The European Parliament’s Economic and Monetary Committee (ECON) is preparing for a vote on 28 November with regard to its resolution on the European Central Bank (ECB) Annual Report. This resolution puts forward a set of recommendations on actions and areas of focus to be pursued by the ECB while delivering on its mandate. 

Members of the European Parliament (MEPs), as elected officials, bear the ultimate responsibility of representing the voices and interests of EU citizens. Their accountability to the public should reflect citizen sentiment and priorities that are reflected in various polls, such as the Eurobaromoter. As an example of this, as seen in a July 2023 Eurobarometer survey, citizens think that the EU should invest massively in renewable energies, such as wind and solar power (85%), and that increasing the energy efficiency of buildings, transport and goods will make us less dependent on energy producers outside the EU (82%). Inflation is still present as a major concern, but less so than at the beginning of the year. These sentiments should be the guiding force for policymakers to prioritise these areas.

The role of the ECB in shaping the lives of European citizens cannot be overstated. Its decisions on monetary policy directly affect interest rates (and therefore the price of mortgages), inflation (the cost of food and electricity) and economic stability. As a technocratic institution, the ECB’s expertise-driven approach wields significant influence over citizens’ lives, yet there is no direct public input and oversight over its policies influencing the day-to-day lives of Eurozone citizens. The European Parliament is the only institution that has an oversight role towards the ECB, primarily through its annual resolution. This key process ensures that the ECB’s actions align with citizens’ interests, and democratic oversight by the European Parliament is essential for shaping  the ECB’s policies to better serve Europe’s people.

However, the current resolution falls considerably short of this ambition.

Inflation is the reason that central banks are raising interest rates. Therefore, understanding the causes of inflation can help us to adopt adapted policy tools that will keep inflation low.

The recent wave of inflation in Europe was primarily driven by fossil fuels, which significantly impacted consumer prices, directly and indirectly, through electricity and food prices. Renewable energy, on the other hand, proved to be a mitigator of these shocks, yet current interest rate hikes are already slowing down investments in the renewable energy sector, thereby undermining the green transition. 

While the ECB recognizes that climate change significantly affects monetary policy and inflation, its current interest rate policy stands in stark contrast to its climate stress test recommendations for a rapid transition to sustainable practices. Such a policy approach, by impacting renewable energy investments and other types of green investments, such as energy-efficient renovations, may inadvertently exacerbate the very economic instabilities that the ECB aims to prevent. Therefore, the ECB should align its monetary policies with the goals of promoting energy efficiency and renewable energy investments for ensuring long-term economic stability and meeting the global climate targets.

However, the European Parliament resolution erroneously identifies a wage-price spiral as the driver of inflation, failing to adequately address its actual supply-side source (rising prices of fossil fuels and Covid-19–induced supply bottlenecks). By attributing inflation primarily to wage-push factors (overall rise in the cost of goods and services that results from a rise in wages), the report ignores the substantial role of fossil fuel price increases and corporate profits as driving forces behind it. In essence, the report blames workers’ wages for our current inflation, and proposes measures that would further harm workers who are already being squeezed by increasing costs of living.  

The current resolution focuses on achieving price stability and fighting inflation through interest rate hikes. While effective in the short term, increasing interest rates is a blunt tool that leads to unemployment and economic downturns, and hinders the green transition. For instance, interest rates are already negatively impacting the financing of renewable energy projects across Europe. 

It is concerning that despite the resolution’s acknowledgement of inflationary pressures on lower-income households, it proposes solutions that will lead to fiscal austerity, which, if combined with tightening monetary policy and a lack of tailored and targeted fiscal support, will risk the overall economic health and exacerbate social inequalities.

It is crucial for policymakers to ensure that their review and recommendations on the ECB’s policies are deeply rooted in the interests and priorities of EU citizens. MEPs must fully recognize and articulate the ECB’s pivotal role in addressing both the immediate needs of the citizens and the wider climate crisis. The upcoming resolution by the MEPs should not only mirror the public’s concerns but also chart a path forward in responding effectively to these priorities. Aligning the ECB’s strategies with the public’s interests is key to ensuring that the bank’s actions are not only impactful but also resonate with the core values of the European community, thereby nurturing a proactive and visionary economic policy framework.

A tangible and innovative solution would be the adoption of a dual interest rate approach, tailored specifically to different economic sectors. This approach, recognizing the critical importance of green investments, offers a more nuanced and impactful alternative to across-the-board rate hikes. Such targeted strategies will not only align with the ECB’s goals but also demonstrate a commitment to a sustainable and economically stable future for the European Union.