AFP: Officially concerned only with monetary policy, central bankers the world over are weighing in on political debates as fears of economic damage from protectionism mount.
“Protectionism will only lead to a loss of prosperity for all,” warned European Central Bank board member Yves Mersch last week.
The Luxembourger’s words came just three weeks after US President Donald Trump took office with a speech that hammered home his ‘America first’ stance, fuelling concern that the US billionaire plans to shake up global trade rules.
Even before the inauguration, Trump was talking up tariffs, telling a German interviewer he would slap a border tax on BMW cars if the firm went ahead with the construction of a plant in Mexico. “It surely can’t be the case that the way to build liberal prosperity is to build barriers between one another,” Reserve Bank of Australia governor Philip Lowe said last week.
“Uncertainty surrounds the direction of US macroeconomic policies with potential global spillovers,” the Reserve Bank of India worried in a statement last week after leaving its main interest rates unchanged.
“Global trade remains subdued due to an increasing tendency towards protectionist policies and heightened political tensions,” it noted.
In many advanced economies, central banks are free of government control, using their independent economic judgement to set interest rates and safeguard financial stability while remaining above the political fray.
But “central bankers have been advancing on to ground that isn’t really theirs for years, offering cautious policy recommendations,” Pictet bank economist Frederik Ducrozet told AFP. Now “a further step has clearly been taken”, he said, as monetary policymakers brace for the uncertainties of Trump’s economic policies and the upcoming Brexit divorce negotiations, expected to take Britain out of the EU’s single market for goods, services, capital and labour.
Bank governors’ newfound readiness to pass comment is more a reflection that protectionism “wasn’t much of an issue to talk about until recently” than staking out of a political position, economist Ben May of Oxford Economics told AFP.
“Central bankers are always happy to talk about things where economic theory is clear,” May said. “The conventional wisdom in economics is that trade is good for the economy.”
As in Britain, where voters had “had enough of experts” according to Brexit campaigner Michael Gove, governments may disagree with their central bank’s advice for reasons unrelated to economics and take actions that limit trade.
Long European summer
Central bankers are at odds however about how high and far the global protectionist wave may rise.
“I don’t think protectionism is likely to spread vigorously and widely in the world,” Bank of Japan governor Haruhiko Kuroda said in January.
Meanwhile, German Central Bank President Jens Weidmann warned last week of “mounting scepticism over globalisation, a sentiment by no means confined to the United States,” labelling Trump’s rhetoric “very worrying”.
“Barriers and exclusion would be the wrong response,” Weidmann added. Both Germany and Japan stand to suffer if the US goes the protectionist route, as Trump has lashed out at both with accusations they are manipulating exchange rates to make their exports cheaper.
While the US is Germany’s biggest export customer, Europe’s largest economy would be even worse off if its EU neighbours turned away from the bloc’s free-trading foundations.
Europe faces several crucial elections this year, including in the EU’s traditional power couple France and Germany.
Anti-euro and anti-EU parties are likely to gain ground in France, Germany, the Netherlands, and possibly Italy in 2017, with eurosceptic parties promising referendums on the single currency if they win in Italy and France. The ECB’s Mario Draghi insisted to an Italian lawmaker last week that “the euro is irrevocable” as he faced questions from a European Parliament Committee.
But in the political trenches, it will be up to mainstream politicians to defend the economic consensus rather than experts like the ECB president.