Taxonomy statement submitted + Partial v • Table.Briefings

Dear reader,

The German government has reiterated its opposition to nuclear power with the German statement on EU taxonomy. Nuclear power is risky and expensive, it said. At the same time, Berlin is calling for less stringent criteria for the use of natural gas as a transition technology, for example in the blending quotas for hydrogen during the so-called “fuel switch”. The EU Commission intends to finalize the delegated act before the end of January. If there are no more changes to the current draft, Robert Habeck and Steffi Lemke have announced their intention to reject the proposal. Meanwhile, Austria has reiterated its intention to take legal action before the European Court of Justice if the EU Commission wants to classify investments in natural gas and nuclear energy as “sustainable”.

Vienna is not only taking a clear stance on EU taxonomy. Austria was the first EU country to pass a general COVID-19 vaccination requirement from the age of 18. In Germany, too, the discussion has recently gained momentum. Whether it actually comes to it, is, however, questionable. A decision is expected by the end of March. With the declining numbers, the peak of approval could have long been passed by then. Other European countries are also rather reluctant to introduce a general vaccination requirement. A partial vaccination requirement for certain occupational and age groups is much more popular, as Eugenie Ankowitsch explains.

Meanwhile, in Brussels on Sunday, some 50,000 people demonstrated against the COVID-19 measures, among them likely demonstrators from Germany, France, and Poland. They threw objects at police officers and buildings, such as that of the European External Action Service, where windows were smashed. The police used water cannons and eventually broke up the demonstration.

It is well known that Europe’s climate protection plans will also have an impact on other countries. After all, one of the goals of the European border adjustment scheme CBAM is to encourage other countries to make greater efforts to decarbonize. However, concerns are particularly high in China. Export costs for Chinese producers could rise as a result of the CBAM, which is why Beijing is likely to push harder for negotiations with Brussels, as Ning Wang reports.

I wish you a good start to the week.

Your
Lukas Knigge

Taxonomy: restrained resistance from Berlin

While other countries such as Austria, Luxembourg, and Spain reiterated their rejection of the planned amendment to the EU taxonomy and threatened legal action against the EU Commission’s plans, Germany’s opposition remains muted. As expected, the German government rejects the inclusion of nuclear energy in the taxonomy regulation. The final storage question is unresolved, and reactor accidents cannot be ruled out.

The inclusion of natural gas as a transitional technology is known to bother Berlin less, even though the German government is calling for improvements to the Commission’s proposal here. The interim targets for blending quotas of decarbonized gases (so-called fuel switch) are not realistic, the statement says. Due to the scarce availability of green hydrogen, the intermediate steps would have to be flexible during the market ramp-up.

The German government also calls for consistency in the “do no significant harm” principle. The emission limits and budgets would have to be consistent with those in other EU legislation on climate and environmental protection. Another criticism of the Commission’s proposal is the criteria under which old gas-fired power plants can be replaced by more modern ones in line with taxonomies. The commitment to a greenhouse gas reduction of 55 percent is unrealistic, according to the German government.

Federal government criticizes low level of influence

Even though the German government has not yet joined Austria and Luxembourg in their plans to appeal the delegated act to the European Court of Justice, it expresses concerns about the process in its statement. Due to the fundamental and political importance of the issues addressed in the Commission’s proposal, an ordinary legislative procedure and public consultation would be appropriate, it says. This would have “ensured adequate opportunities for member states and the European Parliament to exert influence”.

If the delegated act remains unchanged, Federal Minister for Economic Affairs and Climate Action Robert Habeck and Federal Minister for the Environment Steffi Lemke are in favor of rejecting the amendment to the Taxonomy Regulation.

Criticism also comes from the scientific community

A group of scientists had also criticized the Commission’s draft taxonomy in their statement. The experts called for the criteria for the inclusion of gas and nuclear energy to be tightened significantly. Otherwise, the EU climate targets would be undermined.

The panel had already been involved in drawing up the taxonomy over the past three years and was originally entrusted by the Commission with defining the criteria for sustainable investments. In their report, the experts had envisaged a limit value of 100 grams of CO2 equivalent per kWh of electricity generated for gas-fired power plants. This requirement is now also reflected in the statement. However, this can only be met with green or blue hydrogen with efficient capture and storage of the resulting carbon dioxide (carbon capture and storage, CCS) and, under no circumstances, with pure natural gas.

As a result of political pressure from some EU countries, however, the Commission deviated from the scientists’ recommendations. The current draft of the taxonomy also allows for higher emissions, provided a number of criteria are met. Accordingly, plants whose construction permit is issued before December 31st, 2030, and which replace a coal-fired power plant can emit up to 270 g/kWh.

Alternatively, plant operators can opt for a maximum emission of 550 kg CO2 per year – averaged over 20 years. Therefore, a gas-fired power plant can emit considerably more in the first year and thus run practically at full load, provided this is compensated for in subsequent years.

Nuclear energy violates “do no significant harm” principle

According to the scientists, the taxonomy in its current form is “not suitable” to help classify sustainable financial products. The inclusion of nuclear energy would also require “significant changes” to the text, according to the statement. Otherwise, it would violate the “do no significant harm” principle, which is essential for the granting of the sustainability label.

The Commission’s draft stipulates that nuclear power can be classified as sustainable provided that the member states submit a concrete plan for the disposal of radioactive waste. However, the solution to the final storage question is still considered unresolved. New plants must receive a construction permit before 2045, but according to the draft, the lifetime extension of existing power plants can also be classified as green – provided they are at the “highest achievable safety standard”. How this is defined is also a contentious issue.

After a thorough examination of all comments, the Commission intends to adopt the final version of the taxonomy this month and submit it to the Council and Parliament. However, since the taxonomy is a delegated act, they have no power to shape it but can only accept or reject the paper. The latter is considered unlikely. In the Council, this would require a qualified majority of 20 of the 27 EU member states. Only a few countries have spoken out against it so far. The EU Parliament can reject the proposal with an absolute majority. Timo Landenberger and Lukas Scheid

COVID: Most EU countries back partial vaccine mandate

By

Eugenie Ankowitsch

As of February, a general COVID-19 vaccination requirement will apply in Austria for all citizens over the age of 18. Parliament approved the Austrian government’s bill a few days ago with a broad majority. Pregnant women, convalescents up to 180 days after contracting the disease, and people with a medical certificate are exempt from the vaccination requirement.

After a six-week transitional phase, the police are to carry out random checks of vaccination status, for example, during traffic controls, from mid-March. The originally planned complete control through an automatic comparison of the population register with the vaccination register is only planned as a possibility and will only be implemented if the vaccination rate does not increase significantly. It will be expensive for vaccination refusers from mid-March. Fines of up to €3,600 will then be due. However, the bill excludes the possibility of imprisonment. Those affected can also “vaccinate their way out” of the penalty. The Austrian law is initially limited to two years.

