Ukraine: ECB governing council to meet as crisis intensifies

As the energy crisis and inflationary pressures associated with the Russian invasion of Ukraine intensify, the governing board of the European Central Bank (ECB) prepares to meet in what are the most difficult circumstances since the central bank was founded nearly 24 years ago.

At a regularly scheduled meeting on Thursday, ECB executive board members and eurozone central bank governors will face a complex wave of problems threatening European price and financial stability.

Today the EU Commission published plans to cut Russian gas imports by two-thirds this year, adding to short term inflationary pressures. Focusing heavily on demand reduction, the plan includes investment in renewables, energy efficiency and the decarbonisation of industry, along with an expansion of fossil gas storage and a diversification of supplies.

Meanwhile Russia has threatened to cut fossil gas supplies to Europe via the Nord Stream 1 pipeline in response to sanctions applied after its invasion of Ukraine. Russia supplies 40% of the EU’s entire gas market and alternative supplies are limited, so a substantial price shock appears increasingly inevitable.

Oil prices are also under pressure as President Biden has announced a ban on US imports of Russian oil. Prices have spiked to highs not seen since 2008 and analysts have warned that alternative supplies will not be able to bridge the gap.

“We simply cannot rely on a supplier who explicitly threatens us,” said Commission president Ursula von der Leyen. “We need to act now to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition.”

Bloomberg has reported that the Commission is also preparing plans to jointly issue bonds on a “potentially massive scale” to finance renewable energy and defense spending. Such a move would likely be similar to last year’s €1.8tn joint debt stimulus package issued to help member states deal with Covid-19.

Faced with these inflationary pressures and bound to support general EU economic policies under its secondary mandate, eurozone central bankers will be faced with a series of difficult and sometimes contradictory options when they meet on Thursday. Increasing rates could hinder investment in renewables and energy conservation, defeating EU Commission plans and prolonging dependence on Russian fossil fuels. Cash-rich fossil fuel companies, on the other hand, would be impacted to a lesser extent.

A new round of quantitative easing to support an EU joint bond issuance is another possibility, but could add to inflationary pressures.

Since fossil fuels are the source of the current price and financial instability, the ECB may instead seek a more nuanced and targeted approach, balancing greater support for fossil fuel alternatives and energy efficiencies with curbs on credit going towards carbon-intensive activities. This would allow the governing council to balance overall inflationary pressure on the economy while at the same time supporting reallocation of productive resources towards energy security and price stability.

Instruments available to the ECB for this pathway include dual interest rates and an expanded green TLTRO. Another option is to reduce its existing quantitative easing portfolio by replacing carbon-intensive bonds with the new EU joint bonds as they mature. This would require abandoning any lingering commitment to market neutrality.

With the situation developing rapidly, the ECB may also prepare for the complete cessation of Russian fossil fuel imports, making clear that it will “do whatever it takes” to support the EU economy and financial stability.