European Monetary Policy and Climate Change by Viraj Bhide

According to the IPCC, climate change is closely linked to unsustainable levels of material consumption in our modern societies. If this were indeed the case, it is necessary to examine the underlying causes of this economic phenomenon. In this article, we make the case that unsustainable levels of consumption may not be an inherent vice of capitalism, but a consequence of monetary policy.

Consumption and Climate Policy

An important facet of climate change policy is the need to curtail consumption and more particularly, consumerism.

This is often expressed in the modern climate change movement by referring to the Earth Overshoot Day, previously known as Ecological Debt Day, which is the ‘calculated illustrative calendar date on which humanity’s resource consumption for the year exceeds Earth’s capacity to regenerate those resources that year’.

In 2019, Earth Overshoot Day was supposed to be July 29, when humanity is supposed to have ‘used nature’s budget for the entire year’.

A paper included in the IPCC’s AR5, titled “Sustainable Development and Equity”, offers a detailed analysis of the relationship between consumption and climate change. We learn inter alia that :

The possibility of a SD pathway for the world hinges on ‘decoupling’. We consider two types of decoupling at the global scale and in the long term: the decoupling of material resource consumption (including fossil carbon) and environmental impact (including climate change) from economic growth (‘dematerialization’); and the decoupling of human well-being from economic growth and consumption. The first type involves an increased material efficiency and environmental efficiency of production and is generally considered crucial for meeting SD and equity goals; yet while some dematerialization has occurred, absolute levels of resource use and environmental impact have continued to rise, highlighting the important distinction between relative and absolute decoupling. This has inspired examination of the second type of decoupling, including the reduction of consumption levels in wealthier countries.

The spread of material consumption with rising incomes is one of the ‘mega-drivers’ of global resource use and environmental degradation.

From the standpoint of international law, curtailing consumption is an integral facet of intergenerational equity and sustainable development. The World Commission on Environment and Development, which preceded the 1992 Rio Conference on Environment and Development, defined sustainable development « as meeting the needs of the present without compromising the ability of future generations to meet their own needs ». Similarly, the preamble of the 2030 Agenda for Sustainable Development declares : “Planet – We are determined to protect the planet from degradation, including through sustainable consumption and production, sustainably managing its natural resources and taking urgent action on climate change, so that it can support the needs of the present and future generations.”

Consumption and Capitalism

The relationship between consumption and capitalism is an important point of disagreement between the Austrian and Keynesian schools of economics.

The Keynesian school of economics holds that what keeps the economy going is consumption expenditure, and that it is spending, rather than individual saving, which is the essential condition for production and prosperity. This is the dominant view in economics, and as we shall see below, the view taken by central bankers to justify monetary policy.

The Austrian school, which is diametrically opposed to the Keynesian school of economics, holds that saving, not consumption, is the engine of economic growth :

What limits the production growth of goods is the introduction of better tools and machinery (i.e. capital goods), which raises workers productivity. Tools and machinery, are not readily available, they must be made.

In order to make them, people must allocate consumer goods that will sustain those individuals engaged in the production of tools and machinery. The allocation of consumer goods is what savings is all about.

Note that savings become possible once some individuals have agreed to transfer some of their present goods to individuals that are engaged in the production of tools and machinery. Obviously, they do not transfer these goods for free, but in return for a greater quantity of goods in the future. Since saving enables the production of capital goods, obviously saving is at the heart of the economic growth that raises people’s living standards.

Before the introduction of Keynesian economics in the twentieth century, classical economists understood that production was the source of demand and that encouraging saving and production was the way to generate economic growth. The economist Jean-Baptiste Say wrote in the nineteenth century :

[T]he encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption;  and we have seen that production alone furnishes those means.  Thus it is the aim of good government to stimulate production, of bad government to encourage consumption.

Interest rates determine the level of consumption

Both schools of economics agree that in a market economy, consumption levels are closely linked to interest rates. A few simple reasons for this are the fact that higher interest rates:

– make credit cards and loans more expensive, discouraging people from borrowing and spending ;

– decrease the disposable income of people who already have loans, because they spend more on interest payments ;

– make it more attractive to save in a deposit account because of the interest gained.

In other words, low the interest rates incentivise the consumption of resources, while high interest rates incentivise savings.

The role of central banks

In the modern economy, central banks determine monetary policy and thereby, the rate of interest and levels of consumption.

In recent times, central bankers have gone “green” and seem to have found their “ecological conscience”. Here’s a selection of recent news articles on this subject :

– ‘Scared Central Banks Face Up to Threats From Climate Change’ (Bloomberg)

– ‘Ask Your Central Banker If Climate Change Is Hurting You’ (Bloomberg Opinion)

– ‘Mark Carney, eco-warrior’ (

Actions, however, speak much louder than words. The past few decades have seen central banks leading a secular fall in interest rates and savings. Correspondingly, global debt-fuelled consumption has never been higher.

Negative interest rates

If these interest rate and savings statistics seem to be relics of a recent past, think again. In June 2014, the European Central Bank first introduced a negative deposit rate of – 0.1 %. In September 2019 that deposit rate has now been lowered to – 0.5 %.

