>> GROUP: Shadow ECB Council / EZB-Schattenrat  Frederik Ducrozet

Frederik Ducrozet: The ECB’s strategy review is the perfect opportunity for Christine Lagarde to take the necessary time to reflect on the past decade of unconventional crisis measures, not to ‘reset’ monetary policy but to provide her a fresh and healthy starting point for the next eight years. It is likely to be an evolution rather than a revolution, with no radical changes to the ECB’s operational framework, although some decisions could still have a significant and lasting impact on the conduct of monetary policy, at least relative to the pre-crisis period.
Broadly speaking the review will have to address two main topics: the inflation target and its measures, and the policy tools and their side-effects.
On the former, a shift to a symmetrical 2% inflation target looks desirable and plausible, if only for the sake of simplicity and the credibility of forward guidance. In terms of inflation measures, the ECB is unlikely to formally adopt a core inflation target, or to include house prices in the HICP (a Eurostat prerogative), although both ideas make sense and could be included in the review’s conclusions to the extent that the ECB will put more emphasis on those indicators in the future.
On the latter, the ECB is likely to conclude that side-effects of negative rates and QE should be further addressed via its own mitigation measures (e.g., tiering and TLTRO) as well as macro-prudential measures, but we doubt that the review will go beyond that.
Last but not least, climate risks will be a major focus of the review. There is a lot the ECB can contribute to do on climate change and green policies, including a better pricing of climate risks, improvement of internal models taking into account those risks and, ultimately, potential changes to the ECB’s collateral framework and asset purchases as part of a possible ‘green strategy’, with no prejudice to the ECB’s primary mandate of price stability, if that is indeed a conclusion of the review (e.g., exclusion of certain debt securities based on ESG criteria, or differentiated haircut on collateral, etc).
Ultimately, however, climate policy is and should remain the responsibility of democratically-elected governments and institutions. Any change to the ECB’s operational framework that comes down to a more proactive ‘green’ strategy would require political backing to be legitimate and credible. If that happens, for instance as part of a European Commission’s Green Deal, then the ECB will be more than happy to contribute, including by financing the institutions involved and/or buying their debt, as it has done for years with the EIB.
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