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World: Central Bankers Coordinate Economic Relief Following Attacks

  • Kathleen Moore

Governments and central banks in the West were quick to try and cushion the economic impact of the 11 September terrorist attacks. In a remarkable display of coordination, central banks across North America, Europe, and Japan cut the cost of borrowing in an attempt to boost growth. Could this be the basis for further cooperation, or was it a one-off event? And with bailouts to certain industries and stricter regulations on financial movements in the pipeline, is the tide finally turning against unbridled free-market ideology?

Prague, 26 September 2001 (RFE/RL) -- The 11 September terror attacks struck at the heart of the United States' financial system.

Billions of dollars' worth of financial trades were lost as Wall Street shut down. Shares in insurance companies and airlines plummeted amid wider stock market falls around the globe. The service sector suffered as customers stayed home. Oil prices were volatile and slumped to their lowest levels in 18 months.

In the words of Alan Greenspan, the chairman of the U.S. central bank, the Federal Reserve, economic activity simply "ground to a halt."

It's too early for any concrete data to come out on the period following 11 September, but financial authorities around the world were quick to try and soften the blow.

The Federal Reserve took the lead by cutting interest rates as Wall Street reopened for business five days after the attack.

Just hours later, the European Central Bank followed suit by lowering the cost of borrowing in its 12 euro-zone countries. Within two days, central banks in the UK, Sweden, Denmark, Japan, Switzerland, and Canada had also cut rates in what became a global effort to avert a looming recession.

Veronika Lammer is an analyst at Die Erste Bank in Austria. She says the exceptional circumstances prompted coordinated action on a much bigger scale and in a much shorter period of time than previously witnessed. But she says it's not completely without precedent.

"In special situations, central banks and politicians cooperate in a very close manner. This was one of these examples. But we had rate cuts during the crisis in Russia [in 1998] and several rate cuts during the [1997] Asian crisis. So in such special situations the cooperation is very close."

She says it's more effective when authorities in different countries act together rather than alone, but she doubts if we'll see a repeat performance anytime soon.

One prominent figure hoping for some more of the same is German Chancellor Gerhard Schroeder, whose country has seen its economic prospects dim this year. He praised the actions of the U.S. Fed and the ECB today in an address to the German parliament.

"Also, the international cooperation of the financial institutions has worked. I was very happy that the U.S. Federal Reserve and the ECB cooperated, they played some of the most important macroeconomic roles. The ECB has recognized its responsibility for growth in this situation and took positive steps. I can only advise that they take this course further, to look for closer cooperation and to take corresponding further decisions."

Alan Roe is a senior lecturer at Warwick University and former principal economist at the World Bank's European and Central Asian department.

He describes the coordination as a "historic precedent" but adds that it might be difficult to arrange further such cooperation in the future.

This is because various economies are growing at different rates and experiencing different levels of inflation -- two factors that are key in how central banks set interest rates.

"The problem has been that different economies are at different stages of the business cycle and have different requirements. The anxiety to cooperate was catalyzed by the disastrous events of 11 September. Whether we would see similar ease of cooperation in relation to somewhat lesser events than that -- it's very hard to know. But I'd have thought that this example is going to set the stage for an effort to have more examples of such type of cooperation in the future."

Roe says coordinated action should be more effective in combating the main problem facing the global economy today -- the collapse in consumer and business confidence.

"That's a collapse of confidence that's going to apply to all the major economies around the world, so in those circumstances it wouldn't be particularly effective for monetary relief to come simply from the U.S. or one of those economies. It has to come across the board."

Whether the recent round of cuts is enough remains to be seen.

In cutting interest rates in response to the attacks, central banks made clear they were more concerned about economic growth than inflation, which can rise when interest rates come down.

Until recently, the U.S. and European central banks were more worried about inflation. They were eager to avoid linking their decisions to any desire to boost economic activity -- seen as an old way of thinking that is not in keeping with the current "hands-off" approach to economics.

Add in the financial aid to airlines approved in the U.S., along with tighter rules for financial transactions under discussion, and opponents of the free market could start to argue that state intervention in the economy is coming back into fashion.

But Roe says he doesn't see any real shift away from free-market thinking toward interventionism.

"The anxiety about inflation versus growth -- this is something that was there before 11 September. Many central bankers had ceased to put inflation at the top of their worry lists. With the impending recession in the U.S., the growth agenda had moved into greater prominence. That was something that was happening anyway."

He also says there's not much enthusiasm for industrial support, beyond helping airlines deal with soaring insurance premiums right now.

And he says the initiatives to cut off terrorists' money supply are also part of a debate already underway on combating money laundering.

"I see this as an intensification of things that were already in the pipeline. It's sharpened our thinking, of course, but I don't think it's a major shift in the nature of policies."

One upcoming event that may yield fresh cooperation is the meeting of finance ministers from the group of seven leading industrialized nations, set for next week.