French politicians recommend that ECB looks at green dual interest rates

Key takeaways

• The French national assembly has proposed measures for the eurozone’s monetary policy to make the EU economy more resilient to growing climate impacts.
• A key recommendation is for the European Central Bank (ECB) to research green dual interest rates, such as targeted longer-term refinancing operations (TLTROs), to boost long-term project financing.
• The report proposes broader financial reforms, including reinstating mandatory transition plans, differentiating banking capital requirements based on climate-risk exposure, and examining raising the ECB’s inflation target to 3%.

The French National Assembly has recommended several measures to strengthen the eurozone’s monetary policy in the face of climate change, as an increase in extreme weather events and decarbonisation efforts across the EU are expected to impact the broader economy, even as funding for green finance remains below what is needed.

“To meet the immense civilizational challenge of urgently adapting our societies to this new paradigm, we must use all the tools and levers at our disposal, including monetary policy,” said Danièle Obono, a left-wing deputy and co-rapporteur of the report, during a committee meeting.

The European Commission has estimated that an additional 3.7% of the EU’s GDP is needed annually to achieve its target emissions reduction goal of 55% by 2030.

The report, which was passed in February, is part of an ongoing dialogue process. While these types of dialogues between national states and the ECB are common, it is the first time the French legislature has adopted recommendations relating to greening the EU bloc’s monetary system.

The recommendations include having the ECB look into green dual interest rates, which could take the form of green TLTROs, based on a model used by the bank between 2014 and 2019 to stimulate the real economy.

“The introduction of green TLTROs could contribute significantly to accelerating the economic transition by supporting the profitability of long-term green projects,” the report states.

Henri Alfandari, centre-right deputy of the French national assembly and co-rapporteur, said during a committee meeting that it was still vital to preserve central bank independence and maintain a stable economic environment for a transition to take place.

“Additional greening measures should therefore be carefully calibrated to optimise their climate impact while preserving monetary policy effectiveness and price stability,” he said.

Examining monetary policy in the face of climate change

The report also recommends reinstating the obligation to implement transition plans, which were removed during the sustainability omnibus process. It also examines the idea of raising inflation targets from 2% to 3%, lower interest rates during the green transition, and that banking regulations be revised to differentiate capital requirements based on climate-risk exposure.

The rapporteurs also propose creating a European Credit Council to advise the European parliament on coordination and provide democratic oversight, as well as prevent the ECB from deviating from the content of its secondary objectives.

“Climate action can be anchored at the heart of the ECB’s primary mandate due to the inflationary pressures caused by climate change,” said Obono.

Other recommendations include supporting a European plan for financing climate change adaptation, making sure that investment products labelled as sustainable or ESG meet minimum thresholds, and adopting a European green bond standard to help green the ECB’s public securities portfolio.

A step in the right direction by French politicians

The report is a good example of the scrutiny needed to oversee central banks, said Stanislas Jourdan, research associate at the Sustainable Finance Lab.

“Ultimately, both central bank independence and democratic legitimacy are strengthened when parliaments step up their oversight,” he said. “Other parliaments should follow this example”.

Jezabel Couppey-Soubeyran, a French economist at the Université Panthéon-Sorbonne, said the report shows the willingness of French politicians to tackle issues that are often seen as highly technical.

“It comes at just the right time, when climate action is retreating more than it is advancing. In this context of ecological backlash, it is almost an act of resistance,” she said.

For Couppey-Soubeytan, the recommendations are going in the right direction, but she would have liked the measures to go further. For example, by making an explicit recommendation on green dual interest rates rather than just a mention, even as the measure is broadly supported by academics and civil society members across Europe.

“The Banque de France and the ECB are not in favour of it, fearing that it would open a Pandora’s box and undermine the single interest rate policy, which they regard as more or less the only economic policy instrument that functions well in the euro area. Yet this very single rate is not suited to climate risk.”

The fact that the climate change and monetary policy issue was looked at by the French Assembly and that they interviewed several experts should not be downplayed, said Clarisse Murphy, central banks expert at Reclaim Finance.

Jourdan, Couppey-Soubeyran and Murphy were all consulted by the French Assembly committee for the report. France has consistently ranked high for its green banking policies in the Green Central Banking Scorecard.

“At least in France, there seems to be a kind of a common ground on the problem and the fact that monetary policy and climate change are very much interconnected, and there is potentially a role for the central bank to help with the funding of the transition,” Murphy said.

She added that it was “amazing” that dual interest rates were discussed in the report and shows that policymakers “are trying to find ways to fund this transition”.

“I really hope that the Banque de France and the ECB will take on that signal and actually look into if [dual interest rates] could be possible.”

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