The country faces major challenges in technical and administrative implementation. Among other things, thousands and thousands of cases are expected to be brought before the administrative courts. It is likely that the compulsory vaccination will be before the Austrian Constitutional Court sooner rather than later. Since the variant is more contagious even for those who have been vaccinated and they could also spread the virus, the sense of the measure is increasingly questionable, constitutional lawyer Heinz Mayer told the Deutsche Presse-Agentur. “If vaccination does not sufficiently protect the health system, compulsory vaccination is not permissible.” In any case, mandatory vaccination is likely to come too late for the Omicron wave, Mayer said.

Germany: essentially three positions

The debate in Germany is similar. The Bundestag passed a facility-based vaccination requirement for occupational groups in the medical and nursing fields as of March 15th. The German armed forces are also subject to mandatory vaccination, with the COVID-19 vaccine being included in the list of vaccinations that soldiers must tolerate.

Since taking office, the new federal government has been considering a general vaccination requirement. To the annoyance of the opposition, however, the traffic light coalition does not want to present its own bill but has called on the members of parliament to draw up corresponding motions. In the meantime, three positions have crystallized. In addition to the proponents of a general COVID-19 vaccination requirement from the age of 18, there is a group of deputies who advocate a graduated model. And then, of course, there are the opponents of mandatory vaccination around Vice President of the Bundestag Wolfgang Kubicki (FDP).

An “orientation debate” is planned for next Wednesday in the Bundestag. It is expected that the Bundestag will decide on the controversial issue in March – without factional constraints. Until then, many questions need to be clarified, such as: How should compulsory vaccination be controlled and what could the sanctions look like? A national vaccination register like the one in Austria does not exist in this country. Will random checks suffice? Should there be fines? How long should compulsory vaccination last?

Approval is likely to decline

Compulsory vaccination is no longer effective against the current Omicron wave; that much is certain. According to estimates by Karl Lauterbach, the Federal Minister of Health, the peak of the Omicron wave in Germany will be reached in mid-February. The more the infection figures fall then, the more difficult it will be to argue for a general vaccination requirement from the age of 18. By March, the peak of approval could be long past.

The approval ratings in the population are already declining. According to a recent survey by the opinion research institute YouGov, commissioned by the Deutsche Presse-Agentur, approval for a general vaccination requirement fell slightly from 63 to 60 percent compared to December. On Saturday, the actually already decided institution-related vaccine requirement came under pressure. It became known that several states, including Bavaria, are said to have pushed for a postponement of a vaccine mandate in the health care system.

“Omicron is changing the rules of the game,” Stephan Thomae, deputy chairman of the FDP parliamentary group in the Bundestag, told the Süddeutsche Zeitung newspaper. “Now is not the time to just do anything and adopt the toughest possible measures just to show a willingness to act.” SPD parliamentary group leader Rolf Mützenich also does not believe in a general vaccine requirement from the age of 18. “I assume that we will discuss a vaccine mandate that will apply from a certain age limit,” he said on ARD television a few days ago.

Partial vaccination most popular

Some EU countries are already following this path. The Czech Republic and Greece have introduced compulsory vaccination for healthcare workers as well as for people aged 60 and over. In Greece, all unvaccinated citizens in this age group will have to prove from mid-January that they have either been vaccinated or at least have a vaccination appointment. Those who do not get vaccinated will have to pay a monthly fine. There are also discussions about lowering the mandatory vaccination age to 50.

This is already the case in Italy. In addition to health, school, and police personnel, as well as the military and all rescue workers, everyone over the age of 50 must be vaccinated. Implementation will be monitored by the Italian tax authority, which will check registration data against regional vaccination registers. For the time being, the regulation is valid until mid-June.

Significantly more EU countries have decided to make COVID-19 vaccines compulsory for certain occupational groups. In addition to the countries already mentioned, Poland, Finland, Latvia, Lithuania, Belgium, and Hungary, among others, decided to make vaccines mandatory, primarily for healthcare workers but also for other occupational groups.

France excludes unvaccinated

In some ways, France is taking a special path in this regard. Since mid-September, healthcare workers – and not just medical staff – have had to prove that they have been fully vaccinated. Those who fail to do so can be suspended. Vaccination is also compulsory for police and firefighters.

In addition, as of mid-January, the government decided to replace the previously valid health passport with a vaccination passport. This means that only vaccinated and recovered persons will be allowed into theaters, stadiums, restaurants, cafés, long-distance trains, cinemas, and museums. All unvaccinated persons are thus excluded from public life, and a de facto vaccine mandate applies.

No compulsory vaccines, more personal responsibility

However, there are also EU countries in which compulsory vaccination is not up for debate, albeit for different reasons. While in vaccine-skeptical countries such as Romania and Bulgaria, there would simply be no majority in favor of a possible vaccination mandate, there are other countries with particularly high vaccination rates, such as Portugal and Spain. There, there are only a few left who could be vaccinated.

In Scandinavian countries, governments rely on their citizens’ common sense, despite rather moderate vaccination rates. Only Finland introduced compulsory vaccination for healthcare workers and nursing staff at the end of December, with a time limit until the end of 2022. The Netherlands is relying more on restrictions in public life and was in a strict lockdown until mid-January. As of a few days ago, there has been some relaxation. However, bars, restaurants, cafes, museums, and theaters will remain closed at least until January 25th.

China’s concerns about Europe’s CO2 border adjustment

The “Fit-for-55” package of measures is huge, and many measures are causing heated debates. Nevertheless, the majority of the package is still to be adopted in 2022. Some issues have a major impact on the EU’s trading partners – and thus on China. The biggest issue in this respect is the planned Carbon Border Adjustment Mechanism (CBAM). The government in Beijing is looking at this project with great concern – also because the Chinese government does not quite know what is in store for its companies. The fear is that the EU’s new rules will increase the cost of importing Chinese goods.

CBAM is to prevent goods from countries with less restrictive emissions regulations and lower CO2 prices from competing with goods produced in Europe, which are more expensive due to a higher CO2 price. This is because more climate-damaging products could thus undercut the prices of their EU competitors. CBAM is thus closely linked to the European Emissions Trading Scheme (EU-ETS), which sets the price of greenhouse gas emissions in Europe. In other words, from a European perspective, if China does not adequately price the CO2 emissions of its companies, then the EU will mark up imports.

In this way, the EU wants to ensure that it can achieve its climate targets without energy-intensive industries moving abroad. This process is known as “carbon leakage.” Companies simply relocate high-emission processes to other parts of the world in order to save money – without helping the climate. However, critics also fear that CBAM could lead to trade conflicts with other countries like China.

Experts: China particularly affected by CBAM

The amount of the future CO2 border adjustment is to be based on the CO2 price of the ETS, which European companies have to pay on a weekly average for the acquisition of EU emission allowances. Companies from third countries are to be able to claim CO2 prices that they have to pay in their home country.

