ZEW Workshop on the Changing Objectives of Central Banks
Over the past two decades, the European Central Bank (ECB) has taken on a growing number of tasks. From banking supervision to green financing, the thematic scope of the ECB has extended beyond the classical objective of price stability. Is the ECB currently experiencing an excess of tasks, or is this an appropriate response to the economic challenges of our time? ZEW Mannheim organised a full-day workshop on 31 May 2022 with the support of the Strube Stiftung to debate these questions.
Renowned representatives from academia, journalism, politics and (central) banking discussed the changing goals of central banks in four panels. The event was opened by Jürgen Strube from the Strube Stiftung. He emphasised the importance of a stable monetary policy for people’s lives and the economy. He recounted his own formative experiences during the hyperinflationary phase in Brazil during his time at BASF SE.
Role of the ECB in European monetary and climate policy
The first panel discussion focused on the evolution of the ECB’s objectives and responsibilities over time. Katrin Assenmacher (ECB) gave a brief overview of the different phases of European monetary policy, which has adapted to dynamic global events. According to her, the primary objective of price stability has largely been achieved since the introduction of the euro. There was a lively discussion on the ECB’s role in combating climate change. While the analysis of climate risks within the framework of the monetary policy mandate and banking supervision was considered appropriate, Ulrike Neyer (University of Düsseldorf) and Hans Peter Grüner (University of Mannheim) warned against the ECB overshooting the target of its mandate when it comes to climate change. Jan Kemper (ZEW) complemented the debate with new empirical research results showing that the debate on climate change plays an increasingly important role in the speeches of ECB Governing Council members. Katrin Assenmacher clarified in the discussion that climate policy is not anchored in the ECB’s objectives, but that the ECB should not counteract EU policy either.
Shaping central bank communication
In the second panel, the ECB’s communication was analysed from different angles. Christian Conrad (Heidelberg University) showed that the ECB’s inflation forecasts are hardly accurate anymore over a period of more than one year, which is why the ECB should no longer focus so strongly on its long-term forecasts in its communication. Another point of discussion was the way how messages are conveyed in the ECB’s public relations work. Jörg Krämer (Commerzbank) criticised that they are communicated in a rather complex manner and called for a more simplified language. Furthermore, developments in the academic discourse on central bank communication and new methods of analysis were debated.
ECB and green monetary policy
After the first panel had already touched on the topic of climate change and central banks, the speakers delved deeper into the topic of green monetary policy in the third panel. Sandra Detzer (Member of the German Bundestag for the German Green Party) joined the discussion from Berlin. She emphasised the role of fossil fuels in the current inflationary trend. There was broad agreement on the panel that the ECB should analyse climate risks but not take an active role in combating climate change. Markus Zydra (Süddeutsche Zeitung) warned against a rhetorical focus on the topic of climate, which would raise expectations that the ECB would not be able to fulfil and thus damage trust in the institution in the long term. Karolin Kirschenmann (ZEW) stressed that the term “green monetary policy” was misleading and that more neutral terms would better describe the ECB’s role. Jan Pieter Krahnen (Leibniz Institute for Financial Research SAFE) pointed out that ECB interventions could not achieve effective results in efficient capital markets.
Risk of fiscal dominance?
The last panel explored in greater depth the debate on so-called fiscal dominance, which focused on whether the ECB’s room for manoeuvre is at risk due to the fragile state budgets of some euro states. Friedrich Heinemann (ZEW) presented research results according to which the ECB’s bond purchases in the pandemic actually played a decisive role in containing the spreads – the yield differences – on government bonds, also in comparison to the EU’s fiscal aid. This suggests that the stability of bond markets has become heavily dependent on the ECB. Adalbert Winkler (Frankfurt School of Finance and Management) spoke about financial dominance, i.e. the possible narrowing of monetary policy room for manoeuvre due to systemic risks in the banking and financial markets. He did not yet see the danger of financial dominance in the eurozone, which he attributed to the fact that the ECB was following a very similar course to comparable central banks. In conclusion, Friedrich Heinemann summarised the results of the workshop as follows: Overall, there is great caution about an expansion of the ECB’s tasks, but also very different views on whether a problematic threshold has already been crossed.