Ukraine: ECB to take “whatever action is needed”

As the economic effects of Russia’s invasion of Ukraine reverberate across Europe, the ECB has said that it is ready to take “whatever action is needed” to ensure price and financial stability.

EU fossil gas prices surged to new heights of over 1,500% above historical norms while oil was up 90% year-on-year and heating oil 110.72%. Commodity prices also rose dramatically as the crisis deepened, with lithium up 600%, magnesium increased by 160% and wheat 94%.

Coming on the back of a pandemic-related inflation spike, concern is growing that rising prices may become embedded in wage expectations at the same time that growth is inhibited by the war.  “A scenario close to stagflation is not out of the possibilities that we can face,” warned Bank of Portugal governor, Mário Centeno.

Worse may be coming as EU political leaders seek ways to reduce the purchases of Russian fossil fuels which are helping to fund the invasion. On Tuesday, the EU Commission will table proposals to quickly end dependency on Russian oil and gas, including measures to improve energy efficiency, invest in renewable sources, and structurally prepare for a massive increase of renewable energy in Europe’s electricity market.

European and American leaders are also discussing a ban on Russian fossil fuel imports which currently supply close to 40% of the EU’s total gas consumption.

In response to the emergency, the International Energy Association has released a 10-point plan to reduce EU reliance on fossil gas, including accelerating deployment of new wind and solar projects, replacing gas boilers with heat pumps, accelerated energy efficiency improvements in buildings and industry.

In response to  a wave of solidarity with the plight of the Ukrainian people, and bound by a legal duty under its secondary mandate to support the general economic policies of the EU, the European Central Bank (ECB) is implementing sanctions decided by the EU.

“At this dark moment for Europe, the thoughts of the ECB’s governing council are with the people of Ukraine,” said president Christine Lagarde. “The ECB stands ready to take whatever action is needed to fulfill its responsibilities to ensure price stability and financial stability in the euro area.”

As the euro faced its biggest three-day loss in two years as a result of the war, the ECB focus at Thursday’s governing council meeting is likely to be on the immediate economic impact of the hostilities. But as the conflict continues, attention will likely turn to how the central bank can help European countries and their citizens get through next winter without Russian fossil fuels.

The acceleration of the ECB’s roadmap for climate action offers a direction for this effort, particularly the climate mitigation solutions outlined in background papers to the central bank’s 2021 strategy review and in numerous civil society proposals.

Options available to the ECB include a ‘dual rate’ policy in which it sets a different price signal to different actors, offering a preferential rate through its TLTRO programme for banks, proportional to their portfolios of loans for energy-efficient home renovation or renewable energies.

Civil society group Positive Money Europe has outlined how such a programme might work and has recently called for its implementation in response to pre-war inflationary pressures.

The ECB could also embed fossil fuel considerations into prudential regulation, monetary policy and portfolio management, as recommended by climate-focused academics in a policy report released last year. Other possibilities include fossil fuel-free sovereign quantitative easing, selling corporate bonds linked to fossil fuel activities, and integrating fossil fuel considerations into their collateral framework asset ratings

As the contrast between the price volatility of fossil fuels and the price stability of renewables becomes stark, the substantial overlap between climate mitigation measures and reducing European dependence on Russian fossil fuels is also increasingly clear.

If the ECB is to play a meaningful role in supporting EU efforts to help the people of Ukraine while at the same time protecting the eurozone from war-related price and financial instability, it will have to focus less on a risk that has already materialised and more on rapid and concrete action to support moves away from fossil fuels.