In China’s ETS, the CO2 price is currently significantly lower. There, the authorization to emit one ton of C02 currently costs the equivalent of around eight euros, while this price in the EU is 80 euros per ton. Chinese export companies will therefore probably have to pay a high CO2 tax in the future. And so it is no wonder that Beijing is showing little enthusiasm for CBAM.

According to a study by Chatham House, China is one of five countries that will be most affected by CBAM. This is because China exports more goods and services to the EU than any other country in the world. In 2020, goods worth €586 billion were traded between China and the EU. That corresponded to 16 percent of the EU’s foreign trade, according to data from the German Federal Statistical Office. By comparison, the US was at 15 percent.

China is threatened with severe impacts, particularly in sectors with above-average emissions, especially in heavy industry. Take iron and steel, for example: China is the second-largest exporter to the EU in this sector, (according to data from 2015-2019). But also the energy-intensive aluminum industry would be strongly affected by a CO2 border adjustment. As a result, experts expect great resistance from the People’s Republic, especially in these sectors.

China: criticism of Europe’s CBAM plans

But it is still difficult to determine the extent of any impacts, given the feud within the EU over the CBAM draft. “The Chinese side is not only concerned about what the CBAM system looks like in its early stages – but also how it might evolve,” says Lina Li, Senior Manager Carbon Markets and Pricing at environmental and climate consultancy Adelphi. The debate on expanding the scope of CBAM and including indirect emissions is causing particular concern among Chinese stakeholders, Li said. In its CBAM proposal, the EU Commission has named iron and steel, concrete, fertilizer, aluminum, and power generation as industries to be included. But EU Parliament recently proposed to also include organic chemicals, hydrogen, and polymers.

The financial impact of CBAM on China could thus increase significantly in the future, says Lina Li. According to a study by the Development Research Center of the State Council in Beijing, the EU’s CBAM plans could reduce China’s economic growth by up to 0.64 percentage points. That could cost millions of jobs in manufacturing. CBAM could increase the cost of exports to the EU by three percent, thus reducing exports of manufactured goods to the EU by 13 percent. In addition, if the CO2 price difference between the ETS of the country of origin, say China, and that of the EU ETS is significant, “then the costs for affected companies under the CBAM will grow.” And that is currently the case.

Few countries worry as much as China, according to Li. “We are having discussions with experts from Africa who fear CBAM could hit them hard. But the volumes from Africa are negligible,” Li tells China.Table. The US is also less concerned than China because its production has higher efficiency and lower emissions, she says.

Emissions trading: China and EU systems currently incompatible

And China’s ETS will not become compatible with the EU ETS, at least in the short term. Corinne Abele, Head of Foreign Trade at GTAI in Shanghai, estimates that the price of CO2 emissions in China will remain well below the price level of the European ETS. Linking the Chinese ETS with other international systems is therefore hardly possible for the time being.

The Chinese ETS also covers significantly fewer industries to date. So far, only a good 2,200 companies from the power sector are involved. However, two industrial sectors are expected to be added this year. According to Lina Li, the aluminum industry could be included as early as this year. Up to seven other sectors are to be added over the next five years:

Building materials,
Chemistry,
Iron,
Steel,
Non-ferrous metals,
Paper and
Aviation.

This puts China in a good position to discuss bilateral agreements with the EU to mitigate impacts from CBAM, Li believes.

In a telephone conversation with former German Chancellor Angela Merkel and French President Emmanuel Macron in April 2020, China’s head of state and party Xi Jinping stressed that climate change should not be misused as an instrument for geopolitical negotiations. Representatives of affected industries remember this all too well. So much so, that immediately after the presentation of the EU climate package in summer 2021, the European aluminum industry speculated that China would find ways to undermine the CBAM at any cost (China.Table reported). The details of CBAM will still require much negotiation within the EU – and presumably with China. Ning Wang

G7 Presidency: uniting climate protection and trade

Germany will also focus on trade policy during its G7 presidency, according to Federal Minister for Economic Affairs and Climate Action Robert Habeck. “We will be very strict in making sure that ecological rules do not lead to us accidentally or intentionally entering into a trade war,” the Green politician said Friday after the cabinet meeting of the traffic light government. “Trade policy will experience a renaissance, under new conditions,” Habeck said.

The background to this is the German government’s announcement that it intends to drive forward sustainability issues in the club of the most important Western industrialized nations. Presenting the program, Chancellor Olaf Scholz said Germany wants to expand the G7 into a “climate club” that agrees on uniform standards for emissions and CO2 pricing in order to accelerate the implementation of the Paris climate agreement.

The goal is also to discuss how fair trade can be conducted between countries that have different climate protection requirements for their economies. In the EU, a CO2 border tax (CBAM) on the import of products is being considered.

Lessons from the COVID pandemic

Finance Minister Christian Lindner (FDP) announced that another focus of the German presidency would be “stability of currencies, economic areas, and markets”. In the COVID pandemic, public debt had increased all over the world. According to Lindner, it is now necessary to get out of crisis mode and into prevention mode.

Global health policy, shaped by the COVID pandemic, is also to play a greater role in the future. Health issues require international solutions, emphasized Health Minister Karl Lauterbach (SPD). However, this is not just about global vaccine provision and pandemic control. According to Lauterbach, the G7 should also find answers to other health issues, such as the worldwide decline in patients’ chances of treatment due to antibiotic resistance and health risks triggered by climate change. A meeting of health ministers is planned for May 19th and 20th in Berlin. rtr/dpa/luk

Informal meetings of environment and energy ministers: more supply solidarity

At the informal meeting of the 27 energy ministers in Amiens, France, high energy prices were one of the most important topics. The main focus was on how consumers and companies can receive better support in the event of high prices and how strong price fluctuations can be prevented in the future.

Member states should be able to reclaim parts of the resulting profits from energy suppliers in the event of price increases, in order to return them to consumers. In addition, production factors are to be optimized through more efficient short-term transactions on the energy market, according to the results of the informal meetings of environment and energy ministers.

When it comes to security of supply, the energy ministers want to strengthen “mutual solidarity”. This applies both to investments in the expansion of renewables and to gas supply. To this end, they are striving for “optimized use of European storage capacities“.

Habeck wants to ensure full gas storage facilities

Federal Economics and Climate Minister Robert Habeck had previously announced a political reaction. He explained in “Der Spiegel” that winter had shown that with reduced gas stocks, one was vulnerable to “speculation, price fluctuations, and geopolitical tension“. Therefore, it was necessary for gas storage facilities to be better filled in the coming winter. This is a political task, Habeck said.

