter alia by the FCC, as the ECB is hereby granted to pursue any policy it deems necessary as long as it reasons the measure taken with the objective of price stability without any consideration of the actual effects of the measure.35 This wide range of power of the ECB may contravene the principle of conferral as, following the FCC, a competence-competence would thereby be transferred to the ECB.36

While the CJEU supports a wide competence for the ECB, the FCC proclaims that due to its independence from political intervention and its lack of democratic legitimization, the ECB must be restricted to a narrow interpretation of Art. 127 TFEU.37

In light of these uncertainties, any measure in dispute is required to be proportionate in that it pursues a legitimate objective, is suitable and is necessary, Art. 5 para. 4 TEU.38 As apparent from other cases, the CJEU itself employs a factual test of proportionality,39 however, the CJEU falls short of its own methodological approach in its jurisprudence regarding the ECB in examining only the de jure situation.40 Having said that, it has to be kept in mind that the proportionality test under Art. 5 para. 4 TEU directed at the Union is less strict than the proportionality test in regard to e. g. fundamental freedoms which is directed at member states.41 Nevertheless, an examination from a purely legal perspective, only assessing the objectives and means employed, fails to assess actual factual consequences as required by Art. 5 para. 4 TEU,42 and is deemed ultra vires by the FCC.43 In the assessment of necessity, special care is to be observed regarding the influence on the member states’ sovereignty.44 In a highly contested area such as economic and monetary policy, a simple legal approach does not satisfy this requirement. It is suggested hereby that only the factual approach of the FCC complies with the proportionality principle in EU law while the CJEU’s legal approach does not fairly represent the trade-offs between monetary measures and economic effect.

Through usage of the proportionality test, the fear of the CJEU an economic consideration may lead to an “insurmountable obstacle”45 to maintaining price stability could be properly dealt with.

3. Principles underlying the objectives, Art. 127 para. 1 sentence 3 TFEU

In terms of Art. 127 para. 1 sentence 3 icw Art. 119 para. 2 TFEU, the ESCB shall act according to the principle of an open market economy with free competition. Thereby, the Treaties denote that they adhere to a market economy as opposed to a centrally planned economy.46 As the Union itself follows an interventionist approach in regard to certain policy areas, it can be concluded that any deviation from the free market principle is possible, but requires further justification.47

Art. 127 para. 1 sentence 3 TFEU prescribes adherence as well to Art. 119 para. 3 TFEU following which ECB’s measures have to be weighed up against the principles of stable prices, sound public finances and sound monetary conditions and a sustainable balance of payments.48 Especially in regard to Art. 127 para. 1 sentence 2 TFEU, the principles of Art. 119 para. 2 and 3 TFEU ought to be observed.49

[...]


1 UNFCCC, Report of the Conference of the Parties on its twenty-first session, held in Paris from 30 November to 13 December 2015, FCCC/CP/2015/10/Add.1, 2016.

2 Nienhaus, Eine grüne Geldpolitik ist möglich, 2019.

3 Ibid.

4 Mumme, Lagarde will jeden Anleihekauf darauf prüfen, „ob er den Klimawandel bekämpft“, 2020.

5 Mankiw/Taylor, 2012, p. 885 ff.

6 Mankiw/Taylor, 2012, p.886.

7 Mankiw/Taylor, 2012, p. 887; Figures similar to Mankiw/Taylor, 2012, p. 885 ff. 5

8 Schnabel, Die Geldpolitik der EZB in der Corona Krise - erforderlich, geeignet, verhältnismäßig, 2020.

9 Mankiw/Taylor, 2012, p. 903.

10 Federal Constitutional Court of Germany of 21 June 2016, Cases 2 BvR 2728/13, 2 BvE 13/13, 2 BvR 2731/13, 2 BvR 2730/13, 2 BvR 2729/13 - OMT-Entscheidung, ECLI:DE:BVerfG:2016:rs20160621.2bvr272813, recital 69/43 (hereafter: Federal Constitutional Court, OMT-Entscheidung).

11 Protocol (no. 4) on the Statute of the European System of Central Banks and of the European Central Bank of 7 February 1992, OJ L 191, p. 68.

12 Calliess/Ruffert/Häde, EUV/AEUV, Art. 127 AEUV, recital 5; Das Recht der EU/Griller, Art. 127 AEUV, recital 28.

13 Calliess/Ruffert/Häde, EUV/AEUV, Art. 127 AEUV, recital 5; Das Recht der EU/Bandilla, Art. 119 AEUV, recital 30.

14 Frankfurter Kommentar/Manger-Nestler, EUV/GRC/AEUV, Art. 127 AEUV, recital 7.

15 Calliess/Ruffert/tföde, EUV/AEUV, Art. 127 AEUV, recital 6.

16 Decision (EU) 2020/440 of the ECB of 24 March 2020 on a temporary pandemic emergency purchase programme (ECB/2020/17), OJ L 91, 25 March 2020, pp. 1 - 4.

