Technology products will predominately suffer if the trade war between the US and China starts to impact global supply and production chains, Olli Rehn, European Central Bank (ECB) governing council member and governor of the Bank of Finland told a conference in London this week.
“The main effect, and the main concern today is - at least with my meetings with market participants - whether we are meeting the levels or threshold of this trade war journey into [something] real in the sense of eroding the basis of supply and production chains,” said Rehn. “That is part and parcel, and is the essence of economic globalization, that you have cross border production chains between Europe, US and the rest of the world. And if you start doing that, mainly with tech products which is a big part of our economy, would suffer really significantly.
“You are certainly right that the current trade tension or as they are also called the trade wars, the tensions have escalated beyond aggravated. They are clearly behind the pervasive uncertainty as Mario Draghi eluded this is currently eroding confidence in the global economy. It is an issue we have to look at very carefully. On the one hand trade tension also impact inflation upwards, I think that factor is fairly limited,” he said.
On May 27, Reuters reported the Italian deputy prime minister Matteo Salvini had requested that the European Central Bank should “guarantee” government debt in order to keep bond yields low.
For Rehn, this goes against modern central banking, and even the EU treaty.
“I understand that the leaders of Italy are concerned about their economy and Italy has had two or three decades of quite low productivity growth which is underneath the province of a great country and there is plenty of economic and entrepreneurial potential to be liberated in Italy. At the same time, Italy’s public debt is already at the level of 134% of GDP and obviously that poses some constraints for decision makers in Italy,” said Rehn.
“It is not a surprise that I am not very fond of this particular idea as a course because it goes against the principle of modern central banking, which is that they are forbidden to do monetary financing for governance. And I would consider it against the EU treaty.
“We are active players in the fields, and sometimes unfortunately the only active players in the field. The governments need to take more responsibility for their contribution in fiscal policy and statutory reforms to divide the European economy up to improve its productivity, innovative capacity, and ultimately the employment aspect is welcome.”
The ECB is expected to begin research into its monetary policy strategy to fully understand the impact of low inflation, according to Rehn.
“I think it is important that we analysis the reasons why we have such low levels of inflation, why we have such low national rate for interest as we have today… That is why I have proposed that it is important for the ECB also to renew its monetary policy strategy for the medium to long term, and analyze the reasons behind the recent global investment expectations,” he said.
“We have two or three clear candidates for this, one is certainly that low inflation expectations following the long shadow of the financial crisis and the other is that the Philips curve doesn’t behave as it used to, in the sense that you had a rather flat Philips curve a negative correlation between core inflation on one hand and unemployment on the other. We should do research to analyze the reasons for this.”