Luxembourg’s Energy Minister Claude Turmes said in an interview with rtl.lu on Saturday that he blames the old German government for the low levels of German gas storage facilities. He said that it had deliberately not filled the gas storage facilities completely before winter, which had made it easier for Russia to exert political pressure over missing gas deliveries. In a conversation with Habeck, the latter had told him that the new federal government wanted to create the legal basis for replenishing gas stocks before winter in order to curb speculation and price fluctuations. luk

Berlusconi renounces presidency and is hospitalized

Former Italian Prime Minister Silvio Berlusconi officially withdrew from the race for Italian president on Saturday evening. At a virtual top meeting of the center-right parties, the 85-year-old let it be known that he was no longer available. On Sunday, the Ansa news agency reported that Berlusconi had been taken to a clinic for a routine medical examination.

His Forza Italia party, as well as the right-wing Lega and Fratelli d’Italia, now want to search for and present another candidate to succeed the head of state Sergio Mattarella. The election begins on Monday afternoon and is expected to last for days. Traditionally, there are no official candidates in Italy.

“I have decided to take a different path on the road of national responsibility and ask to refrain from putting forward my name as President of the Republic,” Berlusconi had still communicated on Saturday. He had recently been trying hard to win over enough voters for the ballot. Now he claimed to renounce a candidacy, although he would have secured the necessary votes – that is, at least 505 of the total of 1009 electoral people. That may be called into question. In recent days, experts and aides suggested that Berlusconi had been short by as many as 100 electoral people.

While the party leaders of Lega (Matteo Salvini) and Fratelli d’Italia (Giorgia Meloni) recently still officially backed a Berlusconi candidacy, the center-left parties firmly rejected a possible election of the 85-year-old. Giuseppe Conte of the Five Star Movement called for a “serious exchange” between the parties in the search for a serious president. Lega leader Salvini, meanwhile, made it clear that the center-right now has “the honor and responsibility to make its proposals” first.

Most recently, Prime Minister Mario Draghi was considered a co-favorite for the election. Berlusconi and other party leaders, however, are pushing for Draghi to remain in his current position in order to continue his successful work until the end of the legislative term in 2023. A move by the former ECB chief to the presidency would risk new parliamentary elections and a temporary halt to reforms. dpa

The ECB’s existential dilemma

by Jürgen Stark, Thomas Mayer and Gunther Schnabl

Our fiat money regime requires an institutional anchor that credibly and decisively ensures a stable price level and long-term confidence in the euro. Credibility is a central bank’s greatest asset, because it underwrites confidence in the purchasing power of money. And credibility, in turn, rests on the central bank’s independence from political influence, and on its commitment to monetary stability.

Viewed in this light, the European Central Bank has been in dangerous waters for several years. It has jeopardized its political independence and compromised its primary objective. Actions that are clearly intended to anticipate political pressure leave no doubt that it has exceeded its mandate.

For example, during the euro sovereign debt crisis that began in late 2009, the ECB actively participated in the restructuring of Europe’s Economic and Monetary Union (EMU). With its Security Markets Program, it abandoned important monetary-policy principles, including the ban on monetary financing of government debt and the requirement of a single monetary policy for the eurozone. The ECB also took a leading role in rescuing EU member states hit hard by the crisis, even though this was the respective national governments’ responsibility. The boundaries between monetary and fiscal policy thus were deliberately blurred, leading to close coordination between the two.
With then-ECB President Mario Draghi’s unilateral commitment to “do whatever it takes to preserve the euro,” the ECB set itself up as lender of last resort for the eurozone. The attempt to attach conditions to this role in the ECB’s “outright monetary transactions” program failed. Indeed, the program was never activated and has since been replaced by the Asset Purchase Program and the Pandemic Emergency Purchase Program.

ECB causes incentives for higher debts

By purchasing government debt, the ECB has fundamentally distorted bond markets, arguing that it is trying to prevent market fragmentation. But now that risk premiums have leveled out and market access with favorable conditions has been secured for all eurozone member states, governments have an incentive to increase their already exorbitantly high public debt levels. Highly indebted states such as Italy and France presumably will rely on this safeguard indefinitely.

Worse, the ECB’s operations exceeding the limits of EU treaties and statutes have intensified during Christine Lagarde’s presidency. Invoking “secondary objectives,” the ECB has committed itself to promoting a “green transformation.” The ECB wants to help improve financing conditions for “green” projects and ensure that the collateral and bonds it accepts are environmentally “sustainable.”

Until 2021, the ECB’s growing politicization did not trigger any major conflict over its core mandate of ensuring price stability. But with higher inflation becoming more apparent, the situation has changed. To be sure, leading ECB representatives still dismiss today’s inflation as temporary. No one disputes the fact that some factors influencing inflation are temporary. But the problem is that other factors may persist longer than projected.

Hence, it is becoming increasingly clear that inflation will gain momentum without monetary-policy countermeasures, auguring the end of the era of price stability. That puts the ECB in a difficult position because it will simultaneously be confronted with several acute problems of its own making.

First, the ECB’s monetary financing of new sovereign debt has created a money overhang, and now robust demand is running up against the supply constraints caused by the pandemic. The result is higher prices, which are likely to become endemic through subsequent wage increases. The ECB must take seriously the risk of a wage-price spiral, even if there are few hints of this happening at present.

Monetary policy turnaround for greater price stability

Second, it is becoming increasingly clear that the “green transformation” will not be possible without a surge of inflation. Ideally, fossil-fuel energy sources should become more expensive to the same extent that renewable energy becomes cheaper through the expansion of the relevant capacities and infrastructure. The change in relative prices should alter the structure of demand while the overall price level remains stable. In fact, production capacities for brown energy have fallen faster than new capacities for green energy could be created. As a result, fossil-fuel energy prices have risen without renewables prices falling accordingly to compensate.

Owing to the ECB’s open displays of activism and demonstrated willingness to coordinate monetary, economic, financial, and climate policies, it now faces a serious predicament. Because its core mandate is to ensure price stability, it needs to be ready for a monetary-policy turnaround.

That would mean consistently taking steps to dampen demand by reducing the money overhang (selling off the government bonds that have piled up on its balance sheet) and raising interest rates more quickly (contrary to its previous communications). Such tightening would create serious problems for highly indebted eurozone members, not only in financing new debt but also in refinancing maturing debt. Declining tax revenues and rising unemployment as the economy cools would exacerbate the problem further. The future of some countries’ EMU membership would quickly be called into question again.

But if the ECB tolerates rising inflation, it will lose credibility, owing to growing doubts about its willingness or ability to keep the value of money stable. Rising inflation expectations would lead to increasing inflation dynamics and exchange-rate depreciation, which would further increase inflationary pressures.

Like Shakespeare’s Hamlet, the ECB is faced with a quandary. Should it consistently stick to its mandate and risk another acid test for the EMU, or should it accept higher inflation, lose credibility, and seal the fate of the euro as a soft currency?

In the play, Hamlet never can decide. That is why it is a tragedy that ends in disaster.

Copyright: Project Syndicate, 2022.