When explaining its decision to introduce negative rates in 2014, the ECB expressly stated :

By reducing interest rates and thus making it less attractive for people to save and more attractive to borrow, the central bank encourages people to spend money or invest. If, on the other hand, a central bank increases interest rates, the incentive shifts towards more saving and less spending in the aggregate, which can help cool an economy suffering from high inflation. This behaviour is not specific to the ECB; it applies to all central banks.

One of the worst manifestations of what is known as the ECB’s ‘accommodative’ monetary policy can be seen in the European junk bonds market, where ‘zombie corporations’ i.e. companies that continue to operate even though they are insolvent or near bankruptcy, have been able to borrow money at negative interest rates.

The ECB’s focus on increasing consumption is apparent in numerous publications and press releases. See for example these remarks by Mario Draghi, President of the ECB, in 2018 :

Most  important  is  the  virtuous  circle  between  employment,  labour  income  and  consumption,which has been the motor of growth throughout the recovery.

The second consideration that points to the the resilience of domestic demand is the strong link between consumption and job growth in the euro area. Consumption is much more conducive to jobs  than  exports […]

The  third  consideration  is  the  still  very  favourable  financing  conditions  in  the  euro  area, underpinned by our accommodative monetary policy […] The growth rate of loans to households is also the strongest since 2012, with consumer credit now acting  as  the  most  dynamic  component,  reflecting  the  ongoing  strength  of  consumption. Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.

Unanswered questions

Here are some of the questions that must be asked, both to ourselves and to our policy makers, in the interest of a more comprehensive approach to climate change policy, climate change law, and climate justice :

Is there a disconnect between European climate policy and European banking policy?

Can climate policy coexist with economic policies which favour growth in consumption levels?

What would be the practical consequences of reducing consumption levels in our economies? In other words, would this form of ‘imposed poverty’, albeit in the name of climate change, be equitable and politically feasible?

If curtailing consumption is indeed an important facet of climate change policy, why is the ECB pushing for further growth in consumption by pursuing what was previously an unthinkable regime of negative interest rates?

Is the ECB ‘stuck between a rock and a hard place’ when it comes to monetary policy? What is preventing it from raising interest rates and letting ‘zombie corporations’ fail, while simultaneously decreasing consumption in the Eurozone?

Why are we financing consumption by ‘zombie corporations’, fed by negative interest rates, while at the same time asking the general population to make such sacrifices in the name of climate change as bearing significantly higher costs of heating and curtailing their consumption of meat ?

Monetary policy, climate change and public liberties

Finally, when taken together, negative interest rates and climate change policy, with its bans and subsidies, entail the establishment of a heavily planned economy. As the economist Thorsten Polleit has found :

If anyone can suddenly get a loan with a negative interest rate, then it is to be expected that the credit demand will get out of hand. To prevent this from happening, the ECB will have to resort to credit rationing: It determines in advance how many new loans it wishes to hand out, and then allocates this amount of credit. The credit market no longer decides who gets what and when and on what terms and conditions; those decisions are made by the ECB.

According to which criteria should loans be allocated? Should anyone who asks for credit get something? Should employment-intensive economic sectors be favored? Should the new loans only go to ‘the industries of the future’? Should weakening industries be supported with additional credit? Or should Southern Europe get more than Northern Europe? These questions already indicate that the planned economy is established through a policy of negative interest rates.

More than ever it will be the ECB that reigns over credit: It will effectively determine what will be financed and produced and where and when; it will determine who will be in a position to buy and consume on credit. As a central planning authority, the ECB — or the groups that greatly influence its decisions — determines everything: which industries will be promoted or suppressed; which economies are allowed to grow stronger than others; which national commercial banks are allowed to survive and which are not. […]

We must, in this regard, take heed to the warnings of past experiments in central planning : a planned economy is, by definition, incompatible with strong property rights. Furthermore, a cursory glance at the socialist regimes of the past century shows us that the dilution of property rights leads to the dilution of the ensemble of public liberties that previously existed in the planned economy.

Toward a frugal capitalism

Capitalism without artificially low interest rates relies upon saving before consuming. This is why older literature consistently describes capitalists as being averse to spending:

After all, capitalism has historically often been associated with misers and with economic theorists who have placed a sizable emphasis on work, savings, and thriftiness. Ebenezer Scrooge, of course, is perhaps the most famous capitalist villain in English literature. Yet Scrooge is notable for his famous condemnation of Christmas, expressed precisely because Christmas encouraged consumerism. Similarly, pro-capitalist adherents of the so-called « protestant work ethic » — as described by Max Weber — repeatedly condemned excessive consumption, while exalting saving and hard work. Scholars have noted the role of « thrift » as both a moral and capitalist imperative in American culture during the eighteenth and nineteenth century.

It is never too late to turn our backs on the monetary experiments of the past decades and to return to a such a frugal form of capitalism. This would not only be compatible with our concern for the climate, but also our best chance at safeguarding long-cherished public liberties, which are at risk of  being diluted under the current legal framework of monetary and climate change policy.
Viraj Bhide is an attorney at the Paris Bar. You can visit his web site at



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