Mario Draghi has delivered a clear warning to the Trump administration in an address at Jackson Hole, Wyoming: row back on free trade and financial regulation at your peril.
The European Central Bank president told the audience at the Federal Reserve Bank of Kansas City’s annual meeting that free trade was needed to boost growth and deal with the fallout of ageing societies — countering the US president’s calls for a more protectionist approach.
The eurozone’s central banker-in-chief also backed US Federal Reserve chair Janet Yellen’s warning earlier on Friday against rowing back on financial regulation and urged the maintenance of international standards.
The US administration has signalled that it intends to scale back some of the financial regulation introduced following the collapse of Lehman Brothers in the autumn of 2008.
Mr Draghi signalled concerns that a dash for lax regulation could stoke asset price bubbles and market crashes, especially at a time when interest rates across advanced economies remain close to historical lows.
“The stronger regulatory regime that we have now has enabled economies to endure a long period of low interest rates without any significant side-effects on financial stability, which has been crucial for stabilising demand and inflation worldwide,” the ECB president said.
In a question-and-answer session after the speech, he said that the US economic recovery remained ahead of its eurozone counterpart — despite the recovery in the single currency area having “taken ground” — but revealed little about what policymakers in Frankfurt would do next.
“A significant degree of monetary accommodation is still warranted,” Mr Draghi said, echoing remarks he delivered in late July.
While Mr Draghi acknowledged that free trade may worsen inequality, co-operation between nations was “crucial in responding to concerns about fairness, safety and also equity”.
“To inject more dynamism into the global economy we need to raise potential output growth, and to do so with ageing societies we need to lift productivity growth. For advanced economies that are close to the technological frontier, this depends crucially on openness to trade.”
Convergence across countries in regulatory standards was, he said, “one of the most important components of a sustainable open economy”. Some policymakers are worried that the Trump administration’s “America First” stance could prompt it to step back from global bodies including regulatory forums.
Addressing the causes of the crisis, Mr Draghi reflected that regulations had been dismantled “quite systematically” in the 10 years before the great crisis at a time when monetary policy was “quite expansionary”.
“What we would all agree is we don’t want to have that combination again,” he said.
Earlier, Ms Yellen argued that the regulatory reforms have made the system “substantially safer” and are not weighing on growth or lending. While there were ways of adjusting regulations to ensure they did not overburden institutions such as smaller banks, she cautioned changes should be “modest” and preserve the resilience of big banks and dealers. Memories of the last crisis “may be fading”, she warned.
The combination of the two central bankers’ Jackson Hole speeches gave a big boost to the euro, which on Friday hit its highest level against the dollar since January 2015. Ms Yellen’s speech was taken as dovish by traders, who noted she did not address surging asset prices as a justification for tighter monetary policy, sending the US currency lower.
And by not addressing the strength of the euro, Mr Draghi fuelled another leg higher by the currency, which extended its gains versus the dollar to 1.1 per cent to trade at $1.193.
The ECB president’s remarks come ahead of a crucial meeting of his governing council on September 6 and 7, when policymakers are expected to begin discussions on winding down their quantitative easing programme.
Mr Draghi insisted that the central bank would shift towards the exit slowly and that monetary policy needed to remain accommodative for some time yet.
“We haven’t seen that self-sustained convergence of inflation towards the medium term objective because there are several factors that are slowing this process,” the ECB president said, pointing to a lack of wage growth for the eurozone’s workers.
“On one hand we are confident that as the output gap closes inflation will continue converging to its objective over the medium term,” he said. On the other, “we have to be very patient because the labour market factors that are slowing down and the low productivity are not factors that are going to disappear any time soon”.