ECB: Slower Pace of Globalisation Won’t Necessarily Help Boost Inflation

22 June 2021

By David Barwick – FRANKFURT (Econostream) – A further slowing or even a reversal of globalisation would be unlikely to make an important contribution to restoring euro area price stability, the European Central Bank said on Tuesday.

In a pre-release from the fourth economic bulletin of the year, due out Thursday, the ECB said that trade integration, informational globalisation and global value chain (GVC) participation were aspects of globalisation associated with sustained downward inflationary pressure.

The effect is not large, however, implying that globalisation is not driving the synchronisation and slowdown of inflation across advanced economies, the article said, adding that ‘any headwinds stemming from globalisation were too small to be economically meaningful.’

‘Looking ahead a reversal (or further slowdown) of globalisation trends could provide only limited tailwinds for inflation trends’, it deduced.

The analysis based its conclusion in part on the fact that both the decline and the persistency of inflation started in the 1980s, before pervasive globalisation, and ended in the mid-1990s, before Chinese membership in the WTO. Moreover, the decline of inflation occurred in sync for both goods and services, on which globalisation should have acted differently with respect to inflation, the article said.

Furthermore, evidence that manufactured goods should be more sensitive to the disinflationary effect of globalisation than services argues that globalisation causes changes in relative prices, but not a generalised price decline, the report said.

A possible cause of persistently low inflation may instead be monetary policy’s lack of room to counter the disinflationary force of structural changes, either domestic or foreign, the report said.

In a speech in April, ECB Executive Board member Fabio Panetta noted the view held by some that cross-border integration made inflation ‘more of a global phenomenon than a domestic one’, with spillovers depriving monetary authorities of some of the ability to regulate their jurisdiction’s financing conditions.

How well monetary authorities outside the US manage to resist upward sovereign yield pressure caused by brighter economic prospects following a powerful US stimulus ‘will reveal the scope of monetary autonomy in a globalised world’, Panetta said. ‘For smaller and emerging market economies, the constraints on policy may remain significant. But I expect this episode to confirm that globalisation cannot constrain monetary policy in large economies, like the euro area.’