Prof. Nicolae Dănilă, PhD
Member of the Romanian Academy of Scientists
The impact of the global financial crisis of 2008 has been a fundamental one, generating radical changes in all areas, including the way people think and act. I like to believe that we, Romanians, have joined this trend both in thinking and especially in action.
The economic and financial field presents us with huge priorities, challenges and opportunities. A unanimous conclusion identifies at least two key directions for action: increasing national competitiveness and strengthening public finances, both of which can be achieved through a determined and continuous effort to increase investment and productivity. Strong economic growth must be embodied in a rate of sustainable growth, accompanied by an increase in income and a better distribution of wealth, with policies that maintain key macroeconomic balances and constructively integrate dynamism, creativity and intergenerational responsibilities ( Davos 2017). This economic dynamism needs to be an integral part of a development model that necessarily achieves three goals: stability, well-being and social inclusion (G-20, 2017).
I have expressed the view on several occasions that in this world marked by uncertainties, volatility, vulnerabilities and challenges we can identify a process that continues to make its mark: the expression and implementation of the national interest in all its complexity: political, economic, social, financial, educational. We are living in the period of two peaks of this phenomenon (I have mentioned them recently in the public domain), which will have a major national and international influence, namely the so-called “Trump Era” and Brexit.
I believe that post-crisis measures to re-regulate financial markets are also part of global policies. They show a strong national interest, including a reorientation of the directions of action towards the development of each national economy, with a concentration of financial, economic and human resources within each country. I agree that all this is part of the process of de-globalization, of bringing back national forces and their resources within each country, with a focus on economic, financial, new value creation and especially the creation of new ones. new jobs.
The lessons of the crisis objectively call for an increase in the public role of central banks, including the National Bank of Romania. I remember one of my interventions, when I recommended a rethink of the objectives, mission and role of the NBR (ZF, 04.01.2013). I mentioned at the time, among other things: “The role and involvement of the central bank must be intensified as part of the government’s efforts to implement macro-stabilisation and growth recovery policies”. There have been many positive comments about my position, but there have also been many criticisms, some of them harsh.
It is necessary to start from the premise that the NBR is not and should not be a political or politicised institution. Policy decisions are of great importance for the functioning of the economy, for the consolidation of positive effects and for the sustainability of macroeconomic balances in the process of societal evolution. The NBR is not called upon to censor political decisions. This institution contributes with solutions to find the best forms and ways to implement and finalise political decisions. In fact, in this way the NBR effectively and efficiently achieves its objectives. Cooperation with all state institutions, especially with the Government, regardless of its “political color” to increase the effectiveness and efficiency of the policy mix at the national level, must be a permanent and mandatory concern of the NBR. After all, we live in a world where we have independent central banks on the one hand and democratically elected governments on the other. A balanced and efficient environment arises when there is mutual respect between the two parties: central bank independence is recognised (with the general consensus being permanently achieved in its work that the objectives and role of a central bank must be channelled towards the achievement of the national economic interest and be consistent, through its specific solutions, with economic policy and government decisions) and, conversely, central banks are not perceived as institutions that over-influence democratic governments (not appropriate in a normally functioning economy).
The cooperation between these two key structures of the country embodies the main characteristics required at macroeconomic level: to be effective, efficient, constructive, proactive and with a high degree of mutual respect. A central bank should not use monetary policy as a tool to influence government decisions. At the same time, a central bank should not be used as a political tool. I am of the opinion that the involvement of the central bank with analysis, comments and solutions must be found before decisions are taken by the government, not only through the media, but also through direct, non-direct discussions. Once the political decisions are taken, in the process of implementing and finalizing them, the central bank comes up with specific policies and tools (conventional and unconventional) that add value to political decisions and reduce their possible negative effects with influences on macrostability. Moreover, monetary policy is not the main and only macroeconomic policy and is not a substitute for structural reforms, which must be initiated and finalized by the government. Politicians often delay the launch of national programmes and structural reforms, leaving room for a reality where monetary policy is perceived as “the only game in town”.
