ECB’s Wunsch defends controversial market neutrality concept

April 21, 2022|Written by |National Bank of Belgium, European Central Bank

European Central Bank (ECB) governing council member Pierre Wunsch has defended the controversial concept of market neutrality during a recent appearance before the Belgian parliament’s finance committee.

Wunsch said it is not the role of monetary policy to distinguish between high and low carbon asset purchases, despite evidence that the ECB’s €333bn corporate bond portfolio is already heavily biased in favour of the fossil fuel and other high-carbon sectors.

Wunsch is known for being skeptical about the contribution that green central banking can make in mitigating the growing risks of climate change.

While insisting on a risk-based approach in addressing climate-related threats to price and financial stability, Wunsch has also expressed doubts about the scale and importance of such risk and has called for more research and analysis before action is taken.

In his introductory remarks, Wunsch pointed to carbon pricing as the most efficient way to incorporate the externality of climate change into the market, saying that “the [EU’s] Emissions Trading System addresses this.”

Wunsch also acknowledged the ECB’s secondary mandate of supporting general economic policies to help achieve what he called the “long list” of EU objectives, including sustainable development. However, he added that “we have to be careful not to start working in all areas”.

Questioning Wunsch, parliamentarian Dieter Van Besien warned of the climate threat to price stability, calling for a differentiated monetary policy “that distinguishes between investments that are necessary to achieve price stability in the medium and long term and other investments that are fueling inflation today.”

“The lack of differentiation makes the ECB a net drag on the transition,” Van Besien said, warning that the ECB may be undermining long-term price stability through its high-carbon corporate purchases.

Van Besien also suggested that the ECB could purchase European Investment Bank bonds to finance green investments, and could also differentiate the conditions at which a bank can lend money by favouring loans for retrofits and renewable projects.

In response, Wunsch referred to the ECB governing council’s “tradition” of taking a market neutral approach, saying that “we buy what we see in the market and more or less in the same proportion”.

“But when we go away from neutrality immediately we have an enormously long list of questions, and then what?” Wunsch asked. “I fear that if we go in that direction that at some point we will have to make very political decisions.”

Wunsch’s fears echo those of former Bundesbank president Jens Weidmann, a strong opponent of incorporating climate considerations into monetary policy before a dramatic U-turn at last year’s Green Swan Conference.

Under Wunsch’s leadership, the NBB has been sued for failing to protect environmental and human rights when purchasing bonds from companies contributing to the climate crisis, and has been the focus of protests by climate activists. A coalition of climate and environmental advocacy groups has also called on the NBB to give up its “dogmas” on market neutrality and support ECB efforts towards greening its monetary policy.

Commenting in response to Wunsch’s parliamentary appearance, thinktank and campaigning organisation Positive Money Europe (PME) was clear that a lack of differentiation by central banks undermines the ecological transition.

“Companies that invest in fossil projects are much more capital intensive than those that are related to renewable energies,” a PME spokesperson told Green Central Banking. “We need clear differentiation and a monetary policy that takes into account climate related-risks. We can only do that by getting rid of market neutrality.”

This page was last updated April 21, 2022

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