Green Macro-Financial Governance in the European Monetary Architecture. Assessing the Capacity to Finance the Net-Zero Transition (Competition and Change)

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Andrei Guter-Sandu, Armin Haas and Steffen Murau

The European Green Transition requires massive financing efforts, with estimates of EUR 620bn EUR annually, and the headwinds are substantial. Central banks seem overstretched and busy tightening to combat inflation; treasuries are subject to austerity-inducing fiscal rules; and banking systems are afflicted by non-performing loans, fragmentation, and risk aversion. We employ the Monetary Architecture framework to analyze the EU’s monetary and financial system as a constantly evolving hierarchical web of interlocking balance sheets and study its capacity to find “elasticity space” to meet the financing challenge. To this end, we draw on a four-step scheme for Green macro-financial governance along the financial cycle of balance sheet expansion, funding, and final contraction. We find that, first, Europe’s monetary architecture still has ample elasticity space to provide a green initial expansion due to its developed ecosystem of national, subnational, and supranational off-balance-sheet fiscal agencies. Second, as mechanisms to consciously organize the distribution of long-term debt instruments across different segments are absent, its capacity to provide long-term funding is limited. Third, institutional transformation in the last two decades has greatly improved the capacity of the European monetary architecture to counteract financial instability by providing emergency elasticity. Fourth, the capacity of the European monetary architecture to manage a final contraction of balance sheets is limited, which is a general quandary in modern credit money systems. Our analysis points to the need for further investigations into techniques for monetary architectures to manage long-term funding and balance sheet contractions.

Guter-Sandu, Andrei, Armin Haas, and Steffen Murau (2024) ‘Green Macro-Financial Governance in the European Monetary Architecture. Assessing the Capacity to Finance the Net-Zero Transition’, Competition and Change, online first, doi: 10.1177/10245294241275103.

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Forging Monetary Unification through Novation: The TARGET System and the Politics of Central Banking in Europe (Socio-Economic Review)

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Steffen Murau and Matteo Giordano

When the European Monetary Union became effective in January 1999, the accounting treatment for claims and obligations which the Eurosystem’s National Central Banks (NCBs) incur against each other in the ‘Trans-European Automated Real-Time Gross Express Transfer’ (TARGET) system remained unspecified. Only later in 1999, the Governing Council of the European Central Bank (ECB) decided that these claims and obligations should be shifted to the ECB’s balance sheet as a central counterparty—a process called ‘novation’. This ex-post decision completed monetary unification by uniquely ‘stitching together’ NCBs’ balance sheets while profoundly transforming the role of the ECB’s balance sheet. First, novation centralised it at the Eurosystem’s apex, which had not been politically feasible ex ante. Secondly, novation repurposed it into a multilateral mechanism to provide automatic, unlimited funding for cross-border payment imbalances. Thirdly, novation allowed monetary technocrats to operationalise it as an autonomous ‘firefighting’ balance sheet for unconventional monetary policy.

Murau, Steffen, and Matteo Giordano (2024) ‘Forging Monetary Unification through Novation. The TARGET System and the Politics of Central Banking in Europe’, Socio-Economic Review 22 (3), pp. 1283-1312, doi: 10.1093/ser/mwad067

 

Shadow Money in the History of Monetary Thought (Review of Political Economy)

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Steffen Murau and Tobias Pforr

Following the 2007–9 Global Financial Crisis, scholars have conceptualized the credit instruments that lay at its center as ‘shadow money’. As this perspective seems to contradict many established monetary theories, we situate the shadow money concept in the history of monetary thought and clarify the assumptions under which it is meaningful. First, the shadow money concept stems from a market-based credit theory of money which rejects notions that money is primarily chosen by the state and that credit is logically subordinate to money. We explain the associated implications by mobilizing the ‘Matrix of Monetary Thought’ as an analytical tool. Second, the shadow money concept transcends the orthodox three-functions-theory of money because it prioritizes the unit-of-account function as the basis to operate payment systems. This is a theoretical position that stands in the tradition of Henry Thornton. Third, the shadow money concept assumes an inherent hierarchy within monetary systems with a spectrum of monetary forms at the edge of which definitions of moneyness get blurry. The defining feature for credit money is the existence of a par relationship with the ex ante defined unit of account. We conclude that conceptually ambiguous shadow money forms have existed across multiple historical eras.

Murau, Steffen, and Tobias Pforr (2023) ‘Shadow Money in the History of Monetary Thought’, Review of Political Economy, online first, doi: 10.1080/09538259.2023.2272140.

