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The Core of the ECB’s New Strategy

Now that the European Union has committed to achieving net-zero carbon emissions by 2050, the European Central Bank must start preparing for the structural shifts that lie ahead. In a world where governments want the prices of certain forms of energy to rise, the concept of price stability becomes more complicated.

LONDON – Following in the footsteps of the US Federal Reserve, the European Central Bank has launched an in-depth review of its monetary-policy strategy. But as central banks contemplate fundamental changes in their approach, they should be mindful of possible disruptions in their operational environment.

Nowhere is this truer than in strategies to address climate change, one of the most important issues of our time. Since European countries have pledged to make their economies carbon-neutral by 2050, the ECB now must reflect on how its monetary-policy framework could help with that transition.

Although the Treaty on the Functioning of the European Union makes maintaining price stability the primary objective of the European System of Central Banks, it also states that, “Without prejudice to [that] objective, … the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.” According to Article 3, the Union “shall work for … a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.”