A wind of change is blowing at the European Central Bank (ECB) with President Christine Lagarde prematurely leaving her role in February 2027, and two of her fellow Executive Board Members, Isabel Schnabel departing in January and Philip Lane in May. Another member of the Executive Board, Frank Elderson, may also follow if any of the replacements chosen are also Dutch (1).
These changes are unlikely to undermine the green turn taken by the ECB in the last few years given consensus among central bankers that accounting for climate change and nature degradation is essential to their price and financial stability mandate (2). But they could influence how much further the next Executive Board will go on these issues.
From words to action
Under the tenure of Lagarde, Schnabel, and Lane, the ECB significantly developed its work on climate change and nature degradation.
This emerged from evidence showing that climate change and nature degradation pose an urgent and direct threat to price and financial stability (3). Extreme weather events such as heatwaves, droughts and floods have disastrous human and economic consequences. Gradual changes to global temperatures and the state of ecosystems also have a direct impact on the economy and push up global prices.
This led the ECB to implement concrete measures such as a preference for corporate bonds linked to lower carbon emissions when purchasing assets during the quantitative easing period (4).
In addition, the ECB also identified that the EU’s dependence on fossil fuels is a key driver of price instability, underlining that the energy transition is key to protecting EU citizens and the economy and should therefore be accelerated (5).
President Lagarde played an important role in enabling these changes and had the support of her fellow Executive Board Members and some national central banks’ governors (6).
Instability on the horizon
The incoming ECB Executive Board members will be appointed for eight years, during which time they will have to cope with the growing economic impact of climate change and nature loss due to the intensification of both phenomena.
Indeed, experts agree that global warming will, at least temporarily, drive temperatures beyond the 1.5°C of warming threshold (7), with serious consequences for Europe which is the fastest warming continent.
Critical ecosystems and the vital services they provide to our livelihoods and economies are also struggling (8). Concerns are growing over the economic impact of issues such as water scarcity, the decline of wild pollinators and loss of tree cover.
At the same time, the ECB’s task to keep inflation under control will continue to be undermined by Europe’s fossil fuel dependence, while raising interest rates will run the risk of slowing down the energy transition (9). The next ECB Executive Board will therefore face questions on how to support the energy transition and build up Europe’s resilience to energy shock whilst responding to fossil fuel shocks. Tools such as dual interest rates could offer a solution to such predicament (10).
The sustainable path forward
The extensive research the ECB has conducted over the past few years highlights that climate change, nature degradation and fossil fuel dependency will continue to have a significant impact on financial and price stability in the next few years.
To navigate these issues, the incoming President and Executive Board members will be able to rely on the legacy of Lagarde and the departing members of the Board.
But they will also need to strengthen the ECB’s approach on these issues. Anything less could expose the EU economy and citizens to significant harm, leaving the central bank unable to fulfill its mandate.
