Sustainable Finance Lab has delived a contribution to the revision of monetary policy of ECB, the so called strategy review. The key messages from SFL to ECB are:
- The collective financing of a Recovery Fund via the Europen Commission is a big step. However, this should probably not give a final solution because of its size, the problematic economic situation, and the structural trend of divergence in the eurozone. To get the eurozone out of trouble, more joint fiscal policy is needed.
- Monetary policy can be supportive to this goal by lowering borrowing costs and by choosing instruments which steers new money to the real economy instead of financial markets. Instruments like TLTRO, which enables banks to receive money cheaply to borrow out and buying new bonds of European institutions are examples. If possible, ECB could do something extra for countries with the biggest troubles like the ECB is doing no with the Pandemic Emergency Purchase Programme.
- Communicate that you don’t immediately restrict monetary policy if inflation reached 2%. A symmetric goal like the Fed is doing after their review is not advocated by SFL. Because, if you do this you need to further restrict monetary policy after a boomcycle with a too high inflation level during a crisis. We also reject the idea of a lower inflation level. This will increase the risk of deflation and given the high levels of debt this is harmfull.
- Finally, we argue why the ECB should incorporate ecological sustainability in their monetary policy and how this can be done.
The full contribution can be found below.