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Towards a Public Sustainable Finance Paradigm for the Green Transition (Finance and Society)

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Phillip Golka, Steffen Murau and Jan-Erik Thie

Sustainable finance is often discussed as a solution to the climate crisis, but its impacts are limited and its discourse focuses on mobilising private investments through public de-risking, without considering direct government action. We argue that this is due to an implicit reference to mainstream economic theory assuming that an active state leads to time inconsistency problems and crowding-out effects. However, these assumptions have been sufficiently refuted as public investments may actually crowd-in private capital. We therefore propose a paradigm shift towards what we call Public Sustainable Finance, aimed at empowering the role of the state in the green transition on the discursive, policy, and political economy levels. Studying the case of Germany, we show how Public Sustainable Finance can be introduced despite tight fiscal regimes. To this end, we propose that the Climate- and Transformation Fund be given its own borrowing powers. By borrowing an average of 23 billion euros annually from 2024 to 2030, the existing financing gap that has been exacerbated following the November 2023 constitutional court ruling can be closed, enabling a more rapid and effective green transition.

Golka, Philipp, Steffen Murau and Jan-Erik Thie (2024) ‘Towards a Public Sustainable Finance Paradigm for the Green Transition’, Finance and Society 10 (1), pp. 38-50, doi: 10.1017/fas.2023.15.

Monetary Architecture and the Green Transition (Environment and Planning A: Economy and Space)

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Steffen Murau, Armin Haas and Andrei Guter-Sandu

How to finance the Green Transition toward net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for carbon taxes or cap-and-trade to help markets correct themselves, or via war finance analogies that offer a “triad” of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualization of endogenous credit money creation and disregard the systemic and procedural dimensions of financing the Green Transition. We propose “Monetary Architecture” as a more comprehensive framework that perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets. Using the United States as a case study, we stress the importance of a systemic financing dimension that uses all available elasticity space in the monetary architecture while considering a division of labor between firefighting balance sheets such as central banks or treasuries and workhorse balance sheets such as off-balance-sheet fiscal agencies or shadow banks. Procedurally, public workhorses should provide an initial balance sheet expansion and crowd in the rest of the monetary architecture, notably shadow banks, for long-term funding. Firefighters should prevent systemic instability and manage a possible final contraction.

Murau, Steffen, Armin Haas, and Andrei Guter-Sandu (2024) ‘Monetary Architecture and the Green Transition’, Environment and Planning A: Economy and Space 56 (2), pp. 382-401, doi: 10.1177/0308518X231197296.

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Rethinking Monetary Sovereignty: The Global Credit Money System and the State (Perspectives on Politics)

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Steffen Murau and Jens van ‘t Klooster

We propose a new conception of monetary sovereignty that acknowledges the reality of today’s global credit money system. Today, the concept is predominantly used to denote states that issue and regulate their own currency. We reject that Westphalian understanding of monetary sovereignty. Instead, we propose a conception of effective monetary sovereignty that focuses on what states are actually able to do in the era of financial globalization. The conception fits the hybridity of the modern credit money system by acknowledging the crucial role not only of central bank money but also of money issued by regulated banks and unregulated shadow banks. These institutions often operate “offshore”, outside of a state’s legal jurisdiction, which makes monetary governance more difficult. Monetary sovereignty consists in the ability of states to effectively govern these different segments of the monetary system and thereby achieve their economic policy objectives.

Murau, Steffen, and Jens van ‘t Klooster (2023) ‘Rethinking Monetary Sovereignty. The Global Credit Money System and the State’, Perspectives on Politics 21(4), pp. 1319–1336, doi: 10.1017/S153759272200127X.

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Sea Level Rise Learning Scenarios for Adaptive Decision-Making Based on IPCC AR6

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Adaptation decision-scientists increasingly use real-option analysis to consider the value of learning about future climate variable development in adaptation decisions. Toward this end learning scenarios are needed, which are scenarios that provide information on future variable values seen not only from today (as static scenarios), but also seen from future moments in time. Decision-scientists generally develop learning scenarios themselves, mostly through time-independent (stationary) or highly simplified methods. The climate learning scenarios thus attained generally only poorly represent the uncertainties of state-of-the-art climate science and thus may lead to biased decisions. This paper first motivates the need for learning scenarios by providing a simple example to illustrate characteristics and benefits of learning scenarios. Next, we analyze how well learning scenarios represent climate uncertainties in the context of sea level rise and present a novel method called direct fit to generate climate learning scenarios that outperforms existing methods. This is illustrated by quantifying the difference of the sea level rise learning scenarios created with both methods to the original underlying scenario. The direct fit method is based on pointwise probability distributions, for example, boxplots, and hence can be applied to static scenarios as well as ensemble trajectories. Furthermore, the direct fit method offers a much simpler process for generating learning scenarios from static or “ordinary” climate scenarios.