EUROPE.TABLE EDITORS

Till
Hoppe

Charlotte
Wirth

Falk
Steiner

Timo
Landenberger

Corinna
Visser

Lukas
Knigge

Eric
Bonse

Sarah
Schaefer

Manuel
Berkel

Lisa-Martina
Klein

Markus
Grabitz

Stephan
Israel

Claire
Stam

Dear reader,

The German government has reiterated its opposition to nuclear power with the German statement on EU taxonomy. Nuclear power is risky and expensive, it said. At the same time, Berlin is calling for less stringent criteria for the use of natural gas as a transition technology, for example in the blending quotas for hydrogen during the so-called “fuel switch”. The EU Commission intends to finalize the delegated act before the end of January. If there are no more changes to the current draft, Robert Habeck and Steffi Lemke have announced their intention to reject the proposal. Meanwhile, Austria has reiterated its intention to take legal action before the European Court of Justice if the EU Commission wants to classify investments in natural gas and nuclear energy as “sustainable”.

Vienna is not only taking a clear stance on EU taxonomy. Austria was the first EU country to pass a general COVID-19 vaccination requirement from the age of 18. In Germany, too, the discussion has recently gained momentum. Whether it actually comes to it, is, however, questionable. A decision is expected by the end of March. With the declining numbers, the peak of approval could have long been passed by then. Other European countries are also rather reluctant to introduce a general vaccination requirement. A partial vaccination requirement for certain occupational and age groups is much more popular, as Eugenie Ankowitsch explains.

Meanwhile, in Brussels on Sunday, some 50,000 people demonstrated against the COVID-19 measures, among them likely demonstrators from Germany, France, and Poland. They threw objects at police officers and buildings, such as that of the European External Action Service, where windows were smashed. The police used water cannons and eventually broke up the demonstration.

It is well known that Europe’s climate protection plans will also have an impact on other countries. After all, one of the goals of the European border adjustment scheme CBAM is to encourage other countries to make greater efforts to decarbonize. However, concerns are particularly high in China. Export costs for Chinese producers could rise as a result of the CBAM, which is why Beijing is likely to push harder for negotiations with Brussels, as Ning Wang reports.

I wish you a good start to the week.

Your
Lukas Knigge

Taxonomy: restrained resistance from Berlin

While other countries such as Austria, Luxembourg, and Spain reiterated their rejection of the planned amendment to the EU taxonomy and threatened legal action against the EU Commission’s plans, Germany’s opposition remains muted. As expected, the German government rejects the inclusion of nuclear energy in the taxonomy regulation. The final storage question is unresolved, and reactor accidents cannot be ruled out.

The inclusion of natural gas as a transitional technology is known to bother Berlin less, even though the German government is calling for improvements to the Commission’s proposal here. The interim targets for blending quotas of decarbonized gases (so-called fuel switch) are not realistic, the statement says. Due to the scarce availability of green hydrogen, the intermediate steps would have to be flexible during the market ramp-up.

The German government also calls for consistency in the “do no significant harm” principle. The emission limits and budgets would have to be consistent with those in other EU legislation on climate and environmental protection. Another criticism of the Commission’s proposal is the criteria under which old gas-fired power plants can be replaced by more modern ones in line with taxonomies. The commitment to a greenhouse gas reduction of 55 percent is unrealistic, according to the German government.

Federal government criticizes low level of influence

Even though the German government has not yet joined Austria and Luxembourg in their plans to appeal the delegated act to the European Court of Justice, it expresses concerns about the process in its statement. Due to the fundamental and political importance of the issues addressed in the Commission’s proposal, an ordinary legislative procedure and public consultation would be appropriate, it says. This would have “ensured adequate opportunities for member states and the European Parliament to exert influence”.

If the delegated act remains unchanged, Federal Minister for Economic Affairs and Climate Action Robert Habeck and Federal Minister for the Environment Steffi Lemke are in favor of rejecting the amendment to the Taxonomy Regulation.

Criticism also comes from the scientific community

A group of scientists had also criticized the Commission’s draft taxonomy in their statement. The experts called for the criteria for the inclusion of gas and nuclear energy to be tightened significantly. Otherwise, the EU climate targets would be undermined.

The panel had already been involved in drawing up the taxonomy over the past three years and was originally entrusted by the Commission with defining the criteria for sustainable investments. In their report, the experts had envisaged a limit value of 100 grams of CO2 equivalent per kWh of electricity generated for gas-fired power plants. This requirement is now also reflected in the statement. However, this can only be met with green or blue hydrogen with efficient capture and storage of the resulting carbon dioxide (carbon capture and storage, CCS) and, under no circumstances, with pure natural gas.

As a result of political pressure from some EU countries, however, the Commission deviated from the scientists’ recommendations. The current draft of the taxonomy also allows for higher emissions, provided a number of criteria are met. Accordingly, plants whose construction permit is issued before December 31st, 2030, and which replace a coal-fired power plant can emit up to 270 g/kWh.

Alternatively, plant operators can opt for a maximum emission of 550 kg CO2 per year – averaged over 20 years. Therefore, a gas-fired power plant can emit considerably more in the first year and thus run practically at full load, provided this is compensated for in subsequent years.

Nuclear energy violates “do no significant harm” principle

According to the scientists, the taxonomy in its current form is “not suitable” to help classify sustainable financial products. The inclusion of nuclear energy would also require “significant changes” to the text, according to the statement. Otherwise, it would violate the “do no significant harm” principle, which is essential for the granting of the sustainability label.

The Commission’s draft stipulates that nuclear power can be classified as sustainable provided that the member states submit a concrete plan for the disposal of radioactive waste. However, the solution to the final storage question is still considered unresolved. New plants must receive a construction permit before 2045, but according to the draft, the lifetime extension of existing power plants can also be classified as green – provided they are at the “highest achievable safety standard”. How this is defined is also a contentious issue.

After a thorough examination of all comments, the Commission intends to adopt the final version of the taxonomy this month and submit it to the Council and Parliament. However, since the taxonomy is a delegated act, they have no power to shape it but can only accept or reject the paper. The latter is considered unlikely. In the Council, this would require a qualified majority of 20 of the 27 EU member states. Only a few countries have spoken out against it so far. The EU Parliament can reject the proposal with an absolute majority. Timo Landenberger and Lukas Scheid

COVID: Most EU countries back partial vaccine mandate

By

Eugenie Ankowitsch

As of February, a general COVID-19 vaccination requirement will apply in Austria for all citizens over the age of 18. Parliament approved the Austrian government’s bill a few days ago with a broad majority. Pregnant women, convalescents up to 180 days after contracting the disease, and people with a medical certificate are exempt from the vaccination requirement.

After a six-week transitional phase, the police are to carry out random checks of vaccination status, for example, during traffic controls, from mid-March. The originally planned complete control through an automatic comparison of the population register with the vaccination register is only planned as a possibility and will only be implemented if the vaccination rate does not increase significantly. It will be expensive for vaccination refusers from mid-March. Fines of up to €3,600 will then be due. However, the bill excludes the possibility of imprisonment. Those affected can also “vaccinate their way out” of the penalty. The Austrian law is initially limited to two years.

