The Fed's Guns Have Been Spiked By Reluctant Friends

(Bloomberg Opinion) -- The U.S. Federal Reserve delivered a bombshell rate cut on Tuesday, as it braced for the impact of the coronavirus outbreak on the American economy. There are legitimate doubts over whether central bank action will make much difference in an emergency that’s primarily medical. But to the extent that monetary policy can help, it’s regrettable that the Fed had to act alone, and not in coordination with other central banks.

The Covid-19 epidemic is a truly global shock with truly global consequences. There are, of course, differences in timing: The outbreak originated in China, which may now be past the worst. Most new registered cases are coming from South Korea, Italy and Iran. Other countries, including France, Germany, the U.K. and the U.S., have just started to prepare for a steep increase in contagion. The World Health Organization may have not have labelled the disease a “pandemic,” but we don’t look far from that point.

The finance ministers and central bankers from the world’s seven main economies held a conference call on Tuesday. For all the choreography, the meeting produced little. The officials reaffirmed their boilerplate commitment to “use all appropriate policy tools,” including fiscal policy, but they fell short of taking action. The response to the emergency is undoubtedly complex. It is not clear how long the damage will last, nor whether it will have more impact on supply chains than on consumer demand (which matters hugely to inflation predictions). But at a time of severe crisis, this was a spectacular failure of international coordination.

The Fed’s move was therefore a lot less powerful than it might have been. Imagine if all central banks had chosen to take action simultaneously, as they did during the global financial crisis or after the tsunami in Japan in 2011. Finance ministers should have also joined in, outlining their plans for a coordinated fiscal response. Clearly, this would not solve a medical emergency. But it would have assuaged some fears over the ability of policymakers to stand united to protect the world’s economy and to act fast in a crisis.

Europe’s top officials bear a large chunk of the blame. On Monday, Ursula von der Leyen, European Commission President, set out plans for a task force to combat the epidemic. But most governments — with the laudable exception of Italy — have yet to explain how much money they’re willing to commit to fighting this emergency. Euro zone finance ministers will hold a conference call on Wednesday. One hopes that the result is less disheartening than the one from the G-7 gathering.

The European Central Bank is also looking behind the curve. The ECB was the last of all the major central banks to state its willingness to intervene if needed — and its choice of wording was especially feeble. The fear is that President Christine Lagarde may have caved in to the traditional stubborn reluctance of some national central banks, such as Germany’s Bundesbank, to expand monetary policy.

Mario Draghi, Lagarde’s predecessor, was willing to sacrifice consensus in order to act decisively. When the ECB governing council meets next week for its regular policy meeting, Lagarde — who is more of a politician than Draghi — may need to show whether she’s willing to do the same. A large-scale scheme to provide liquidity to small- and medium-sized enterprises is the least the ECB can do. An interest rate cut and an increase in the size of asset purchases should also be on the cards.

There is no guarantee that these policy responses would actually work. The stock market may initially take any dramatic steps from policymakers as a sign that the outlook is worse than feared — as it seemed to do on Tuesday following the Fed’s announcement. However, as the human and economic cost of the coronavirus spreads, a bigger risk is minimizing what is happening and acting too late. Europe should lead from the front, not hide at the back.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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