EU parliament tackles ECB’s ‘long-neglected’ secondary mandate

The European Parliament has adopted a resolution offering a solution to the long-neglected secondary mandate of the European Central Bank (ECB). However, the resolution fails to acknowledge the link between our dependence on fossil fuels and price stability.

In the Strasbourg plenary vote of 16 February, parliament adopted its annual resolution on the ECB. This report is voted upon every year to allow the European Parliament to adopt a unified view on the policies implemented by the ECB, and suggest recommendations ahead of the future challenges that the bank will face.

The report is the outcome of long negotiations that took place over a time period characterised by inflation peaks that the monetary union has never previously experienced in the 31 years since its formation. Nevertheless, MEPs stood united and adopted the resolution with a strong majority of 376 votes in favour, 96 against and 35 abstentions.

MEP Rasmus Andresen of the Green group led this year’s resolution towards an unprecedented breakthrough: directing the ECB to act more strongly on its secondary objectives.

The European Parliament will help the ECB deliver on its secondary mandate

For the first time ever, MEPs included a whole section in the resolution on “secondary objectives”. These refer to the goals of EU economic policies that, without prejudice to price stability, the ECB must support when implementing its monetary policy. These objectives include full employment, protection of the environment, social progress and more.

However, the law remains vague, leaving open to question the legitimacy of ECB decisions on which objectives, other than price stability, it should act upon. As a technocratic institution staffed by unelected officials, the central bank does not have the democratic authority to specify or prioritise these objectives, which leaves it to deal with a legal requirement without the necessary instruments to fulfil it.

Positive Money Europe has long followed the debate on the ECB’s secondary mandate, arguing that it has been neglected for years due to the difficulties of the bank has in deciding which objectives to independently prioritise when implementing its monetary policy.

To overcome this deadlock, civil society representatives and experts have suggested that the European Parliament should play a stronger role in prioritising the ECB’s secondary objectives. In previous declarations, ECB president Christine Lagarde has recognised the possible role of parliament  interpretating the secondary objectives. She said: “Clearly, [the secondary objectives] have to be taken into account, particularly if those secondary objectives are stated very clearly by the other institutions, and in particular by the European Parliament.”

Positive Money Europe has previously proposed that the annual ECB resolution should be used as a space to provide a political interpretation of the secondary mandate.

The text adopted by MEPs reflects this proposal, as it “suggests taking advantage of this resolution to provide input to the ECB on secondary objectives”.

It continues by strengthening parliament’s oversight of the ECB, and calling on the bank to “devote a specific chapter in its annual report to explaining how it has interpreted and acted upon its secondary objectives and to presenting the effects of its monetary policy on the EU’s general economic policies”.

It’s a great achievement for civil society to see parliament finally acknowledging the issue and ready to offer the ECB its support and input on the secondary objectives.

The lack of clarity around the ECB’s secondary mandate has caused a frustrating stalemate for too long. With this vote, MEPs have offered a sensible solution, but it’s now up to both the European Parliament and the ECB to raise their game accordingly – with wisdom and open-mindedness.

MEPs fail to acknowledge fossilflation

As in previous years, the resolution also shows there is a general consensus within parliament on the importance of greening monetary policy to prepare for the challenges that environmental breakdown will pose in maintaining price stability. In a dedicated section, the resolution welcomes the progress made by the ECB on its climate action plan.

However, it’s disappointing that MEPs could not agree to state the obvious about the nature of the inflationary pressure. Indeed, during the plenary session, they voted against a proposal from the Greens to add that “addressing the climate emergency and the euro area’s dependence on fossil fuels not only touches upon the ECB’s secondary mandate but also upon its primary mandate, given the serious threat these issues pose to price stability”.

The lack of a majority reveals a worrying lack of understanding among many MEPs of how our dependence on fossil fuels is jeopardising price stability both in the short run and the decades to come.

This failure to state the obvious is awkward when the ECB itself has repeatedly acknowledged this basic fact. Isabel Schnabel, for instance, was clear in stating that “[fossil fuel inflation] is to blame for much of the recent strong increase in euro area inflation”. Meanwhile, Fabio Panetta confirmed that “appropriate public policies that compress the demand for fossil fuels and stimulate the production of cheaper renewable energy sources can help to contain inflationary pressures and may even help to reduce inflation”.

When looking through the lenses of “fossilflation”, it becomes clear that green monetary policy is not a nice to have, but should become an essential tool to drive a smooth, green transition. Positive Money Europe will therefore continue to work to ensure policymakers in Europe understand the need to align macroeconomic policy with sustainability and the fight against climate change.

This is an edited version of an article that first appeared on Positive Money EU.