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ECB’s Lagarde calls for EU-issued green bonds

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The European Central Bank (ECB), the European Investment Bank (EIB), and the International Energy Agency (IEA) have called for a faster transition towards clean energy, with ECB President Christine Lagarde arguing for a “green Capital Markets Union” and EU-issued green bonds.

The leaders of the institutions, who met with member state officials and representatives of large European companies at the Paris headquarters of the IEA for a joint conference on Friday (29 September), did not hold back with their stark warnings.

“Everywhere we look we see natural disasters becoming more frequent, more severe,” Lagarde warned, saying that this summer’s forest fires in Canada had burned the equivalent of France’s total wooded areas.

Watering down green ambitions is counterproductive

Her justification for the ECB’s interest in the green transition was that environmental catastrophes could lead to price volatility and risks to financial stability. Earlier this month, for example, the ECB published the results of a climate stress test for banks, showing that a faster green transition would be better for bank stability.

This week, the ECB published the results of its survey among European companies in which it asked them about the biggest obstacles to energy investments.

“According to firms, stricter climate standards provide a stronger incentive to invest than the physical impact of climate change,” Lagarde said, arguing that “procrastinating” was counterproductive.

EIB President Werner Hoyer argued in the same direction: “Talk of watering down, pausing or even reversing the green transition only creates confusion and hampers investment,” he said.

Financing costs

According to Lagarde, another obstacle to green investments is high financing costs – though, perhaps predictably, did not raise that the ECB’s own policy of raising interest rates was partly to blame for the increased financing costs. Instead, she called for a stronger “market for green finance in Europe, which would reduce the risk premium and lower financing costs”.

She also pointed to a “major market inefficiency” as investors find it hard to invest in green projects while many companies find it hard to find the money for such investments.

“Nearly 40% of firms see [the] lack of investor willingness to finance green investment as a very significant obstacle at a time when huge pools of private financing [are] actually searching for ESG [environmental, social and governance] investment,” Lagarde said.

Green Capital Markets Union and Green EU bonds

She put that shortfall down to the fact that the EU still does not have a Capital Markets Union (CMU), but rather a lot of segregated and thus small capital markets. While the ECB president acknowledged that a CMU would not solve all the problems, she floated the idea of a “green Capital Markets Union”.

“As a way to expand the investor base to which European firms have access, I think it is worth considering what a green CMU market would imply and would require,” she said, calling for the consideration of a green bond “issued by Europeans”.

Asked by EURACTIV, an ECB spokesperson clarified that what Lagarde meant was an “EU-issued green bond”, comparable to the EU debts that were issued to finance the pandemic recovery fund “Next Generation EU”.

But instead of overcoming the pandemic, these EU green bonds would help the EU finance its green transition. The spokesperson pointed to an ECB paper from March 2023 that takes a closer look at the feasibility of an EU Climate and Energy Security Fund.

Arguments that link the CMU with the issuance of more EU-level debt have recently become more audible from the ECB. In late August, member of the ECB’s executive council Fabio Panetta called for the completion of the CMU, arguing that a European Safe Asset was an essential part of any such effort.

Will Draghi pick it up?

A European Safe Asset, which also refers to EU-level debt, is controversial as it would imply further fiscal integration of the EU, which some member state governments are opposed to.

However, as a large financing gap for the green transition still remains, with EU member states struggling to agree on how to overcome it and reliance on member state subsidies risking market fragmentation and inefficiencies, EU-level debt linked to common green investment needs might prove to be the way out of the dilemma.

The former ECB president and former Italian Prime Minister Mario Draghi was also present at the conference on Friday. Earlier this month, European Commission President Ursula von der Leyen asked him to compile a report by the summer of 2024, focusing on how the EU can ensure its future competitiveness.

[Editedby Nathalie Weatherald]

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