15 September 2020

Bloomberg: Lagarde Leverages Virus to Press for Greener Monetary Policy

The pandemic could easily have derailed Christine Lagarde’s plan to enlist the European Central Bank in the fight against climate change. Only she won’t let it. “It’s a topic that I am very keen about, which I believe has a systemic dimension,” she told journalists after the ECB’s latest monetary policy meeting on Sept. 10.

Lagarde made battling global warming a defining feature of her eight-years as managing director of the International Monetary Fund, warning that humanity would be “roasted, toasted, fried and grilled” if it failed to act.

She reiterated that message as she vied to become the ECB’s first female president last year, telling members of the European Parliament that combating climate change should be “mission critical” for the Frankfurt-based institution, which sets monetary policy for the 19-nation euro zone.

Lagarde had been at the helm less than four months when Italy recorded its first death from Covid-19 on Feb. 21. Suddenly, the deadly new virus assaulting the continent posed a more clear and present danger than greenhouse gases. The immediate imperative was propping up the euro-area economy, which shrank almost 15% in the second quarter, compared with the same period last year—the most on record.

Instead of allowing the Covid-19 recession to bump climate off her agenda, Lagarde has used it to try to persuade skeptics that phenomena such as global warming are well within the remit of monetary policy, a notion that some of her European peers, notably Bundesbank President Jens Weidmann, have resisted. Across the Atlantic, the chairman of the U.S. Federal Reserve has also been lukewarm on the idea. “Society’s overall response to climate change needs to be decided by elected officials and not by the Fed,” Fed chairman Jerome Powell said in January.

Lagarde’s argument is that the ECB will not be able to deliver on its mandate to preserve price stability or properly carry out its supervisory functions if it does not stay vigilant against threats from new and unexpected sources. This year, a virus brought the world economy to a nearly complete halt. Is it really unimaginable, asks the ECB’s new chief, that the next economic or financial crisis might be triggered by a devastating series of natural disasters, such as a string of wildfires or floods?

“It’s absolutely crucial to be prepared,” says Sabine Mauderer, a board member at the Bundesbank. “The question is no longer ‘if’ but ‘how’ we can play an active role in the fight against climate change.”

Prior to her confirmation, Lagarde floated ECB Strategy Starts to Find Focus"> several ideas for how the ECB could take steps to help alleviate global warming. The most radical involved greening the bank’s massive quantitative easing program (QE), in which it buys bonds from banks to lower interest rates. Lagarde suggested the bank should prioritize purchases of environmentally friendly securities, but noted this could not be done overnight. The European market for green corporate bonds is still small, at around €100 billion ($118.7 billion), and the institution must take care not to crowd out other investors.

Her comments met with resistance from inside and outside the institution. The most frequently invoked objection against what Lagarde was proposing is that the ECB must strive always to be market-neutral. If the bank were to favor debt issued by makers of wind turbines over that of oil majors, it would open itself up to accusations that it was charting its own industrial policy..... more at Bloomberg

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