Völz, V., & Hinkel, J. (2023). Sea level rise learning scenarios for adaptive decision-making based on IPCC AR6. Earth’s Future, 11, e2023EF003662. https://doi.org/10.1029/2023EF003662

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International Monetary Hierarchy through Emergency US-Dollar Liquidity. A Key Currency Approach (Competition and Change)

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Steffen Murau, Fabian Pape and Tobias Pforr

The notion that the international monetary system is hierarchical has become increasingly common, but the nature, causes, and shape of international monetary hierarchy remain vague. In this article, we develop a monetary theory of international hierarchy based on the “key currency” approach. We perceive the international monetary system as a world-spanning payment system that is inherently hierarchical because it needs central nodes for clearing and settlement. The centrality of the US-Dollar (USD) as global key currency places the US at the apex and makes the Federal Reserve (Fed) the system’s hierarchically highest institution. Other monetary jurisdictions are pushed into peripheral positions and rely on both using and creating USD-denominated credit money instruments “offshore.” Based on this approach, we explain international monetary hierarchy through different mechanisms to supply emergency USD liquidity from the Fed to non-US central banks. Currently, there are three different public mechanisms for non-US central banks to access the Fed’s balance sheet and attain emergency USD liquidity. The first-layer periphery may receive emergency USD liquidity via the Fed’s central bank swap lines. The second-layer periphery can make use of the Fed’s new repo facility for Foreign and International Monetary Authorities to access emergency USD liquidity. The residual mechanism for the third-layer periphery to access emergency USD liquidity is the Special Drawing Rights system, administered by the International Monetary Fund, in which the Exchange Stabilization Fund acts as gatekeeper for the Fed.

Murau, Steffen, Fabian Pape, and Tobias Pforr (2023) ‘International Monetary Hierarchy through Emergency US-Dollar Liquidity. A Key Currency Approach’, Competition and Change 27(3-4), pp. 495–515, doi: 10.1177/10245294221118661.

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Co-creating a coastal climate service to prioritise investments in erosion prevention and sea-level rise adaptation in the Maldives

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While the prioritisation of scarce resources for climate adaptation is becoming a priority for low and middle income countries, the climate service literature addressing adaptation prioritisation decisions is scarce. This paper contributes to filling this gap by presenting a co-creation process carried out in the Maldives among representatives of government, civil society and researchers. Together, we identified the need to improve a ranking method currently used by the Maldivian government to prioritise islands for investments in erosion prevention. As a solution we developed a layered index. The first layer of this index captures the objective dimension of the problem through an erosion hazard subindex, using the three variables wave energy, reef health and reef flat minimum width. The second layer captures the normative dimension through a multi-criteria analysis using the erosion hazard subindex as one criterion next to other stakeholder selected criteria such as critical infrastructure, economic activity, per capita income and the potential to house additional people that resettle from riskier places as sea-level rise progresses. Results of this new ranking method show that socioeconomic criteria were considered more important by the stakeholders than the biophysical criterion of erosion hazard. Among the top-ranked islands are many regional centres but also less populous islands that have a large potential to house additional people. Lessons learnt from the co-creation process highlight the importance of assembling interdisciplinarity teams, fostering mutual learning among project participants, and designing research projects that do not prescribe upfront the exact problems to be addressed and methods to be applied.

Hinkel, J., Garcin, M., Gussmann, G., Amores, A., Barbier, C., Bisaro, A., Cozannet, G. L., Duvat, V., Imad, M., Khaleel, Z., Marcos, M., Pedreros, R., Shareef, A., & Waheed, A. (2023). Co-creating a coastal climate service to prioritise investments in erosion prevention and sea-level rise adaptation in the Maldives. Climate Services, 31, 100401. https://doi.org/10.1016/j.cliser.2023.100401
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Climate learning scenarios for adaptation decision analyses: Review and classification

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Economic decision analysis is an important tool for developing cost-efficient adaptation pathways in sectors that involve costly adaptation options, such as flood risk management. Standard economic approaches, however, do not consider learning about future changes in climate variables even though a large literature on adaptive planning emphasises the key role of learning over time, because uncertainties about climate change are substantial. An emerging, diverse and fragmented set of economic adaptive decision making approaches, coming under labels such as real-option analysis or optimal control, have started to address this challenge by including the economic valuation of learning in the economic appraisal of adaptation options through making use of so-called climate learning scenarios. We synthesise this literature and classify the climate learning scenarios applied with respect to which climate variable is learned about, which learning sources are employed, how the learning is modelled, which climate data is used for calibrating learning scenarios, which goodness of fit information is provided and how deep uncertainty is handled. Our results show that publications consider learning through observations or do not explicitly state the source of learning. Most authors generate climate learning scenarios through stochastic processes or Bayesian approaches and use climate model output from the IPCC or the UK Met Office to calibrate the learning scenarios. The reviewed literature rarely provides information on the goodness of fit of learning scenarios to the underlying climate data. We conclude that most of the methods used to generate climate learning scenarios are not well-grounded in climate science and are inadequate to represent climate uncertainty. One avenue to improve climate learning scenarios would be to combine a Bayesian approach with emulators that mimic climate model runs based on observations from future moments in time.

Völz V., Hinkel J., Climate learning scenarios for adaptation decision analyses: Review and classification, 2023, Climate Risk Management, https://doi.org/10.1016/j.crm.2023.100512.

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