The law and politics of independent policy coordination: fiscal and sustainability considerations in the European Central Bank’s monetary policy

Abstract

Central banks around the world are increasingly concerned with environmental sustainability. Their efforts to shape as well as follow broader climate policies are examples of policy coordination. In this paper, we study how and why the European Central Bank (ECB), previously narrowly focused on its primary objective of price stability, has moved towards more extensive coordination with the political institutions of the EU regarding both fiscal and climate policies. Based on a qualitative empirical analysis of actual policies and views held by ECB top officials, we trace the evolution of the practice and ideological backing of ECB policy coordination. Such coordination can happen in two ways: (1) monetary to economic coordination, with the central bank seeking to influence economic policy making; and (2) economic to monetary coordination, with the central bank basing its monetary policy measures on decisions by economic policy makers. Our findings document an interesting paradox: although the ECB has increasingly engaged in policy coordination, it has done so on a unilateral basis by choosing on its own whether, when and with which economic policies it coordinates monetary policy. We refer to this practice as “independent policy coordination”. Analysed against recent case law by the Court of Justice of the European Union, the legal limits to independent policy coordination are only vaguely defined. As it is notoriously difficult to distinguish independent policy coordination from autonomous policy making by the ECB, we conclude that multilateral coordination – to the extent it remains compatible with the primacy of price stability – might be the next logical step.

Keywords: central banks, European Central Bank, monetary policy, policy coordination, independence, climate policies, fiscal policies

JEL Classification: E42, E52, E58, K23