No ECB support for EU efforts to reduce fossil fuel dependence

Despite growing inflationary pressures associated with European dependence on Russian fossil fuels, the European Central Bank (ECB) has offered no support for EU Commission efforts to rapidly reduce imports and switch to more stable and secure renewable energy sources. Following a “very intense” meeting, the ECB governing council continued its tightening of monetary policy, maintained its position of so-called market neutrality and offered no differentiation between high-carbon and low-carbon assets, lending and activities.

“The Russian invasion of Ukraine is a watershed for Europe,” the governing council said in its monetary policy statement released after the meeting. But despite promising to “take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to safeguard financial stability”, there was no direct response to the crisis in Ukraine and its effect on EU energy prices, apart from a brief extension to the Eurosystem repo facility for central banks.

ECB president Christine Lagarde was more forthcoming in her press conference. “The Russia-Ukraine war will have a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce, and weaker confidence,” she said. “We are very attentive to the prevailing uncertainties,” she added, and that the ECB “[stands] ready to adjust all of our instruments to ensure that inflation stabilises at our two per cent target over the medium term”

Civil society groups have called for adjustments to several ECB monetary policy instruments to speed up the transition to more stable and secure energy sources, and reduce dependence on Russian fossil fuels.

Responding to yesterday’s ECB decision, Positive Money EU called on the central bank to “support the acceleration away from fossil fuels”. The ECB should “wind down dirty assets” in its corporate bond portfolio and facilitate bank credit for energy efficiency, the group said, also calling for the purchase of more supranational bonds “so that delivering a just transition doesn’t fail because of too tight financing conditions”.

Bloomberg has reported that the EU Commission is preparing plans to jointly issue bonds on a “potentially massive scale” to finance renewable energy and defence spending.

The New Economics Foundation, a thinktank focusing on social, economic and environmental justice, also called on the ECB to act decisively to support EU policymakers in reducing reliance on Russian fossil energy.

“If the ECB is serious about delivering on its price and financial stability objectives, it must once and for all abandon the outdated paradigm of ‘market neutrality’ that only serves to reinforce an unstable economic system based on fossil fuels,” said economist Lukasz Krebel. “The ECB must go beyond its climate roadmap that focused on slowly incorporating climate-related financial risks into its operations, and must use its policies to actively steer credit towards a rapid green transition, such as through targeted refinancing operations supporting cheap loans for housing retrofits and clean energy.”

“The energy price crisis amplified by the dramatic war on Ukraine serves as a painful reminder that Europe cannot truly control inflation without controlling its energy supply,” said Paul Schreiber of Reclaim Finance. “Taking stock of this reality, the ECB must support the EU’s efforts to improve energy efficiency and develop renewable energies. By ignoring it, the ECB would shockingly stay blind to the political and economical context, and endanger both its mandates.”

Eurozone inflation increased to 5.8% in February on the back of a 31.7% rise in fossil energy prices, with March figures likely to be higher as the effects of the Russian invasion grow.

However ECB staff predict annual inflation for 2022 to be just 5.1%, falling quickly to 2.1% in 2023. Just three months ago, the ECB was projecting an inflation rate of 3.2% for the year.