European Commission President Ursula von der Leyen faces a challenge to her plans to boost investment as the European Central Bank (ECB) continue to neglect its secondary mandate to “support the general economic policies in the Union,” according to Euractiv.
Esther Lynch, General Secretary of the European Trade Union Confederation, reported difficulties. Meanwhile, von der Leyen’s second-term policy orientation has focused on “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.
This was the centrepiece of the mandate on which she won re-election with an increased majority, as well as of the Strategic Agenda for the EU. Just a few hours later, however, the ECB announced that 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 now it is openly sabotaging it. High interest rates are now preventing much-needed investment in the transition to a green and digital economy that will create new quality jobs while fighting climate change and increasing productivity.
The ECB decided to freeze interest rates despite saying that “most measures [of underlying inflation] were either stable or edged down.” This shows that despite cutting interest rates last month, European central bankers are still pursuing a strategy that does not fit the problem at hand.
The Bank’s own data shows that profits were the main driver of inflation between 2021 and 2023. Data from the European Commission shows that corporations increased their profits by almost 2 per cent across the EU last year, while the value of inflation-adjusted wages fell.
Inflationary crisis
As the authors of the parliamentary report, influential economists Isabella Weber and Jens van ‘t Klooster, note, “using monetary policy to deal with shocks harms exactly those [clean energy] investments most needed to protect the European economy against future shocks.”
This inflationary crisis was first triggered by high energy prices, particularly for oil and gas. On the same day that the ECB announced an unprecedented rate hike last February, oil giant Shell announced that it had made a €38.5bn profit last year.
The cost of debt capital, especially to cover the high upfront costs of renewable energy, is often the largest contributor to the total cost of electricity generation. It is therefore not surprising that companies are cancelling quality renewable energy job creation projects such as offshore windfarms, which involve high upfront costs, due to record interest rates.
It also discourages public investment, which President von der Leyen said was key to unlocking private investment in the green transition. Thus, the ECB’s current interest rate strategy not only openly violates the central bank’s role in supporting EU policy, but also contravenes the Governing Council’s commitment to “include climate change considerations in monetary policy.”
Economists argue that a far more effective way of tackling profit-driven inflation would be to increase and properly apply taxes on the excess profits of energy giants such as Shell.
For too long the ECB has punished workers for the crisis caused by corporate speculation. The ECB should finally do its part to get Europe to invest again and lower interest rates as soon as possible, experts say.
