How European Monetary Policy Can Be Green, Social, and Democratic

The European Central Bank (ECB) faces a conundrum: how to deal with the constraints of a restrictive mandate on one hand, and the necessity for action in the face of multiple crises on the other. So argues this paper from Jens van ‘t Klooster, a postdoctoral fellow at Belgium’s KU Leuven research university.

Van ‘t Klooster explains that the ECB has so far resolved this conundrum by increasingly broadening the interpretation of its price stability objective. However this has undermined the bank’s legitimacy in addressing novel issues such as climate change.

The paper begins with an overview of the EU’s 1992 Maastricht treaty that gives the ECB its mandate, followed by a discussion of how this mandate is interpreted today. Van ‘t Klooster then examines the ECB response to the Eurozone crisis and the Covid-19 pandemic, showing how the bank’s mandate was reinterpreted to allow emergency action.

Turning to the ECB’s response to the climate crisis, the tension between the bank’s mandate and the practical requirements of the situation is explored, focusing on climate change as a threat to price stability. However justifying climate action on price stability grounds may open interpretation of the ECB’s mandate too far, resulting in an “authorisation gap”. The core problem, says Van ‘t Klooster, is that “the law has lost much of its role in guiding monetary policy”.

The paper offers a series of recommendations for how the EU can democratise the ECB and close the authorisation gap. The mandate of the ECB can be amended through a treaty change, it suggests, showing how key passages in the ECB mandate can be specified through fiscal-monetary coordination on the EU level. In addition, other passages in the ECB mandate can be amended through the EU’s ordinary legislative procedure.

Even if it does not receive such guidance, the paper shows how the ECB can still strengthen its democratic legitimacy by coupling its programmes to existing politically sanctioned legal instruments such as the EU’s green  taxonomy.

“By denying the ECB adequate democratic guidance, the EU’s political institutions weaken the ECB as an institution,” Van ‘t Klooster says. Important choices are being left to the ECB itself, and this lack of an explicit democratic authorisation makes the position of the ECB precarious. There are tools within the existing EU treaties to provide ECB operations with a formal legal basis for climate action, he concludes.