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Draghi, Yellen And Central Banks In The Age Of Trump

In the wake of the U.S. election, central bankers unite to stabilize the world economy in the face of populist calls to scrap regulations.

Yellen, Trump, Draghi
Yellen, Trump, Draghi
Marco Zatterin

-Analysis-

BRUSSELS — Two of the world's most powerful central bankers have united to warn U.S. President-Elect Donald Trump to leave financial regulations intact. After Federal Reserve Chair Janet Yellen criticized Trump's campaign promise of deregulation, European Central Bank President Mario Draghi made sure to swiftly express his support for his transatlantic counterpart.

An unwritten code of solidarity exists between central bankers. Former Italian President Carlo Azeglio Ciampi, who had earlier headed the Bank Of Italy, once argued that this was due to the strategic mission of central banks, which forces central bankers to work "between discipline and discretion, between autonomy and dialogue with the executive branch." When the going gets tough in an interconnected world, bank governors across the world often find themselves on the same side in the fight to guarantee financial stability in the global economy.

The tacit alliance between Yellen and Draghi has already come to the fore twice this year. In mid-June, both the Federal Reserve and the ECB pledged to do "whatever it takes' to stabilize financial markets in the lead-up to the United Kingdom's referendum on pulling out of the European Union. Now they are renewing their cooperation in the aftermath of Trump's stunning election victory, which has cast a pall of uncertainty on the economy even as stock markets perform strongly.

Mutual admiration

The strong bilateral links between the ECB and the Fed persists despite the different challenges facing the central banks" respective leaders. Draghi and Yellen are said to have a reasonably strong working relationship, fostered through frequent meetings at the G7 and at the annual economic symposiums in Jackson Hole, Wyoming.

The relationship has had a few tense moments when their interests have diverged: Draghi's unconventional monetary policy led to minor deflation and an appreciation of the U.S. dollar, hurting American exports, and the two institutions disagreed on banking risk laws from the Basel Accords.

Former ECB president Jean-Claude Trichet characterized the relationship between European central bankers as a "strong brotherhood based on mutual admiration," a description that also applies to the bond between the ECB and the Fed. When Yellen announced a week after Trump's election that she would stay on as Chair of the Fed, and continue with plans to raise interest rates, Draghi echoed her call to keep current financial regulations in place.

According to Draghi, legislation aimed at regulating financial markets since 2008 strengthened banks and made them more stable than they were before the financial crisis. He supports Yellen's declaration that we cannot "turn back the clock" on regulation, calling for effective implementation of existing policies rather than an overhaul.

The ECB chief remains convinced that the current regulatory framework should stay untouched. This would primarily ensure monetary stability, but also prevent any deregulation that makes European firms and credit institutions less competitive than their American rivals. Draghi views Yellen's opposition to Trump during the just concluded campaign as a kind of mutual guarantee of resistance, one comparable to his long-held opposition to German austerity policies. While the two situations are undoubtedly different, they are both examples of central bankers guarding their independence from political pressures.

Some financial analysts disagree, claiming that Trump's election provides Draghi an opportunity to take stronger action in Europe. He could pursue policies he believes in against the objections of the German Bundesbank, like extending the bond-buying program by six months in December to prop up the Eurozone economy.

Despite their divergence on interest rates — Washington raised them last December while Frankfurt hasn't — Yellen and Draghi share the same concerns that all central bankers have. They represent institutions that must resist the populist wave sweeping through politics and fight speculators who seek to take advantage of weaknesses in the economy. They possess the power to intervene in the economy and the financial markets at their discretion, but they must respect well-established rules. In the eyes of Yellen and Draghi, the American president-elect would do well to heed this message and respect the financial laws already in existence.

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