ECB Brief: Panetta Says We’re to Blame if Globalisation Leads to Low Inflation

26 April 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Fabio Panetta killed two birds with one stone on Monday, turning a treatise on whether globalisation hinders monetary policy’s domestic objectives – in particular by engendering spillovers that render financing condition favourability an effectively exogenous variable - into another plea for continued policy support.

While the central banks of smaller economies may be at the mercy of globalisation, the latter’s impact in the Eurozone on inflation and financing conditions ‘depends on our policy response to it’, he told a joint BIS, BoE, ECB and IMF conference.

The euro area therefore does enjoy monetary policy autonomy, and ‘[i]f globalisation leads to below-target inflation, it is because we are tolerating that undershooting’, he said.

While his path to the determination that European monetary policy is not doing all it could may have been new, the conclusion was hardly surprising. By the same token, the policy prescription he offered would, one can be reasonably sure, have found its way into many other speeches Panetta might have given at this juncture, barring perhaps those on digital currencies.

That said, there would be no shortage of central bankers he may have felt needed pushing back against with respect to globalisation and low European inflation. At the level of the Executive Board, Isabel Schnabel, for example, has recently attributed subdued price pressures here at least in part to globalisation; this, however, is neither new nor unique to Schnabel.

Panetta thus framed policy action as a viable means despite globalisation to ‘shelter the domestic recovery from adverse foreign spillovers.’

Given the ongoing dependency of the recovery on policy support, which dependency conceals underlying economic conditions and therefore how well the economy would fare under less accommodative policies, ‘[t]he recovery will need to be well advanced before we can get a clear picture of the underlying damage’, he said.

Moreover, the European recovery will likely be ‘slow and incomplete’ in any case, he said, returning to pre-pandemic output levels only in mid-2022. ‘This evidence suggests that we should avoid withdrawing policy support – either deliberately or by tolerating adverse spillovers – until the output gap is closed and we see inflation sustainably back at 2%’, he said.

Financing conditions would thus need to remain ‘very favourable’ until well past the pandemic, he said.

Lest anyone object, Panetta made clear that all this is just irrefutable common sense. ‘The need for very accommodative policy over a longer period should in any case be uncontroversial, given that inflation remains well below our aim in our projection horizon and, according to survey measures of inflation expectations, even beyond it’, he said.

That Panetta is one of those on the Governing Council who react most allergically to any hint of policy withdrawal – and consequently to the idea of an economic recovery that could produce such an outcome – is well established. To the extent he calls into question conventional wisdom about the relationship between globalisation and inflation, today’s intervention is interesting. Beyond that, par for the course.