I agree that monetary and financial stability policies well anchored in the real economy can “buy time” for governments until they complete the policies and reforms required by the stage of the national economy and the long-term national interest, including the economic growth model and sustainable policies that produce the necessary social, political, economic and financial balance. After all, monetary policy can stimulate or restrain the real economy, but in the short term. Governments are the ones who may or may not “set” the economy on a sustainable and permanent long-term growth trend by implementing specific labour market, economic and social reforms. Realistically, however, I see big challenges for the central bank in the immediate period ahead: related to its independence and especially the continued expectation that a central bank can, through its policies, make the economy work, reduce unemployment, ensure strong growth and maintain price stability. Exaggerations in this direction are counterproductive and may undermine the central bank’s credibility and public support for this institution. In this regard, the Governor of the Bank of England pointed out that we must not confuse the independence of the central bank with its omnipotence. “While carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot solve broader societal challenges” (Carney, London, Conference, 28 September 2017). At the same conference, in relation to the topic addressed by Governor Carney, another speaker, Guy Debelle – Deputy Governor of the Reserve Bank of Australia (Debelle, 28 Sept. 2017 – London) – said that a central bank is dependent on political decision in terms of its objectives translated into targets in close correlation with the priorities and programmes set by the government at each stage of the national economy, but it is independent in terms of the policies and instruments it uses to achieve its objectives and functions.
In the process of fulfilling its role and objectives, the central bank is accountable and reports to the politicians: ‘So with independence has come the accountability. The accountability is to the politicians and the population at large, not a small group of central banking aficionados, nor the financial markets’ (Haldane, 2017). In the same vein: “the central bank should not be regarded as a front of all wisdom. To do so risks comprising the independence…” (Debelle, 2017). The process of transformation that the central banks are going through in the direction of their modernization highlights the main internal reform, namely the change of the culture and the mentality of the central bankers. “The period of financial globalization transformed the academic economist into an active policymaker – as central banker and even as finance minister. The next decade will flush up an altogether different set of characters and institutional mechanisms” (Wolfgang Munchau, F.T. 14.11.2016).
In the coming years we will see national and international experimentation on how central banks will deal with the three categories of challenges (Borio – 2011): economic (central banks will operate in a hostile economic climate), intellectual (economic paradigms have overturned many of the benchmarks, economic models and analyses of central banks; it has been shown that ensuring price stability is not a guarantee against financial and macroeconomic instability), institutional (central banks need to adjust their policy set and instruments in a way that does not damage their reputation and independence). Let’s keep in mind a reality in constant transformation: we live in a world of interaction, and as a well-known analyst put it: “We are not living in a world of mathematics. We are living in a world of facts”.
The actions of those who make decisions at the national level, regardless of the central institution where they operate, have as their main purpose the creation of a prosperous and inclusive society. Building an inclusive society must start with educational reform. Increasing the level of preparation of human capital, the main resource of each country, is a key factor that leads to increased productivity, competitiveness and diversification of the national economy. Well-designed macroeconomic policies implemented in an effective and efficient mix lead to the sustainability of potential growth and benefit the whole population by creating better jobs, increasing wage earnings and ensuring a high quality of goods and services. It is necessary to recall the truth that productivity remains the challenge and the main source of long-term sustainable economic growth. Increasing public support for entrepreneurship and innovation, defining key productive sectors with high growth potential, achieving sustainable financing of the real economy from banks, the capital market and national and European public funds, reducing bureaucratic barriers to investment are priorities for government cooperation with other decision-making structures at the macro level, including with the National Bank of Romania. In order for the process of achieving the objectives, as well as the transmission process of the monetary policy of the NBR to be completed effectively and efficiently, it is necessary that robust and sustainable economic growth and job creation are reflected in a better and more efficient use of capacities and factors of production, a process that in the long run will create the expected phenomenon of pressure on wages and inflation…” (Draghi, 2017).
