The ECB is failing on its duty to support Europe’s economic and green transition goals

Ursula von der Leyen is facing an unfortunate and unnecessary challenge to her plans to increase investment as part of her second term as European Commission President, as the European Central Banks keeps neglecting its secondary mandate to ‘support the general economic policies in the Union’, writes Esther Lynch.

Esther Lynch is General Secretary of the European Trade Union Confederation

The political guidelines for von der Leyen’s second term set out to “turbo charge investment”, promising to “unlock the financing needed for the green, digital and social transition.”

“This mandate has to be the time of investment”, von der Leyen told the European Parliament on July 18.

This was a central plank of the mandate on which she won re-election with an increased majority, as well as of the Strategic Agenda for the EU as decided by heads of member states.

It seems though that the news from Strasbourg did not reach Frankfurt. Just hours later, the ECB announced it was holding interest rates at historically high levels.

Not only has the ECB long neglected its secondary mandate to ‘support the general economic policies in the Union’ – but it is now openly sabotaging them.

High interest rates are preventing desperately needed investment in the transition to a green and digital economy that would create new quality jobs while combating climate change and raising productivity.

The ECB took the decision to freeze interest rates despite the fact it said “most measures [of underlying inflation] were either stable or edged down.”

It shows that, despite finally bringing interest rates down from absolute record levels last month, Europe’s central bankers are still wedded to a strategy that does not match the problem at hand.

The Bank’s own data shows that profits were the main driver for inflation between 2021 and 2023.

European Commission data shows corporations increased their profits by almost 2% across the EU last year, while – when inflation is taken into account – the value of wages fell.

Clearly then, we were facing a profit-price spiral, not a wage-price spiral.

But, as a recent study for the European Parliament explained, “monetary policy does little to stop sellers’ inflation.”

Instead, it piles further financial pressure on already struggling working people, who depend on credit not only for their mortgages but for the car they need to get to work, for everyday items like a fridge, and increasingly even for household bills.

And as authors of the Parliament’s report, the influential economists Isabella Weber and Jens van ‘t Klooster point out “using monetary policy to deal with shocks harms exactly those [clean energy] investments most needed to protect the European economy against future shocks.”

This inflation crisis was first sparked by the high price of energy, particularly oil and gas.

On the very same day that the ECB announced its unprecedented rates hike last February, oil giant Shell announced it made profits of €38.5 billion last year – double the profit the company made in 2021, and the highest in its 115-year history.

It would be logical then to reduce our dependency on fossil fuels by increasing investment in clean energy.

The cost of borrowing capital, especially for the up-front heavy costs of renewables, is often the largest contributor to the overall cost of generating electricity. It is no surprise then that companies have been cancelling quality job-creating renewable energy projects, such as offshore windfarms which involve high upfront costs, due to record interest rates.

It also impedes public investment, which President von der Leyen said herself was key to unlocking private investment in the green transition.

The ECB’s current rate strategy thus is not only in open breach of the central bank’s role in support EU policy as decided by democratically elected leaders, but is also contradicting the governing council’s commitment to ‘include climate change considerations in monetary policy’.

Money is being allowed to pile up in the reserves of the world’s largest banks at a time when investment needs to be massively scaled up.

The result for ordinary people will be higher energy prices and fewer quality green jobs.

A much more effective way to tackle profit-driven inflation would be through increased and properly enforced windfall taxes on the excess profits of energy giants like Shell.

The ECB recently opened the House of the Euro in Brussels in order to bring its operations closer to the EU institutions. Currently, the two could not seem further apart.

For too long, the ECB has been punishing working people for a crisis caused by corporate profiteering.

The ECB should finally do its bit to get Europe investing again and cut interest rates as quickly as possible.