The country faces major challenges in technical and administrative implementation. Among other things, thousands and thousands of cases are expected to be brought before the administrative courts. It is likely that the compulsory vaccination will be before the Austrian Constitutional Court sooner rather than later. Since the variant is more contagious even for those who have been vaccinated and they could also spread the virus, the sense of the measure is increasingly questionable, constitutional lawyer Heinz Mayer told the Deutsche Presse-Agentur. “If vaccination does not sufficiently protect the health system, compulsory vaccination is not permissible.” In any case, mandatory vaccination is likely to come too late for the Omicron wave, Mayer said.

Germany: essentially three positions

The debate in Germany is similar. The Bundestag passed a facility-based vaccination requirement for occupational groups in the medical and nursing fields as of March 15th. The German armed forces are also subject to mandatory vaccination, with the COVID-19 vaccine being included in the list of vaccinations that soldiers must tolerate.

Since taking office, the new federal government has been considering a general vaccination requirement. To the annoyance of the opposition, however, the traffic light coalition does not want to present its own bill but has called on the members of parliament to draw up corresponding motions. In the meantime, three positions have crystallized. In addition to the proponents of a general COVID-19 vaccination requirement from the age of 18, there is a group of deputies who advocate a graduated model. And then, of course, there are the opponents of mandatory vaccination around Vice President of the Bundestag Wolfgang Kubicki (FDP).

An “orientation debate” is planned for next Wednesday in the Bundestag. It is expected that the Bundestag will decide on the controversial issue in March – without factional constraints. Until then, many questions need to be clarified, such as: How should compulsory vaccination be controlled and what could the sanctions look like? A national vaccination register like the one in Austria does not exist in this country. Will random checks suffice? Should there be fines? How long should compulsory vaccination last?

Approval is likely to decline

Compulsory vaccination is no longer effective against the current Omicron wave; that much is certain. According to estimates by Karl Lauterbach, the Federal Minister of Health, the peak of the Omicron wave in Germany will be reached in mid-February. The more the infection figures fall then, the more difficult it will be to argue for a general vaccination requirement from the age of 18. By March, the peak of approval could be long past.

The approval ratings in the population are already declining. According to a recent survey by the opinion research institute YouGov, commissioned by the Deutsche Presse-Agentur, approval for a general vaccination requirement fell slightly from 63 to 60 percent compared to December. On Saturday, the actually already decided institution-related vaccine requirement came under pressure. It became known that several states, including Bavaria, are said to have pushed for a postponement of a vaccine mandate in the health care system.

“Omicron is changing the rules of the game,” Stephan Thomae, deputy chairman of the FDP parliamentary group in the Bundestag, told the Süddeutsche Zeitung newspaper. “Now is not the time to just do anything and adopt the toughest possible measures just to show a willingness to act.” SPD parliamentary group leader Rolf Mützenich also does not believe in a general vaccine requirement from the age of 18. “I assume that we will discuss a vaccine mandate that will apply from a certain age limit,” he said on ARD television a few days ago.

Partial vaccination most popular

Some EU countries are already following this path. The Czech Republic and Greece have introduced compulsory vaccination for healthcare workers as well as for people aged 60 and over. In Greece, all unvaccinated citizens in this age group will have to prove from mid-January that they have either been vaccinated or at least have a vaccination appointment. Those who do not get vaccinated will have to pay a monthly fine. There are also discussions about lowering the mandatory vaccination age to 50.

This is already the case in Italy. In addition to health, school, and police personnel, as well as the military and all rescue workers, everyone over the age of 50 must be vaccinated. Implementation will be monitored by the Italian tax authority, which will check registration data against regional vaccination registers. For the time being, the regulation is valid until mid-June.

Significantly more EU countries have decided to make COVID-19 vaccines compulsory for certain occupational groups. In addition to the countries already mentioned, Poland, Finland, Latvia, Lithuania, Belgium, and Hungary, among others, decided to make vaccines mandatory, primarily for healthcare workers but also for other occupational groups.

France excludes unvaccinated

In some ways, France is taking a special path in this regard. Since mid-September, healthcare workers – and not just medical staff – have had to prove that they have been fully vaccinated. Those who fail to do so can be suspended. Vaccination is also compulsory for police and firefighters.

In addition, as of mid-January, the government decided to replace the previously valid health passport with a vaccination passport. This means that only vaccinated and recovered persons will be allowed into theaters, stadiums, restaurants, cafés, long-distance trains, cinemas, and museums. All unvaccinated persons are thus excluded from public life, and a de facto vaccine mandate applies.

No compulsory vaccines, more personal responsibility

However, there are also EU countries in which compulsory vaccination is not up for debate, albeit for different reasons. While in vaccine-skeptical countries such as Romania and Bulgaria, there would simply be no majority in favor of a possible vaccination mandate, there are other countries with particularly high vaccination rates, such as Portugal and Spain. There, there are only a few left who could be vaccinated.

In Scandinavian countries, governments rely on their citizens’ common sense, despite rather moderate vaccination rates. Only Finland introduced compulsory vaccination for healthcare workers and nursing staff at the end of December, with a time limit until the end of 2022. The Netherlands is relying more on restrictions in public life and was in a strict lockdown until mid-January. As of a few days ago, there has been some relaxation. However, bars, restaurants, cafes, museums, and theaters will remain closed at least until January 25th.

China’s concerns about Europe’s CO2 border adjustment

The “Fit-for-55” package of measures is huge, and many measures are causing heated debates. Nevertheless, the majority of the package is still to be adopted in 2022. Some issues have a major impact on the EU’s trading partners – and thus on China. The biggest issue in this respect is the planned Carbon Border Adjustment Mechanism (CBAM). The government in Beijing is looking at this project with great concern – also because the Chinese government does not quite know what is in store for its companies. The fear is that the EU’s new rules will increase the cost of importing Chinese goods.

CBAM is to prevent goods from countries with less restrictive emissions regulations and lower CO2 prices from competing with goods produced in Europe, which are more expensive due to a higher CO2 price. This is because more climate-damaging products could thus undercut the prices of their EU competitors. CBAM is thus closely linked to the European Emissions Trading Scheme (EU-ETS), which sets the price of greenhouse gas emissions in Europe. In other words, from a European perspective, if China does not adequately price the CO2 emissions of its companies, then the EU will mark up imports.

In this way, the EU wants to ensure that it can achieve its climate targets without energy-intensive industries moving abroad. This process is known as “carbon leakage.” Companies simply relocate high-emission processes to other parts of the world in order to save money – without helping the climate. However, critics also fear that CBAM could lead to trade conflicts with other countries like China.