By analysing the strategies and activities of central banks in EU countries or worldwide, we can identify their main functions, in relation to their public objectives and role, with the necessary projections and a look into the future:
Ensuring monetary stability
Financial stability, in all its forms
Regulatory and supervisory activity
Functions related to operational issues
Functions related to financial infrastructure
I will now make a few references to the last category in view of the classification of the central bank as an institution of public interest, taking into account the influence of the other functions (which have been and will be increasingly written about) on society.
Promoting institutional development and financial markets. I refer to the mission of the Eurosystem (of which we are a part) as stated by the Governing Council of the ECB: “to safeguard financial stability and promote European Financial integration” and “shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system ”. To a large extent, this role correlates with that of the government in the direction of institutional regulations and arrangements and with the policies of allocating resources in the economy to achieve development goals. The implementation, effectiveness and transmission of monetary policy are closely linked to government decisions and how they are implemented. I include here the need for a better “design” of the role and especially an effective coordination of the involvement of the Ministry of Finance, the NBR and the ASF in the macro-prudential structures and mission, which would contain decisions and solutions with long-term applicability and effects. The central role in these macroprudential objectives lies with the NBR. The central bank, not being a political institution (as it should be in reality), has a specific involvement in economic management, setting an anchor for inflationary expectations and providing a good basis for sustainable economic growth, characterized by a balance between support productivity and national income and wealth distribution policies. The independence of the central bank and the synergy between macro-prudential policy and monetary policy strengthen the process of implementing macro-prudential measures to eliminate or mitigate in time the negative effects that may be caused by systemic risks.
Particular attention should be paid to the governance arrangements within these structures, which should clearly separate their involvement in the crisis prevention process, and separately in the crisis management process. In the area of crisis management the role of government and its structures is inevitable. In the area of crisis prevention, the autonomy of institutions called upon to take macro-prudential decisions is essential.
Economic development: the central bank’s involvement relates to its decisions and policies through the use of specific instruments (lending to and attracting deposits from banks, market liquidity and repo transactions, regulations on lending in the economy, intervention in the exchange rate of the national currency against major currencies, bank resolution, etc.). Linking the activity of the central bank with government actions and policies is essential, given that many of the measures and instruments used by the central bank need financial support and the creation of a legal framework from the government (the central bank has no legislative initiative). Conventional and unconventional central bank policies and instruments need to be well structured. I believe that the central bank is called upon to be proactively involved in maintaining financial sector initiatives in the direction of financing the real economy. Commercial banks and the central bank have a high social responsibility reflected, among other things, in achieving financial inclusion. Romania’s economic situation and the targets we propose for the current and future stages, targets objectively imposed by the unprecedented transformations that occur at European and global level, impose policies of the central bank that maintain a balance in the dynamics between the need for financing the real economy, on the one hand, and the strengthening of the financial system and its stability (emphasizing, with priority, the strengthening and development of entities with majority domestic capital).
The concerns and decisions of the countries in these directions are obvious. I recall the priorities of the current US administration, which wants, among other things, to keep the cost of financing low (low interest rates), deregulate the financial markets and revitalize the national economy. To this end, it has asked the Fed – the US central bank (I know there will be comments on its much broader status and role compared to Europe) – for specific policies and instruments to help achieve the following national goals: supporting faster economic growth, lowering the trade deficit and creating new jobs – reducing unemployment. We are talking about the priorities of the strongest economy and the objectives of its central bank. It is obvious that in such a process one assumes the risks of entering an upward trend of inflation and even the detriment, it is true to a lesser extent, of financial stability. What I want to stress is that we have a clear example of putting into practice the skills needed by every government in relation to Priorities and Prioritisation. We started talking today about the possibility of decisions to change the NBR policies and instruments used during the recent crisis with a greater or lesser effectiveness and efficiency. I believe that we should not rush into taking decisions and thus forget the many systemic mistakes made by some central banks throughout the recent history of economic and financial crises, namely changing key elements in monetary and financial stability policies before the economy of the country concerned has fully recovered from the crisis and is on a sustainable growth trend (see also Central Banking, Vol. XXIV, number 3, February 2014). The situation of the national economy and the expectations of Romanians also require us to prioritize and prioritize at all macro levels, but necessarily in close correlation with each other.
