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Christine Lagarde Has a Troubling Ambition

Ferdinando Giugliano

(Bloomberg Opinion) -- Christine Lagarde is eager to make her mark at the European Central Bank. At the moment, we know precious little about her views on the future course of monetary policy. But one thing is clear, the new president wants the ECB to take on a bigger role in the fight against climate change.

Lagarde thinks it’s possible to reconcile this ambition with the ECB’s mandate, which includes, at least indirectly, improving the quality of the environment. But she should be extremely mindful of another important principle: Market neutrality. That means the ECB should not offer an advantage to any particular company or sector.

The central bank’s chief has pushed successfully for the inclusion of climate change in the strategic review of monetary policy being carried out by the ECB this year. Fortunately, there are steps the central bank can take (or, indeed, has taken) to help the environment without compromising on its other objectives. As Lagarde herself has noted, the ECB takes into account sustainability as it invests its own pension fund.

On monetary policy, meanwhile, central bankers have to be mindful already of the impact that climate change will have on prices and other economic variables. It’s also right for the ECB’s supervisory arm to demand that banks are ready to withstand any climate-related shocks.

Things would get much more troubling were the ECB to adopt the radical idea of twisting its monetary policy to penalize “dirty” industries and reward “green” ones. For example, the central bank could skew its massive corporate bond-buying scheme toward apparently virtuous companies, thereby affecting the borrowing costs of businesses.

One could try to justify this approach by arguing that, as well as maintaining price stability, the ECB’s mandate also encompasses supporting the objectives of the European Union, which include “the improvement of the quality of the environment.” There’s also the view that polluting companies and industries will face greater risks in the future. The ECB would only be protecting its balance sheet by shunning them.

These arguments are extremely dangerous.

One pillar of the ECB’s asset-purchase scheme is “market neutrality” — namely, that the central bank shouldn’t favor any country or sector. The ECB buys corporate and sovereign bonds with the aim of lifting euro-zone inflation back to its target of close to but below 2%. When it chooses which securities to buy, it does so based on the relative size of the bloc’s various economies, and companies’ market capitalizations. The inclusion of special preferences would prompt accusations of overreach and undermine the independence of the central bank.

The ECB does already use criteria to judge whether some assets are just too risky to be purchased. The central bank isn’t buying Greek sovereign bonds as part of its quantitative easing program, for example, because no major credit-rating agency considers them investment grade. It sold its portfolio of bonds from the retail conglomerate Steinhoff International Holdings NV after serious accounting irregularities emerged there — even though it wasn’t required to do so.

However, it’s crucial that these eligibility principles are as market-neutral as possible. Arbitrary penalties would open the door to all sorts of whimsical assessments. Today’s ECB might choose to be harsh with oil and gas companies on the basis that one day they’ll be shunned by investors and regulators. Tomorrow’s policymakers might use that precedent to take a tougher stance against a high-debt country, if they feared it was headed for trouble.

It’s fine for the ECB to include “green bonds” in its purchases — as it does presently — but it should go no further. Quantitative easing has been controversial enough, even as the ECB implemented it with laudable impartiality. Fanning those flames would be a terrible move by Lagarde.

To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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