Experts: China particularly affected by CBAM

The amount of the future CO2 border adjustment is to be based on the CO2 price of the ETS, which European companies have to pay on a weekly average for the acquisition of EU emission allowances. Companies from third countries are to be able to claim CO2 prices that they have to pay in their home country.

In China’s ETS, the CO2 price is currently significantly lower. There, the authorization to emit one ton of C02 currently costs the equivalent of around eight euros, while this price in the EU is 80 euros per ton. Chinese export companies will therefore probably have to pay a high CO2 tax in the future. And so it is no wonder that Beijing is showing little enthusiasm for CBAM.

According to a study by Chatham House, China is one of five countries that will be most affected by CBAM. This is because China exports more goods and services to the EU than any other country in the world. In 2020, goods worth €586 billion were traded between China and the EU. That corresponded to 16 percent of the EU’s foreign trade, according to data from the German Federal Statistical Office. By comparison, the US was at 15 percent.

China is threatened with severe impacts, particularly in sectors with above-average emissions, especially in heavy industry. Take iron and steel, for example: China is the second-largest exporter to the EU in this sector, (according to data from 2015-2019). But also the energy-intensive aluminum industry would be strongly affected by a CO2 border adjustment. As a result, experts expect great resistance from the People’s Republic, especially in these sectors.

China: criticism of Europe’s CBAM plans

But it is still difficult to determine the extent of any impacts, given the feud within the EU over the CBAM draft. “The Chinese side is not only concerned about what the CBAM system looks like in its early stages – but also how it might evolve,” says Lina Li, Senior Manager Carbon Markets and Pricing at environmental and climate consultancy Adelphi. The debate on expanding the scope of CBAM and including indirect emissions is causing particular concern among Chinese stakeholders, Li said. In its CBAM proposal, the EU Commission has named iron and steel, concrete, fertilizer, aluminum, and power generation as industries to be included. But EU Parliament recently proposed to also include organic chemicals, hydrogen, and polymers.

The financial impact of CBAM on China could thus increase significantly in the future, says Lina Li. According to a study by the Development Research Center of the State Council in Beijing, the EU’s CBAM plans could reduce China’s economic growth by up to 0.64 percentage points. That could cost millions of jobs in manufacturing. CBAM could increase the cost of exports to the EU by three percent, thus reducing exports of manufactured goods to the EU by 13 percent. In addition, if the CO2 price difference between the ETS of the country of origin, say China, and that of the EU ETS is significant, “then the costs for affected companies under the CBAM will grow.” And that is currently the case.

Few countries worry as much as China, according to Li. “We are having discussions with experts from Africa who fear CBAM could hit them hard. But the volumes from Africa are negligible,” Li tells China.Table. The US is also less concerned than China because its production has higher efficiency and lower emissions, she says.

Emissions trading: China and EU systems currently incompatible

And China’s ETS will not become compatible with the EU ETS, at least in the short term. Corinne Abele, Head of Foreign Trade at GTAI in Shanghai, estimates that the price of CO2 emissions in China will remain well below the price level of the European ETS. Linking the Chinese ETS with other international systems is therefore hardly possible for the time being.

The Chinese ETS also covers significantly fewer industries to date. So far, only a good 2,200 companies from the power sector are involved. However, two industrial sectors are expected to be added this year. According to Lina Li, the aluminum industry could be included as early as this year. Up to seven other sectors are to be added over the next five years:

Building materials,
Chemistry,
Iron,
Steel,
Non-ferrous metals,
Paper and
Aviation.

This puts China in a good position to discuss bilateral agreements with the EU to mitigate impacts from CBAM, Li believes.

In a telephone conversation with former German Chancellor Angela Merkel and French President Emmanuel Macron in April 2020, China’s head of state and party Xi Jinping stressed that climate change should not be misused as an instrument for geopolitical negotiations. Representatives of affected industries remember this all too well. So much so, that immediately after the presentation of the EU climate package in summer 2021, the European aluminum industry speculated that China would find ways to undermine the CBAM at any cost (China.Table reported). The details of CBAM will still require much negotiation within the EU – and presumably with China. Ning Wang

G7 Presidency: uniting climate protection and trade

Germany will also focus on trade policy during its G7 presidency, according to Federal Minister for Economic Affairs and Climate Action Robert Habeck. “We will be very strict in making sure that ecological rules do not lead to us accidentally or intentionally entering into a trade war,” the Green politician said Friday after the cabinet meeting of the traffic light government. “Trade policy will experience a renaissance, under new conditions,” Habeck said.

The background to this is the German government’s announcement that it intends to drive forward sustainability issues in the club of the most important Western industrialized nations. Presenting the program, Chancellor Olaf Scholz said Germany wants to expand the G7 into a “climate club” that agrees on uniform standards for emissions and CO2 pricing in order to accelerate the implementation of the Paris climate agreement.

The goal is also to discuss how fair trade can be conducted between countries that have different climate protection requirements for their economies. In the EU, a CO2 border tax (CBAM) on the import of products is being considered.

Lessons from the COVID pandemic

Finance Minister Christian Lindner (FDP) announced that another focus of the German presidency would be “stability of currencies, economic areas, and markets”. In the COVID pandemic, public debt had increased all over the world. According to Lindner, it is now necessary to get out of crisis mode and into prevention mode.

Global health policy, shaped by the COVID pandemic, is also to play a greater role in the future. Health issues require international solutions, emphasized Health Minister Karl Lauterbach (SPD). However, this is not just about global vaccine provision and pandemic control. According to Lauterbach, the G7 should also find answers to other health issues, such as the worldwide decline in patients’ chances of treatment due to antibiotic resistance and health risks triggered by climate change. A meeting of health ministers is planned for May 19th and 20th in Berlin. rtr/dpa/luk

Informal meetings of environment and energy ministers: more supply solidarity

At the informal meeting of the 27 energy ministers in Amiens, France, high energy prices were one of the most important topics. The main focus was on how consumers and companies can receive better support in the event of high prices and how strong price fluctuations can be prevented in the future.

Member states should be able to reclaim parts of the resulting profits from energy suppliers in the event of price increases, in order to return them to consumers. In addition, production factors are to be optimized through more efficient short-term transactions on the energy market, according to the results of the informal meetings of environment and energy ministers.

When it comes to security of supply, the energy ministers want to strengthen “mutual solidarity”. This applies both to investments in the expansion of renewables and to gas supply. To this end, they are striving for “optimized use of European storage capacities“.

Habeck wants to ensure full gas storage facilities

Federal Economics and Climate Minister Robert Habeck had previously announced a political reaction. He explained in “Der Spiegel” that winter had shown that with reduced gas stocks, one was vulnerable to “speculation, price fluctuations, and geopolitical tension“. Therefore, it was necessary for gas storage facilities to be better filled in the coming winter. This is a political task, Habeck said.

