In defense of a green Central Bank

Jan Martel (1896–1966), Maquette for Arbre Cubiste (Cubist Tree), 1925.


The fact that the idea of ​​green central banks is being discussed is a reminder that we live in desperate times.

The very fact that we are discussing the idea of ​​green central banks is a reminder that we live in desperate times. It demonstrates that good people, who care passionately about the green transition, have lost hope of living in functioning democracies willing and able to pursue our common interest.

Since the 1970s, our Western regimes have embraced the mantle of Central Bank independence. Independence from what? From dirty politicians eager to use central bank printing presses to make their nests, comes the standard answer. Which, in practice, means independence from parliament.

But this also includes highly political decisions (for example, an interest rate hike that shifts power from debtors to creditors, or the purchase of an energy company's bonds) beyond the reach of the protesters and in the hands of an oligarchy that traditionally profited from policies that destroy the planet. Indeed, whenever political decisions are disguised as technical decisions and removed from the democratic domain, the result is toxic policies and economic failure.

While I am heartened by the recent urgency to engage in monetary policy in pursuit of the green transition, what fills my heart with sadness is that all of the recent talk of “green” central banks is not accompanied by any challenge to the notion of independence. from the central bank.

Depoliticize political decisions

Like monetary policies, green policies are – and it could not be otherwise – political choices. Whether we introduce a carbon tax or move away from fossil fuels or push nuclear energy, each of these decisions has different effects on different people, communities and social classes. They are policies from start to finish. To leave both monetary and green policies to nominally independent central banks is, in effect, to outsource all decisions that matter to the oligarchy to which central banks are committed.

In fact, what has happened is that since the 1970s central bank independence has been an excuse to formally depoliticize policy decisions. In other words, of intentionally undermining democracy and abandoning the notion that crucial policy decisions must be reached democratically.

Central banks cannot be, and never have been, independent. Its legal independence simply reinforced its dependence on bankers, on creditors, on multinational corporate interests. To pin your hopes for a green transition on these same central banks is to legitimize the decline of democracy, while turning citizens into denizens begging central bankers to save the planet on their behalf.

Understandably, central bankers like Christine Lagarde, president of the European Central Bank (ECB), cannot go out in broad daylight to challenge basic articles of the statute that bind them professionally and legally. Being legally obligated not to criticize the independence of the central bank, it is natural for them to express any concern they have for the planet by seeking to “green” their institution's practices – for example, excluding guarantee bonds that were used to finance the production of electricity to from lignite.

But for Democrats willing to push for the green transition, it is logically and ethically impermissible to continue talking about the importance of “greening” our central banks while remaining mute on the undemocratic farce that is a pretext for central bank independence.

It could be argued that, in any case, we are saddled with central banks whose bylaws are what they are. Given the climate emergency, can we waste years debating new statutes and mandates for our central banks? Shouldn't we do whatever it takes in the short term, within existing central bank statutes, to discourage pollution and boost green investments?

Yes, of course we should. Central banks should immediately be hard-pressed to take the task into their own hands. Except that this cannot and should not be done by applying political or environmental criteria themselves to their lending practices, including quantitative easing.

Changing the ECB's mandate

To illustrate my point, compare and contrast two approaches to using the ECB's firepower in pursuit of a genuine new green deal in Europe.

One approach, which I refer to as “warranty adjustment,” is to tampering with ECB guarantee rules, linking the valuation haircut it applies to corporate guarantee bonds to the carbon footprint of the company in question. For example, lending just 40% of an ExxonMobil bond secured as collateral, but raising it to 70% if the oil giant halts all future drilling projects.

The problem with this is threefold: legal, political and practical. Legally, the ECB's mandate, as specified in its statute, must be extended beyond its current single commitment to price stability – a task that will involve 27 parliaments accepting a new statute.

But even if this hurdle can be overcome or circumvented, and everyone turns a blind eye to the new warranty rules, the political problem remains: who will decide which valuation allowance applies to which security? Outsourcing such a colossal policy decision to unelected central bankers would constitute the last straw of democracy.

And then there's the issue of the policy's impracticality: how can the ECB verify that ExxonMobil will make the best green use of the funds it receives, courtesy of abandoning future oil drilling and guaranteeing a small valuation haircut for its bonds. ? What can the ECB do if, say, it discovers that ExxonMobil has taken the money and, instead of investing in solar or wind power, used it to buy back its own shares? The answer is sadly little.

Establish an EIB-ECB alliance

The second approach is to leave the ECB's statute alone (at least for now), but have the Council of the European Union announce that it is instructing the European Investment Bank to issue new bonds annually on the order of 5% of EU GDP to finance the green transition. As the ECB is already buying as many EIB bonds as possible, legally within its current charter, this announcement effectively establishes an EIB-ECB alliance.

An informal declaration by the ECB that it will continue buying EIB bonds will ensure that, without a penny of new taxes, the EU now has 5% of its GDP to invest directly in green energy, transport, agriculture and heavy industry each year. This will allow the EU to funnel real money into green investments of our governments' collective choice. No ECB charter changes, no collateral adjustments, just immediate green action.

While this measure would not democratize the ECB itself (which would have to come later), it would limit the ECB's policy-making and leave the selection of green projects to elected politicians in the EU Council and European Parliament.

However, we hear nothing about an EIB-ECB Alliance – such a move would be both legal and more effective in harnessing the ECB's firepower for Europe's green transition. But our ears are ringing with all the talk about green central banks relying on legally suspect and virtually ineffective “collateral adjustments”.

Why? Because the powers that be are prepared to sacrifice the Earth before allowing the redemocratization of the political decisions that took so long to wrest from the protesters' hands.

*Yanis Varoufakis is a former finance minister of Greece. Author, among other books, of the global minotaur (Literary Autonomy).

Translation: Fernando Lima das Neves.


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