Lagarde’s legacy building begins at the ECB
The ECB president will launch the second strategic review in the 20-year history of the organisation
Every good central banker needs a legacy. Mario Draghi, the former head of the European Central Bank, is widely credited with rescuing the eurozone from a debt crisis. Today his successor, Christine Lagarde, will kick off the search for a defining cause of her own.
Ms Lagarde will launch the second strategic review in the 20-year history of the ECB — a process that she has said will last until December as it turns “every stone” in search of ways to fine tune its monetary policy toolkit.
One of the most controversial ideas Ms Lagarde has proposed for the review is to make tackling climate change a “mission-critical” priority of the ECB.
It is easy to see why this idea appeals to Ms Lagarde, with extreme weather events increasing in frequency and intensity every year — the latest being the wildfires raging across Australia — and pushing green issues to the top of the political agenda.
The Bank for International Settlements warned this week that the next financial crisis could be caused by a “green swan” event driven by global warming and that action by central banks, while important, would not be enough on its own to deal with it this time.
Central bankers, notably Mark Carney at the Bank of England, have long been pushing for more action to deal with the financial risks of climate change. Yet Ms Lagarde is likely to nudge the ECB to go further in several ways.
For a start, the ECB could integrate climate-related risks into all its modelling and take more account of them when valuing collateral it accepts from financial institutions, as proposed by Banque de France governor François Villeroy de Galhau.
Environmental campaigners are calling on the ECB to do even more and repurpose its €2.6tn asset-purchase programme, known as quantitative easing (QE), by divesting “brown” bonds issued by carbon-intensive companies while increasing purchases of green bonds.
This would be unacceptable to some members of the governing council, such as Jens Weidmann, head of Germany’s Bundesbank. Critics say it is up to politicians, not central banks, to decide which companies to favour and which to penalise.
But the “green QE” idea is catching on at the European Commission as it develops its Green Deal to cut carbon emissions. Thierry Breton, the EU’s new single market and industry commissioner, said this week that to unlock the €1tn of financing needed for the Green Deal countries may issue long-term debt that could be bought by the ECB via its QE programme.
“We are going to discuss this with the ECB, which is looking for tools to invest in as part of its quantitative easing policy,” Mr Breton said on a visit to Paris this week.