The European Central Bank’s outgoing chief economist, who played a key role in the institution’s response to the eurozone crisis, has hit out at the ‘America First’ rhetoric of US president Donald Trump.
The backlash against globalisation is derailing investment across the world, Peter Praet told the Financial Times, arguing that clarity on trade rules was “absolutely essential”.
While the global trade war has so far centred on Beijing and Washington, Mr Trump has threatened to impose tariffs on $11bn-worth of European products and ratchet up barriers on European motor manufacturers.
The ECB views geopolitical risk as the main threat to the eurozone’s economy. The uncertain global environment also explains why the export-dependent region’s growth has slowed since the second half of 2018.
“Industrial organisation is very complex and a few frictions, even something relatively simple like tariff restrictions or delays, can have big consequences in an era of just-in-time delivery systems,” Mr Praet said. “Stalling on investments, stalling on reorganising your firm, this waiting mode that companies are in can be very damaging, especially for manufacturers.”
Mr Praet will depart from the ECB at the end of May after an eventful eight-year term on its executive board, serving for most of that time as the central bank’s chief economist. He worked closely with its president Mario Draghi on the policies that are widely credited with cushioning the eurozone from crisis.
“While president Draghi rightly gets credit for steering the eurozone through a very difficult period, Peter Praet and his team have been instrumental in finding innovative ways for the ECB to deliver on its mandate,” said Mahmood Pradhan, the IMF’s euro area mission chief.
Those innovations included auctions of cheap central bank cash, negative interest rates and a €2.6tn stimulus programme that began in March 2015 and only stopped expanding at the end of last year.
“We have needed to have intellectual curiosity, the courage to act and collegiality,” Mr Praet said. “In a crisis, you count on each other, you have to build trust. I have been able to work very well with Mario and other board members.”
But now the European economy faces fresh headwinds, he warned: “Globalisation provided people with comfort, you were in an environment where you felt like you could travel to most places, that you could expand your business . . . Suddenly now you have this zero-sum game, with this very worrisome ‘America First’ rhetoric. Businesses really aren’t used to that.”
The global slowdown has heaped fresh pressure on central bankers to step up their interventions, but Mr Praet cautioned against expecting monetary policy to succeed in combating populist rhetoric and political fragmentation.
“If people are concerned there is going to be a war tomorrow, cutting rates by 25 basis points won’t help,” he said. In a climate of political debate that is “sometimes chaotic and misinformed”, there is “an urgent need” for central bankers to explain to the public that monetary policy “cannot be mobilised to do anything they like”.
“When people say you are the only game in town, you have a lot of power. But there are many things that people would like us to do, but they are not in our mandate,” he said.
And he rebuffed suggestions that the ECB needs to revamp its monetary policy to respond to concerns that it has little ammunition left, should the economy deteriorate again.
The defining moment of Mr Praet’s time in office came when Mr Draghi pledged — during a speech in London in 2012 — to do “whatever it takes” to save the eurozone from a disorderly collapse. It was a move that the ECB chief economist wholeheartedly supported.
“When Mario came back from London, I congratulated him,” Mr Praet said. “It was a big relief. The euro area was not prepared for a big banking and sovereign debt crisis.”
Mr Draghi’s pledge led the ECB to challenge market speculation of a collapse of the euro with a commitment to buy bonds in potentially unlimited quantities. That helped bring down borrowing costs for southern states such as Italy and Spain. Mr Praet played a key role in promoting the policy, flying around the world to meet concerned investors.
“We have a framework now for crisis management, but it’s not been tested entirely,” he said. “Though we have done a lot to change the institutional framework, so I do feel more confident about the future.”
But Mr Praet acknowledged that one task remaining for the central bank is to challenge investors’ scepticism on inflation. Although the ECB insists that its 2 per cent target is symmetrical — it will tolerate undershooting or overshooting to a small degree — many investors are sceptical.
“There is still this perception in the market that we act asymmetrically — that we are more willing to tolerate low inflation than we are inflation that is above our goal of below but close to 2 per cent,” Mr Praet said. “More can be done to clarify that we do act symmetrically and care an equal amount about being above or below our target.”