During a first-ever civil society dialogue with the ECB, Positive Money Europe quizzed President Christine Lagarde and Chief Economist Philip R. Lane on helicopter money, central bank independence and market neutrality.
In January 2020, the European Central Bank (ECB) announced it would carry out a strategic review to assess whether its monetary policies were fit for purpose both today and in the future. This is the first such review since 2003, and will be completed in mid-2021.
As part of this review, on 21 October the ECB organised an ECB Listens event. Civil society organisations from across Europe had the opportunity to give feedback on how the bank’s monetary policies affected their work, and how these issues affected the ECB’s thinking.
Positive Money Europe’s Executive Director Stanislas Jourdan began by questioning Lagarde and Lane on whether the ECB’s understanding of the economy is still fit for purpose in the post-crash economic world.
“We are extremely concerned that old-fashioned central banking theory does not seem to be working anymore. For example, the ECB has failed at achieving its inflation mandate for the past six years, bringing the robustness of the economic theory which the bank relies upon into question,” Jourdan said.
Jourdan then insisted that the ECB should “add quality over quantity” when conducting massive injections of money. The ECB currently relies on banks and financial markets to make sure that the money it creates reaches ordinary people in the real economy. But this approach is failing as money is instead being used to subsidise fossil fuel companies and inflate asset prices – to the benefit of the one percent.
Instead of always creating more money with very blunt tools such as quantitative easing (QE), Jourdan asked the ECB officials whether the bank is prepared to issue cash transfers directly to euro zone citizens instead, known as ‘helicopter money’. This would cut out the middleman and ensure money reaches the real economy.
Despite creating huge sums of money with QE programmes, the ECB has missed its inflation target for the past six years. Making direct cash transfers would give the ECB a better chance of achieving this. The proposal was echoed by other civil society organisations, such as Oxfam, COFACE and the New Europeans initiative.
Chief Economist Philip R. Lane responded by acknowledging that this was a long-running criticism. He said: “Many people on the call so far have emphasised, why are we so dependent on intermediation through the financial system? Why don’t we deal directly with the real economy?”
“I’m pretty sure that after the global financial crisis of 2008, that critique has really been reinforced. I think we have to listen to that, and even though all central banks have an underlying legal framework about what kind of operations we can do, I’m going to be sympathetic to the idea.”
While it is encouraging that Lane appears more sympathetic to helicopter money as a concept, it is still shocking that the ECB has not even researched the topic, despite the Bank of England and the Bank of Austria already doing so.
Central bank independence
Positive Money Europe’s Advocacy Officer Alessia Del Vasto also raised how the ECB is using the tradition of central bank independence as an excuse for inaction on climate and social issues.
“The ECB is designed to be independent and technocratic so that it can focus on a single, narrow objective of stabilising prices without being subject to political interference. Most people would agree that money creation is a powerful tool, and it makes sense to entrust an institution to safeguard it,” Alessia said.
“However, structurally low inflation allows central banks to intervene more without jeopardising price stability. Given this situation, people are right to question why central banks should remain independent when they are not using their independent powers for the greater social good.”
Unfortunately, neither Christine Lagarde or Philip Lane directly addressed this point during the event.
The climate crisis and market neutrality
Positive Money Europe was among a number of NGOs to raise concerns on how current ECB policies are undermining the EU’s attempts to fight the climate crisis. Together with Greenpeace and the World Wide Fund for Nature (WWF), Positive Money Europe highlighted how market neutrality and asset purchase programmes posed an imminent danger to the climate and environment.
As Greenpeace Climate and Energy Campaigner Adam Pawloff stated: “The climate crisis is the biggest market failure the world has ever seen. Sir Nicholas Stern pointed that out 15 years ago, and that’s the case because markets don’t price climate risk in, and they over-allocate capital to industries that are driving the climate emergency.”
“The market neutrality principle in the long run will make it impossible for the ECB to achieve its secondary mandate, but also its primary one. It’s imperative that the ECB abandons this principle, and beyond that, aligns its policy, the collateral framework and prudential regulation with the fight against the climate crisis.”
Henry Eviston, Sustainable Finance Policy Officer at WWF, said: “We know that 63 percent of corporate QE programmes support high-carbon sectors. Between March and May this year, the ECB purchased over €8 billion worth of assets from oil majors. This creates an implicit subsidy and makes it easier for them to damage the climate and the environment.”
Christine Lagarde broadly welcomed the criticism, by saying: “When we agree on the facts and have the right tools, then we can convince those who do not see climate change as within the mandate of the central bank that taking it on board is part of our duty.”
“Firstly, climate change impacts on price stability and secondly, it is an issue of good risk management. If the market is deficient in pricing risks, then should we just follow the markets when they are wrong or should we not?”
“I would like to thank Greenpeace, who with other institutions have produced a helpful report which is useful to have on the table for discussions with those who are not necessarily as convinced as I am.”
Noticeably, while several NGOs criticised the market neutrality principle, only Business Europe – the most powerful business lobby group in Brussels – took a stand in favour of it.
Will the ECB keep listening?
Positive Money Europe has been asking for the ECB to engage officially with civil society groups for a long time. We’re therefore very satisfied that the ECB finally organised such an exchange of views, with an apparent open-mind to taking on board apparently unconventional viewpoints.
On this, Lagarde said: “This event will give ECB staff the opportunity to think over these different viewpoints and look into research in response to some of your questions. This reinforces the fact that in addition to the narrow angle from which we have historically looked at monetary policy, we need to enlarge the horizon and be courageous in tackling some of these issues.”
“These issues may not be the core business which monetary economists are used to, but it is our duty to open that box.”
However, listening is good, but questions need answers – which the format of the event did not allow for. We will therefore aim to ensure further meetings such as this one to engage in more detail.
The ECB Listens event will now be followed with similar events in every euro zone country, giving national level civil society organisations the opportunity to interact with their respective central banks.
But this is not enough. Civil society organisations can help the ECB place the needs and opinions of ordinary citizens at the heart of its policymaking. We hope that this is the first of many future opportunities we have to meet and discuss ways the ECB can help create a sustainable, fair and prosperous euro area for everyone.
To watch the recording of the two hours session, click here.