European Integration Is Dead, Long Live Monetary Cooperation
The news of Britain’s decision in the EU referendum—and the subsequent resignation of David Cameron—created a wave of confusion and fear on financial markets. The pound sterling dropped to its lowest level since 1985, and the London stock market opened with a FTSE 100 lower by 8.9% compared to the day before. Debates were revived on what sectors of the British and European economy will be affected, what new policies must be designed to protect them, or how long and painful will the Brexit-driven recession be.
Amidst a sea of disagreements on all these points bound to keep debates alive for the time being, one policy decision was made that was not contested—nor is it likely to be—by either the winning or the losing side in Britain, or by any other administration around the world. As the Bank of England announced its decision “to provide more than 250 billion pounds ($347 billion) plus "substantial" foreign currency liquidity and… to take additional measures if needed”, no lively disagreements arose around the consequences of this decision, even as markets seemed to have quieted down after the initial shock. The European Central Bank and the Bank of China followed suit with similar promises. The Swiss Central Bank, the more conservative of national monetary authorities, rushed to weaken the Swiss franc and deter investors from seeing it as a safe haven.
This underscores three important aspects of the present world economy: First, while regional political integration may have lost momentum, monetary policy cooperation at a global level is alive and well. Second, the latter’s detrimental effects on the economy are much more perverse and much less observable than of other official intergovernmental agreements—and thus less likely to attract opposition, or even any attention. Third, and as a result, central bank cooperation, especially in crisis circumstances, is in fact more likely to attract support on all sides, and thus to cement monetary authorities in a position of ‘market makers’.
International central bank cooperation was long sought after since the 19th century as a way to allow for ‘monetary policy independence’, that is, domestic monetary expansion and artificial lowering of interest rates without international repercussions such as balance of payments crises. Rothbard (2008, 111) explained that central banks “coordinate monetary and economic policies… [in order to] harmonize rates of inflation, and fix exchange rates.” It was thus central bank cooperation that paved the way for the Nixon shock in 1971 and the present international fiat money system. Through central bank cooperation, the large bank bailouts which followed after the 2008 financial crisis were absorbed by the global financial system instead of burdening particular national economies. It was the concerted international action of monetary authorities which then precluded global markets from properly adjusting after crises, nipping in the bud capital outflows that could have destabilized the fragile financial systems of inflationary countries and their trading partners, and prolonging the recession.
The aftermath of Brexit is unfortunately no different. Every time central banks are handed the opportunity to ‘soothe’ markets, they also quietly expand their mandate and their grip on the economy. Decades of inflationary monetary policy have also created dependent financial markets, hanging on to the Fed’s, ECB’s or BoE’s every word, awaiting and welcoming their poisonous interference to artificially fuel their growth or prevent a plunge. Central banks are swiftly moving away from being a ‘last resort’. They are a first and main resort for perpetuating our hampering governments, even in the face of otherwise momentous changes.
Western European governments may have lost an important battle on the official integration front, but they are still far from losing the war on their citizens’ wealth.