Compare and contrast

Central banks are globalisation's new enemy

Globalisation is gaining ground almost everywhere in the economy. Central banks are a dangerous exception.

A Transatlantic Trade and Investment Partnership (TTIP), endorsed this week by Barack Obama, would help make trade between the United States and Europe even freer. But truly global markets are already the 21st century way. The whole world uses the same telephones, aircraft, computers, pharmaceuticals and high-speed trains.

Global oligopolies dominate the production of everything from power plant construction to food processing equipment. While local regulators remain quite influential, they know that consumers want the best, which is almost always provided by international economies of scale.

Take carmakers. They are closely associated with their home country, but the same models are sold everywhere, with only slight variations to suit national tastes and regulations. If TTIP harmonised US and European safety and emissions standards, prices would fall by only a few per cent.

TTIP’s gains would mostly be of the same small order of magnitude, spread across many industries, and only if many diabolical details can be dealt with. Proponents of TTIP argue that a general political agreement with a mechanism for overriding protectionist regulation will make the technical negotiations easier.

It’s a great shame then that central banking is stuck in 19th century nationalist thinking. While there is a plenty of international cooperation, every monetary authority has an exclusively domestic mandate. And each of them seems determined to take a narrow view of that mandate, far narrower than their typical approach to inflation targets. Central bankers basically ignore both their policies’ effect on other countries and the possibility of damaging retaliation.

In diplomacy, too much of this sort of “me-first” policy can lead to war. Even if the current central bank race to devalue through monetary easing is only a phoney currency war, it could easily turn into a more substantial economic conflict, with tariffs and harsh capital controls.

The current situation is full of historical irony. After World War Two, the Bretton Woods accord put central banks at the vanguard of globalisation. The rest of the economy slowly caught up - and pulled ahead - through many rounds of trade accords. Central banks should rediscover their 20th century dynamism.