European monetary policy: Between market neutrality and climate change

Abstract

Climate change has also become a relevant topic in the financial sector. According to a survey of 33 central banks, 70 percent describe climate change as a major threat to financial market stability. Thus, if climate change threatens the stability of the financial markets and worries central banks, the next question is what role does climate change play in the current monetary policy of the eurozone and other currency areas? This article will address this question, drawing on speeches by the European Central Bank (ECB) Governing Council. The article analyses the speeches of the ECB Governing Council with a view to establishing how the ECB’s top management handle climate change and what kinds of institutional change result from the new green policy. The paper will show that in recent years, the issue of climate change has increasingly moved from a marginal position towards the centre of the ECB Executive Board’s agenda. Gradually, the growing awareness of the problem has resulted in institutional change: Climate change was initially seen as a risk factor for the financial markets – it is now considered a threat to price stability itself. Redefining the relationship between climate change and the ECB’s primary task has created new scope for action. Now, it is not only a matter of the ECB gathering knowledge on climate change and integrating that into its own calculations and models, but also of it pursuing an active monetary policy in the fight against climate change. In this context, the concept of market neutrality has been abandoned and replaced by the more interventionist principle of market efficiency.