September 06, 2017
On the failure of global policy coordination
This comment by Brad Setser is a few days old but we think it is worth picking it up. He writes on policy co-ordination failures by the G3 central banks since the start of the financial crisis. While he concedes that the G20 had its fair share of successes, they got a couple of things wrong. The first was premature fiscal consolidation - agreed at the Toronto G20 summit in 2010. The second was the failure by the ECB and the BoJ to follow the Fed's lead and do QE back then. The ECB did not start QE until 2014. The result was that the dollar was relatively weak during 2012 and 2013, at a time when the eurozone was in worse shape than the US.
We are now in a very different environment, but Setser is not happy about the current policy stance either, especially over here in the eurozone.
"...now I worry that the Europeans have gotten perhaps a bit too fond of the policy mix that produced a weak euro—with Europe’s relatively tight fiscal policy (the structural deficit of the eurozone as a whole is about 1 percent of its GDP, well below the structural fiscal deficits of its main trading partners) offset by a relatively large external surplus. Even now the eurozone’s domestic demand is far below what I consider a reasonable estimate of where it should be."
He notes that the recovery is driven by domestic demand, not net exports, which is a good thing but probably the result of the downward shock to commodity prices. The real issue is that, if France and Spain start to consolidate without any offsetting easing in Germany and the Netherlands, the recovery will not affect the external surplus much. And that will make it harder for the ECB to exit the current monetary policy regime.
The fundamental point Setser raises is that there is no real global policy co-ordination going on - beyond joint responses to one-off clear and present threats.