Draghi Wishes for a World Order Populists Will Love to HateBy and
ECB president urges policy be properly aligned across borders
International coordination could face domestic political ire
Mario Draghi has just pushed the boundaries of central banking further into the realm of globalization, at a time when globalization is on the run.
Following the work of Reserve Bank of India Raghuram Rajan and others, the European Central Bank president on Tuesday became the most senior global central banker so far to call for more explicit policy cooperation between jurisdictions. Draghi’s aim is to mitigate the damaging cross-border side-effects brought on by the combination of monetary activism and tighter global financial links.
“We have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions,” Draghi said at the ECB’s annual policy forum in Sintra, Portugal. “In a globalized world, the global policy mix matters.”
While Draghi made no explicit reference in the speech to the U.K.’s June 23 decision to quit the European Union, a powerful rejection by voters of globalization, he told European leaders just hours later that he leans toward the more pessimistic forecasts of the impact of Britain’s vote on growth in the rest of the region, according to a document obtained by Bloomberg News.
The International Monetary Fund predicted earlier this month that output in the remainder of the EU could fall as much as 0.5 percent below the baseline through 2019. An ECB spokesman declined to comment on Draghi’s reported remarks, which also included an outline of measures the central bank, regulators and governments should take in strengthening the single currency.
Policy coordination is a laudable thought as long as it’s not taken too far, said Omair Sharif, senior U.S. economist at Societe Generale in New York.
“What he’s getting at is simply the idea that we don’t have a great understanding of all the financial linkages and capital flows,” Sharif said. “That certainly does call for better understanding among central banks, not necessarily coordinated policies.”
Technocrats, including those at the the Bank for International Settlements in Basel, go further, saying that new global rules are the best way to create more financial stability for all concerned.
But if central bankers seek to increase coordination, either on interest-rate policies or financial rules, the groundswell of nationalism and populism sweeping developed economies risks making their job next to impossible. While monetary policy is increasingly global, most politics remains local.
Central banks are governed by laws set at home that require them to pursue certain, sometimes explicit, goals for their own economies--typically linked to inflation and unemployment. They are also answerable to domestic, elected lawmakers. International conditions matter only insofar as they directly affect the outlook for a bank’s own economy. Even if they believe their home country’s long-term interests will be best served, central bankers stray from those mandates at their peril.
“There are areas where better coordination would be warranted, and that would mean that at least short-term domestic objectives would need to be superseded by global objectives,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Could the Fed accept worse domestic outcomes not to blow up imbalances globally? It would be very difficult to sell it,” he said.
Still, Draghi’s speech shows that another set of pressures is mounting on central bankers to recognize that their asset purchases, interest-rates and currency policies are, especially for titans like the U.S. Federal Reserve and the ECB, more globally relevant than ever.
At the Group of 20 nations meeting in Shanghai in February, states agreed to “consult closely” on foreign-exchange markets. That happened against the backdrop of the introduction of negative interest rates by the Bank of Japan that regional peers saw as representing a fresh salvo in a currency war intended to drive down the yen.
Draghi and others may struggle to find the right balance.
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