Praet Warns Central Banks May Have Trouble in New World Order

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The European Central Bank’s freshly retired chief economist is worried about the state of the world.

In his first public speech since leaving office last month, Peter Praet warned about the lack of trust in institutions and the danger of ever-spreading protectionism that could leave central bankers unable to deal with the consequences.

“Basic institutions are put into question today,” Praet said in a speech in Brussels at the Belgian central bank, where he was on the executive board before his eight-year stint at the ECB in Frankfurt. If the framework for global trade were to change fundamentally as a result of the conflict between the U.S. and China, “the consequences for the world economy would be very grave,” he said.

Negotiations between the U.S. and China are currently deadlocked after several rounds of tit-for-tat trade tariffs. On top of that President Donald Trump threatened last week to slap new tariffs on Mexico unless it stemmed migrant flows to the U.S.

Flagging trust in global institutions is particularly worrisome compared to other recent challenges “because it’s very difficult for monetary policy to deal with that,” according to Praet. An interest rate cut may not help if central bankers had to warn of a “trade war maybe tomorrow morning.”

Praet highlighted the U.K.’s departure from the European Union as another source of uncertainty. “Will it be orderly? Nobody knows,” he said. “Sometimes you say nobody wants to shoot yourself in your own foot but sometimes societies can be in vicious circles and destroy wealth for generations.”

To contact the reporter on this story: Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss, Brian Swint

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