ECB’s Panetta: Dividing Economy ‘Into Rival Blocs Would Do More Harm Than Good’

15 November 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Fabio Panetta said on Friday that trying to divide the global economy into opposing blocs would be more detrimental than beneficial.

In a speech at a conference organised by Banca d’Italia and the Italian Presidency of the G7, Panetta, who heads Banca d’Italia, said, ‘An escalation of trade barriers between blocs would lead to severe efficiency and welfare losses for all.’

Among the potential outcomes would be a rise in the volatility of economic growth and inflation as well as less diversification of economies, he added.

‘Indeed, several studies have shown that trade openness and participation in global production networks improve the diversification of sources of supply and demand, thereby reducing exposure to local shocks’, he argued.

For Panetta, the world should not think of ‘blanket measures’ like protectionism as ‘the solution to our problems’.

‘A blanket measure is like a kitchen knife: it is not the right instrument to perform complex surgery’, he said.

Protectionism would not be as ‘protective’ as it seemed, according to Panetta, as goods from certain blocked countries could wind up being imported anyway through third parties.

‘This would only add a third trade intermediary, increasing costs and risks and reducing transparency. Such unintended consequences would undermine economic efficiency and security’, he said.

The price of fragmentation in the global economy ‘would in fact be very high’, he observed, with some studies suggesting that the cost could supass 6% of global GDP in the worst-case scenarios.