Luxembourg’s Energy Minister Claude Turmes said in an interview with rtl.lu on Saturday that he blames the old German government for the low levels of German gas storage facilities. He said that it had deliberately not filled the gas storage facilities completely before winter, which had made it easier for Russia to exert political pressure over missing gas deliveries. In a conversation with Habeck, the latter had told him that the new federal government wanted to create the legal basis for replenishing gas stocks before winter in order to curb speculation and price fluctuations. luk

Berlusconi renounces presidency and is hospitalized

Former Italian Prime Minister Silvio Berlusconi officially withdrew from the race for Italian president on Saturday evening. At a virtual top meeting of the center-right parties, the 85-year-old let it be known that he was no longer available. On Sunday, the Ansa news agency reported that Berlusconi had been taken to a clinic for a routine medical examination.

His Forza Italia party, as well as the right-wing Lega and Fratelli d’Italia, now want to search for and present another candidate to succeed the head of state Sergio Mattarella. The election begins on Monday afternoon and is expected to last for days. Traditionally, there are no official candidates in Italy.

“I have decided to take a different path on the road of national responsibility and ask to refrain from putting forward my name as President of the Republic,” Berlusconi had still communicated on Saturday. He had recently been trying hard to win over enough voters for the ballot. Now he claimed to renounce a candidacy, although he would have secured the necessary votes – that is, at least 505 of the total of 1009 electoral people. That may be called into question. In recent days, experts and aides suggested that Berlusconi had been short by as many as 100 electoral people.

While the party leaders of Lega (Matteo Salvini) and Fratelli d’Italia (Giorgia Meloni) recently still officially backed a Berlusconi candidacy, the center-left parties firmly rejected a possible election of the 85-year-old. Giuseppe Conte of the Five Star Movement called for a “serious exchange” between the parties in the search for a serious president. Lega leader Salvini, meanwhile, made it clear that the center-right now has “the honor and responsibility to make its proposals” first.

Most recently, Prime Minister Mario Draghi was considered a co-favorite for the election. Berlusconi and other party leaders, however, are pushing for Draghi to remain in his current position in order to continue his successful work until the end of the legislative term in 2023. A move by the former ECB chief to the presidency would risk new parliamentary elections and a temporary halt to reforms. dpa

The ECB’s existential dilemma

by Jürgen Stark, Thomas Mayer and Gunther Schnabl

Our fiat money regime requires an institutional anchor that credibly and decisively ensures a stable price level and long-term confidence in the euro. Credibility is a central bank’s greatest asset, because it underwrites confidence in the purchasing power of money. And credibility, in turn, rests on the central bank’s independence from political influence, and on its commitment to monetary stability.

Viewed in this light, the European Central Bank has been in dangerous waters for several years. It has jeopardized its political independence and compromised its primary objective. Actions that are clearly intended to anticipate political pressure leave no doubt that it has exceeded its mandate.

For example, during the euro sovereign debt crisis that began in late 2009, the ECB actively participated in the restructuring of Europe’s Economic and Monetary Union (EMU). With its Security Markets Program, it abandoned important monetary-policy principles, including the ban on monetary financing of government debt and the requirement of a single monetary policy for the eurozone. The ECB also took a leading role in rescuing EU member states hit hard by the crisis, even though this was the respective national governments’ responsibility. The boundaries between monetary and fiscal policy thus were deliberately blurred, leading to close coordination between the two.
With then-ECB President Mario Draghi’s unilateral commitment to “do whatever it takes to preserve the euro,” the ECB set itself up as lender of last resort for the eurozone. The attempt to attach conditions to this role in the ECB’s “outright monetary transactions” program failed. Indeed, the program was never activated and has since been replaced by the Asset Purchase Program and the Pandemic Emergency Purchase Program.

ECB causes incentives for higher debts

By purchasing government debt, the ECB has fundamentally distorted bond markets, arguing that it is trying to prevent market fragmentation. But now that risk premiums have leveled out and market access with favorable conditions has been secured for all eurozone member states, governments have an incentive to increase their already exorbitantly high public debt levels. Highly indebted states such as Italy and France presumably will rely on this safeguard indefinitely.

Worse, the ECB’s operations exceeding the limits of EU treaties and statutes have intensified during Christine Lagarde’s presidency. Invoking “secondary objectives,” the ECB has committed itself to promoting a “green transformation.” The ECB wants to help improve financing conditions for “green” projects and ensure that the collateral and bonds it accepts are environmentally “sustainable.”

Until 2021, the ECB’s growing politicization did not trigger any major conflict over its core mandate of ensuring price stability. But with higher inflation becoming more apparent, the situation has changed. To be sure, leading ECB representatives still dismiss today’s inflation as temporary. No one disputes the fact that some factors influencing inflation are temporary. But the problem is that other factors may persist longer than projected.

Hence, it is becoming increasingly clear that inflation will gain momentum without monetary-policy countermeasures, auguring the end of the era of price stability. That puts the ECB in a difficult position because it will simultaneously be confronted with several acute problems of its own making.

First, the ECB’s monetary financing of new sovereign debt has created a money overhang, and now robust demand is running up against the supply constraints caused by the pandemic. The result is higher prices, which are likely to become endemic through subsequent wage increases. The ECB must take seriously the risk of a wage-price spiral, even if there are few hints of this happening at present.

Monetary policy turnaround for greater price stability

Second, it is becoming increasingly clear that the “green transformation” will not be possible without a surge of inflation. Ideally, fossil-fuel energy sources should become more expensive to the same extent that renewable energy becomes cheaper through the expansion of the relevant capacities and infrastructure. The change in relative prices should alter the structure of demand while the overall price level remains stable. In fact, production capacities for brown energy have fallen faster than new capacities for green energy could be created. As a result, fossil-fuel energy prices have risen without renewables prices falling accordingly to compensate.

Owing to the ECB’s open displays of activism and demonstrated willingness to coordinate monetary, economic, financial, and climate policies, it now faces a serious predicament. Because its core mandate is to ensure price stability, it needs to be ready for a monetary-policy turnaround.

That would mean consistently taking steps to dampen demand by reducing the money overhang (selling off the government bonds that have piled up on its balance sheet) and raising interest rates more quickly (contrary to its previous communications). Such tightening would create serious problems for highly indebted eurozone members, not only in financing new debt but also in refinancing maturing debt. Declining tax revenues and rising unemployment as the economy cools would exacerbate the problem further. The future of some countries’ EMU membership would quickly be called into question again.

But if the ECB tolerates rising inflation, it will lose credibility, owing to growing doubts about its willingness or ability to keep the value of money stable. Rising inflation expectations would lead to increasing inflation dynamics and exchange-rate depreciation, which would further increase inflationary pressures.

Like Shakespeare’s Hamlet, the ECB is faced with a quandary. Should it consistently stick to its mandate and risk another acid test for the EMU, or should it accept higher inflation, lose credibility, and seal the fate of the euro as a soft currency?

In the play, Hamlet never can decide. That is why it is a tragedy that ends in disaster.