The European Central Bank (ECB) has concluded its strategy review, but the political debate around monetary policy is likely to remain elevated, rather than settling swiftly. The updated inflation target reflects additional commitment to maintaining ultra-loose monetary policy among ECB decision- makers, but as discussed in the past, public scrutiny for independent central banking shows no sign of abating – and political positions remain more varied than the new ECB consensus.
On one of the most pressing issues beyond the inflation target – climate change – the diversity of political views appears to have manifested itself also within the governing council. Greater disclosure is by now a standard tool in that area. But “greening” asset purchases and collateral requirements will pose several questions, not just from a narrower perspective on the bank’s mandate. If monetary policy acts decisively to increase the cost of carbon-intensive investments, political calls for comparably bold steps to compensate the losers of the climate transition will likely get louder.
Behind this is the bigger question of the balance between monetary and fiscal policy going forward. The pandemic recovery fund was an important political signal. But while it was hailed as a “Hamilton moment”, the outlook for greater fiscal burden sharing – and more flexible debt and budget rules – remains uncertain beyond the German and French election cycles. Monetary policy may no longer be the only game in town, but the ECB remains the single most powerful player. The bank’s importance has grown precisely because of its independence, shielding it from political pressures that once seemed to put Eurozone integrity at risk; today, ironically, the result of this increased influence is greater politicization.
This is, in turn, the backdrop against which the ongoing legal battles involving European institutions and Germany’s highest court will continue to matter. The immediate risk of judicial blockage for existing unconventional policies might be limited. However, the infringement procedure the European Commission has recently launched against Germany will not manage to isolate European institutions – including the ECB – from the reach of national top courts. Legal or constitutional changes in Germany are unlikely given the de- facto lack of political majorities. Even if they were to occur, they could not undo the eternal democracy principle on which the court bases its “ultra vires” scrutiny for European institutions in Germany.
Short of a new, European constitution turning the EU into a de-facto federal state, top-down claims of clear supremacy for European law will remain somewhat hollow. This will limit the ability of the Luxembourg judges to gradually expand the power of supranational institutions such as the ECB. In turn, obstacles will remain for the large-scale “outsourcing” of politically divisive questions such as the climate transition to the central bank.
Ultimately, legal conflicts about court oversight for the ECB only demonstrate that political views on economic policy continue to differ. While there might be some rapprochement on the question of inflation management, the political conflicts around the greening of Europe’s economy will only start in earnest once politicians and policymakers move from the formulation of targets to the implementation of specific policies. The degree of the central bank’s involvement in this will determine the strength of political scrutiny – and opposition – it will attract.