What Reforms for a Greener and More Democratic ECB?

Executive Summary

The ECB can and should differentiate credit conditions to green its monetary policy. The authors argue that the ECB’s current approach to interest rate policy risks undermining climate investments by raising financing costs in green sectors while failing to constrain polluting activities. Historical precedents show that sectoral rate differentiation is neither new nor incompatible with central bank independence. By offering preferential refinancing rates for green investments — through banks, the EIB, or other public entities — the ECB could shield climate-compatible projects from tightening cycles, while preserving its price stability mandate. Failing to adapt risks both higher inflation from delayed decarbonization and deeper systemic vulnerabilities from climate shocks.

Democratic legitimacy must match technical innovation in ECB policy. Greening monetary policy raises legitimacy questions, since defining “green” investments cannot be left to technocrats alone. To address this, the authors propose creating a European Credit Council, a deliberative body under the authority of the European Parliament. The Council would not instruct the ECB, but would provide independent expertise, scrutinize the broad socio-economic effects of credit policy, and ensure consistency with EU treaty objectives. By institutionalizing deliberation and transparency, the Council would rebalance power between the ECB and Parliament, embedding climate action in a more democratic framework without eroding central bank independence.

Policy Recommendations

1. Differentiate credit conditions by introducing preferential ECB refinancing rates for climate-compatible investments, shielding them from tightening cycles.
2. Enable green refinancing for both private banks and public entities such as the EIB, linked to clear environmental criteria.
3. Institutionalize democratic oversight by establishing a European Credit Council as a permanent parliamentary body with analytical and deliberative functions.
4. Clarify mandates by aligning ECB credit operations with EU climate goals through formal integration of taxonomy standards.
5. Strengthen accountability by requiring the ECB to justify how climate-oriented measures affect price stability, reversing the burden of proof in public communication.