Protection of customers of financial institutions (consumer protection). I agree to a small extent with the views that there are institutions legally empowered to perform this function. I believe that a central bank has a direct and indirect responsibility in achieving this public goal. After all, the entire activity of supervision, achieving financial stability and macrostability has as final goal precisely the achievement of the stages characterized by a stable, sustainable economic and financial climate, with beneficial effects on the present and future welfare of the population, income protection. and wealth accumulation at the national and individual levels. The examples of other countries can be lessons for us.
Advising the government: with analysis and solutions to economic and financial problems, support in structuring and obtaining national financing from domestic and international markets. At this time we have a priority: there is a need for increased cooperation and consultation between the Presidency, the Parliament, the Government and the NBR on taking a political decision on the timing of Romania’s accession to the Banking Union and the Capital Markets Union, and subsequently to the Eurozone. Europe is moving fast. We need to stay connected to the transformation process of the continent. In this respect, a political decision by Romania is imperative, because we have a complex path of economic development, convergence, reforms and adjustments to go through until the time we propose to join the Euro, with the intermediate stages of accession mentioned above.
I have repeatedly said that we need to become strong, competitive, in a reasonably short period of time in order to be prepared for an EU-wide political decision to join all euro-member countries, but especially to avoid the danger. our decoupling in case the analysis of economic realities “will give water to the mill” to a political decision of the Eurozone to postpone for an “indefinite” period the accession of our country to the single European currency. We are called upon to continue to pursue the country project to which we have irrevocably committed, namely to complete EU integration, but from a position of a strong and competitive country. Once the political decision is taken, the NBR and to a certain extent also the ASF are called upon to come up with solutions and programs for the technical aspects of accession (Dănilă, 2015). Why can’t we have an institutional economic and financial advisor in the central bank? Such a transparent stance would support increased confidence in the central bank, strengthen its independence and improve the effective and efficient delivery of its policies and decisions.
Financial education. It is one of the crucial responsibilities of the central bank and the financial system as a whole. The new strategies, the new business models, the very existence of these institutions are closely related to the level of understanding of financial phenomena and activities by the population and companies. Let us not forget that we are living in a time of crisis of confidence in central banks and commercial banks. Raising the level of financial education of the population and the business community will increase their confidence in the central bank and other financial institutions. Much has been written about financial education and more will be written.
I conclude my public intervention with some references to the views of Gillian Tett (F.T. 11.11.2016), who saw 2016 as a “big economic policy inflection point”. Mention that “is a deep conviction that governments cannot reignite growth by relying on monetary policy alone. Rather, fiscal and supply side reforms are needed”. He goes on to say that historians will come to the following conclusion: ‘the most important inflection point is not about deregulation or tax cuts, instead, the pendulum swing that matters is about the ROLE OF CENTRAL BANKS’. It concludes that central banks are not and cannot remain “the only game in town” and that “fiscal and supply side policy is now CENTRE STAGE”.
There will be comments and criticisms on the above. I’m glad about that. I am afraid, however, that we will continue to indulge in analyzes and arguments “after the fact” and even with firm positions such as “it is not possible”. But we forget that our role in society is not just to say or even to repeat “no way”, but we are called to come up with initiatives and solutions for the present and future of the country and ourselves.
- Borio, C.: “Central Banking Post-Crisis: What Compass for Uncharted Waters”, Central Banking Publications, London, 2011.
- Dănilă, N .: “The window of opportunities and challenges for Romania”, AOSR Publishing House, Bucharest, 2015.
- Dănilă, N .: “What is Romania’s country project in the next 10 years”, AOSR and Hotnews site, August 31, 2015.
- Debelle, G.: “Central Bank Independence in Retrospect”, London 28 Sept. 2017 (address at Bank of England Independence: 20 years on Conference).
- Draghi, M.: Speech at the ECB Forum on Central Banking, Sintra, 27 June 2017.
- Haldane, A. : “A Little More Conversation, a Little Less Action,” FRB of San Francisco, March 31, 2017.