17 Calliess/Ruffert/tföde, EUV/AEUV, Art. 127 AEUV, recital 59.

18 Federal Constitutional Court of Germany of 5 May 2020, Cases 2 BvR 859/15, 2 BvR 1651/15, 2 BvR 2006/15, 2 BvR 980/16 - PSPP-Entscheidung, ECLI:DE:BVerfG:2020:rs20200505.2bvr085915, recital 165 (hereafter: Federal Constitutional Court, PSPP-Entscheidung).

19 Opinion of AG of 14 January 2015, Case C-62/14, Gauweiler and Others v Deutscher Bundestag, ECLI:EU:C:2015:7, recital 127 (hereafter: Opinion of AG, C-62/14, Gauweiler).

20 ECB, 2011, p. 64; Alexander/Lastra, 2020, p. 11.

21 Federal Constitutional Court, OMT-Entscheidung, recital 69/46, 177; Opinion of AG, C-62/14, Gauweiler, recital 130.

22 ECB, 2011, p. 83; Opinion of AG, C-62/14, Gauweiler, recital 131.

23 Opinion of AG, C-62/14, Gauweiler, recital 126.

24 Federal Constitutional Court, PSPP-Entscheidung, recital 81/60.

25 Federal Constitutional Court, PSPP-Entscheidung, recital 142.

26 Calliess/Ruffert/^äJe, EUV/AEUV, Art. 119 AEUV, recital 13; Opinion of AG, C-62/14, Gauweiler, recital 129.

27 Pilz, 2018, p. 187.

28 CJEU of 27 November 2012, Case C-370/12, Pringle v Ireland, ECLI:EU:C:2012:756, recital 56.

29 Pilz, 2018, p. 187.

30 Federal Constitutional Court, OMT-Entscheidung, recital 196.

31 CJEU of 11 December 2018, Case C-493/17, Weiss and Others, ECLI:EU:C:2018:1000, recital 61 (hereafter: CJEU, C-493/17, Weiss); Federal Constitutional Court, OMT-Entscheidung, recital 69/52.

32 CJEU, C-493/17, Weiss, recital 62 - 64.

33 Refer to ECB, 2011, p. 56; Refer to CJEU, C-493/17, Weiss, recital 66.

34 Opinion of AG, C-62/14, Gauweiler, recital 111; Das Recht der EU/Bast, Art. 5 EUV, recital 73.

35 Federal Constitutional Court, PSPP-Entscheidung, recital 133.

36 Federal Constitutional Court, PSPP-Entscheidung, recital 136.

37 Federal Constitutional Court, PSPP-Entscheidung, recital 143.

38 Opinion of AG, C-62/14, Gauweiler, recital 161; Federal Constitutional Court, PSPP-Entscheidung, recital 128.

39 Calliess/Ruffert/Ca/liess, EUV/AEUV, Art. 5 AEUV, recital 44; CJEU of 10 April 2008, Case C-265/06, Commission/Portugal (tinted windows), ECLI:EU:C:2008:210, recital 37 ff; Opinion of AG, C-62/14, Gauweiler, recital 173; Federal Constitutional Court, PSPP-Entscheidung, recital 144 f, 152.

40 Federal Constitutional Court, PSPP-Entscheidung, recital 162.

41 Das Recht der EU/Bast, Art. 5 EUV, recital 67; Karpenstein, EuZW 2019, 705, p. 706.

42 Calliess/Ruffert/Calliess, EUV/AEUV, Art. 5 EUV, recital 51; Das Recht der EU/Bast, Art. 5 EUV, recital 71.

43 Federal Constitutional Court, PSPP-Entscheidung, recital 165.

44 Calliess/Ruffert/Ca//iess, EUV/AEUV, Art. 5AEUV, recital 53.

45 CJEU, C-493/17, Weiss, recital 67.

46 Calliess/Ruffert/tfäde, EUV/AEUV, Art. 119 AEUV, recital 8; Das Recht der EU/Griller, Art. 127 AEUV, recital 29.

47 Calliess/Ruffert/Häde, EUV/AEUV, Art. 119 AEUV, recital 9.

48 Calliess/Ruffert/Häde, EUV/AEUV, Art. 119 AEUV, recital 25; Das Recht der EU/Bandilla, Art. 119 AEUV, recital 36.

49 Frankfurter Kommentar/Manger-Nestler, EUV/GRC/AEUV, Art. 127 AEUV, recital 7.

Excerpt out of 41 pages

Details

Title
The European Central Bank and Green Interaction. The Role of Christine Lagarde
College
Carl von Ossietzky University of Oldenburg
Grade
1,3
Authors
Year
2020
Pages
41
Catalog Number
V1011962
ISBN (eBook)
9783346410504
ISBN (Book)
9783346410511
Language
English
Notes
Es handelt sich hierbei um eine interdisziplinäre Arbeit, welche sowohl die ökonomischen als auch die rechtlichen Perspektive betrachtet.
Tags
EZB, Geldpolitik, Klimaschutz, climate change, green monetary policy, European Grenn Deal, Christine Lagarde
Quote paper
Hanif Rahimy (Author)Christian Daniel Hein (Author), 2020, The European Central Bank and Green Interaction. The Role of Christine Lagarde, Munich, GRIN Verlag, https://www.grin.com/document/1011962

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