The weapons supplied to central banks have sprung up, and it is hoped that the variants of Covid-19 will not force the withdrawal of monetary stimuli to slow down. This is because the fiscal ones are more effective. Ignazio Angeloni, former member of the Single Resolution Board (SRB) of the European Central Bank (ECB), the supervisory board of Frankfurt, draws a chiaroscuro picture for the coming months. That will also put a strain on Jerome Powell’s Federal Reserve, which meets today in Jackson Hole for the annual symposium. But the Italian economist, now a fellow at the Harvard Kennedy School, also goes to trial in Italy, which has regained a new international credibility through the executive Mario Draghi.
Jackson Hole opens today. What should we expect after more than a year and a half of the pandemic?
“I’m not expecting big news. The situation of the American economy is too fluid; the infections and deaths of Covid have started to grow again since the summer, and this could lead to new slowdowns in the economy. Powell is usually very cautious in his choices; according to some even too much. It will give indications on “tapering” (timing of the reduction of purchases of securities) only when those uncertainties have been dispelled. In the background we must also consider the fact that Powell has to be reconfirmed shortly, and is personally weak, accused as he is of being little independent and little expert in monetary matters. The US president himself, who must decide whether to reconfirm him, is severely weakened by the Afghanistan question. A delicate situation on several fronts, which does not recommend risky moves ».
Last year Jerome Powell’s big deviation occurred, with the Federal Reserve tolerating temporary fluctuations in inflation. And inflation continues to be at the center of the discussions. Wrongly?
“That announcement made last year becomes relevant today: it allows the central bank to delay monetary tightening for a certain period of time. The fact that inflation is very high (over 5 percent) is therefore not decisive for the decisions that the Fed will take any time soon. Personally, I believe that sustained and lasting inflationary dynamics is not possible in our economies (and therefore also in Europe) without a recovery in wage dynamics. The run-up of wages to prices was the determining cause of the “great inflation” of the 1970s: I do not see the conditions today. Trade unions have been undermined around the world by competition from low-cost Asian labor and the automation of manufacturing processes. These structural conditions of the labor market can change, but it will take time ”.
There is increasing insistence on Fed tapering. Would you still wait for the exit strategy or do you see conditions (macro and health) improving such as to justify a withdrawal of pandemic aid?
“The impression is that the ultra-accommodative policy has little effect in stimulating the economy, and indeed can even be counterproductive in certain situations – for example, when negative rates penalize banks’ balance sheets and induce them to restrict supply. of credit. I believe central banks share this assessment, even if they understandably hesitate to admit that their weapons are blunt. Fiscal policy, on the other hand, keeps its effectiveness intact in phases of economic depression. Therefore, when the uncertainties caused by the variants dissipate, which could hopefully happen in the coming months, the conditions will mature to reverse the expansionary policies, starting with the monetary policy “.
Speaking of the above, the rates of various sovereign bonds continue to be negative, but investors continue to buy them: is it a sustainable ecosystem?
“As an economist, trying to use common sense as well as theory, I say no. Negative interest rates in the long run cannot favor a sustained and sustainable growth process of the real economy ».
However, Powell finds himself in a difficult situation. How to judge its mandate, and the pandemic response?
“Powell does not have an economic background and in particular monetary, and a few moments of his mandate this has been seen and constituted a factor of weakness. But he is a person of common sense and prudent, who listens to different opinions and takes them into account. These are important characteristics for a president, who does not decide alone but above all must make a synthesis of different points of view and considerations. It should also be considered that in the committee that decides American monetary policy (the Federal Open Market Committee) there are economists of the highest order, who undoubtedly have an important influence on Powell ».
Delta variant, shortage in the global supply chain, inflation, finally geopolitical tensions. What must be frightening on both sides of the Atlantic more in view of autumn?
«In my opinion, the greatest risks for the global economic recovery derive from three factors: the Covid situation (in the event of new variants that are difficult to control); the financial sector (excessive leverage of large banks and overvaluation of the stock market) and the geo-strategic situation. In particular, the situation in Afghanistan, badly managed by the US administration, in addition to giving rise to a very painful humanitarian crisis, constitutes a macroeconomic risk factor that did not exist before ».
On the monetary policy front, what will be the legacy given by Covid-19?
“The most important lesson of Covid, from the point of view of economic policy, is that the economic impact of the pandemic crisis can be profound and painful, but it is quickly overcome once the health situation is restored. The pandemic will leave less lasting and less severe damage to the economy than the previous financial crisis (the effects of which are still present in both America and Europe). Economic policy (fiscal, monetary, banking) must therefore react quickly, but also be ready to rapidly reduce support when conditions improve ».
There is a chapter that has become increasingly important with the pandemic, namely awareness of the climate emergency. How crucial will it be in future monetary policy decisions?
“In my opinion, the relationship between climate change and monetary policy has been exaggerated in the current debate. Monetary policy alone can do little against climate change. For climate risks to recede, people’s behavior, patterns of production and consumption, and along with them the policies of governments, must change. All on a global level. Monetary policy can help these changes to some extent by facilitating them on the financial side, but not determining them ”.
Let’s look at Italy for a moment. A spring and a summer have passed since the beginning of the Draghi executive. What have been the most positive results and what are the long-term unknowns for our country?
“Italy has acquired a credibility and authority with the new government that it did not have before. This is important, but it is only the beginning of the journey. The problems of Italy and of the Italians are still there, to be faced. We have an action plan (the NRP) and we have received from Europe the financial instruments to carry it out. Now we must demonstrate will, perseverance, continuity of purpose and action over a multi-year period. As an Italian, I hope that in this period of time the country will benefit from the greatest possible political continuity ».
Mps and Unicredit have reopened the season of bank mergers. Is it an opportunity for Italy and Europe or do you see more risks than benefits?
«The MPS case is very particular: it is a question of giving accommodation to an important banking entity that has survived for too long with an unsustainable business model and cost structure. The merger strategy in Italy is a broader topic. In my opinion, it must give rise to two or three large universal banks, larger than the current ones, functionally and geographically diversified, capable of competing on a European and global level. If Mps / Unicredit leads in that direction, it is welcome, but for this purpose the strength of the structure that will derive from the merger must be privileged, not the nostalgia for an Mps banking model of the past that sometimes feel re-emerging “.
And in Europe?
«The issue of bank consolidation arises not only in Italy, but for Europe as a whole. The European economy must be supported by large banking entities, active internationally in all relevant fields – retail banking, payments, asset management, consulting and investment banking. This was a goal of the banking union which, nearly 10 years after its inception in June 2012, has not been achieved. It remains necessary to strengthen Europe, economically and also politically ».