The changing of the guard that is taking place at the systemically important central banks in 2018-19 will mark the beginning of a new era of monetary policy. Who is likely to lead this transition to a “new normal”? More important, just how new will it really be?
In the decade since the global financial crisis, advanced-country central banks have adopted unprecedentedly active monetary policies. The Bank of Japan’s Haruhiko Kuroda and the European Central Bank’s Mario Draghi maintain such policies to this day in order to stimulate economic activity and counter deflationary pressures. In contrast, the US Federal Reserve, beginning under former chair Janet Yellen, and the Bank of England, under Mark Carney, have been laying the groundwork for policy “normalisation”.
Another systemically important central bank, the People’s Bank of China, has focused not on monetary expansion but on financial reform. Former PBoC governor Zhou Xiaochuan built a strong reputation domestically and, perhaps more so, internationally during his record-setting 15-year tenure, owing to his gradual, steady and effective approach. Although the PBoC’s lack of official independence means that his authority to set interest rates was constrained by the advice of the 15-member Monetary Policy Committee, this did not affect Zhou’s ability to put in place the foundations of a financial sector befitting the world’s largest economy.
Yet, even as central banks face important transitions, the choices of their new leaders have reflected a desire for continuity. Most obvious, Kuroda has been confirmed for another five-year term at the BoJ, and Zhou was replaced in March by his own deputy governor, Yi Gang. Even Yellen’s successor, Jerome Powell, will probably amount to more of the same.
Of course, Powell was initially presented as a break from the past. After all, if US President Donald Trump had wanted to remain on the same path, he would have just selected Yellen for a second term (which would have been more in line with tradition). But in Trump’s view, the Democrat Yellen was a vestige of Barack Obama’s administration and thus had to be replaced with a declared Republican like Powell. But both Powell and Yellen are Fed veterans and seem to be following the same normalisation path.
In Europe, the changes brought by the new governors are likely to be more significant. At the BoE, Carney — who announced in November 2016 his intention to cut short his term — will remain in the job until a few months after the UK’s exit from the European Union in March 2019, in order to minimise any market disruption.
But Carney’s replacement is likely to represent a significant departure. Despite his impeccable track record as the governor of Canada’s central bank, Carney’s appointment was controversial: he has always been perceived as too close to the previous chancellor of the exchequer, George Osborne, and insufficiently sympathetic to Brexiteers. Carney’s successor will thus have to be congenial, if not amenable, to Brexit’s champions.
In a sense, however, Carney’s replacement will amount to the restoration of the status quo. After all, when Carney was “imported”, he was disrupting the tradition of in-house appointments — a tradition that will be revitalised if, as seems likely, one of the BoE’s current deputy governors is named as his replacement.
Perhaps the most profound shift will happen at the ECB, where four top posts will need to be filled by the end of next year. The recent nomination of former Spanish economy minister Luis de Guindos to serve as ECB vice-president offers some clues regarding what to expect.
In particular, the choice of a Spanish vice-president (which in Guindos’ case represents a break with the tradition — intended to protect central-bank independence — of not appointing politicians) suggests that the next president will come from the northern eurozone. Of the eurozone’s three largest economies, only Germany has never held the presidency. If the presidency goes to a German, that German will most likely be Bundesbank President Jens Weidmann.
A monetary hawk, Weidmann will struggle to win the support of the southern countries. Moreover, his nomination will trigger the resignation of another German, Sabine Lautenschläger, the only woman on the ECB’s executive board. The prospect of an exclusively male board — not to mention the fact that no woman was even short-listed for the presidency — will not go down well with the European Parliament.
The European Parliament’s preference for greater gender parity is surely welcome, though it is probably based more on a desire to avoid criticism than a genuine commitment to diversity. And, in fact, with their selections for the top jobs, all central banks are failing in this respect, even though diversity is now viewed, in many institutional contexts, as an indicator of good performance. In short, central-bank leadership remains an “old boys’ club”.
As we enter a new era for monetary policy, we should be seeking to overhaul central-bank leadership in a more fundamental way. The lack of diversity among candidates for the top jobs suggests that the selection process is far too narrow and inward-looking. Central banks ought to be cultivating younger people, women and minorities in order to broaden the range of approaches, skills, perspectives and expertise that effective monetary policymaking will require in the future.
Real change will come eventually. But for now, in terms of both policy and personnel, it is mostly old wine in familiar bottles. — Project Syndicate
Paola Subacchi is a senior fellow at Chatham House and visiting professor at the University of Bologna. Her most recent book is The People’s Money: How China Is Building a Global Currency.