Drift Toward Protectionism a Serious Risk to Global Growth

European Central Bank president Mario Draghi said protectionist policies pose a "serious risk" for growth in the global economy.

At a gathering of central bankers, economists and others in Jackson Hole, Wyoming, on Friday, Draghi said the global economy is firming up. He told the audience in a speech that "a turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy," CNBC reported.

The comments come at a time when President Donald Trump is taking a hard look at the US's trade agreements around the world, pushing to reduce trade deficits and make conditions more favorable for American manufacturers.

Trump also came to office promising American business leaders he would break down regulations, which he said have constrained economic growth. The financial industry in particular seems poised to benefit if Obama-era regulations on banks and Wall Street get dismantled or diluted.

Draghi, a former Goldman Sachs executive, said "there is never a good time for lax regulation" especially because it can create incentives that lead to higher risk-taking. "By contrast, the stronger regulatory regime that we have now has enabled economies to endure a long period of low interest rates without any significant side-effects on financial stability, which has been crucial for stabilizing demand and inflation worldwide," Draghi said.

"With monetary policy globally very expansionary, regulators should be wary of rekindling the incentives that led to the crisis."

Those remarks follow a speech by Federal Reserve Chair Janet Yellen earlier in the day, when she said the financial system is safer now than it was at the time of the 2008 financial crisis. Some regulations that arose from that crisis may need to be adjusted, she noted.

Protectionism is a risk that "is particularly acute in the light of the structural challenges facing advanced economies," Draghi said in his speech.

The central banker said fostering a robust global economy was essential to preparing for the challenges of an aging population and strained public resources. By 2025, he said, there will be 35 people aged 65 and over for every 100 persons of working age in major developed economies, compared with 14 in 1950. At the same time, public debt levels have surged in those countries from 56% of GDP in 2007 to around 87% today, Draghi said.

"Only higher potential growth can provide a lasting solution," Draghi said. "So, clearly, to foster a dynamic global economy we need to resist protectionist urges. But to do so, we also need to identify how best to respond to protectionism."

Yellen Distances Herself From Trump

By broadly defending the sweeping financial rules put in place in the past decade, Yellen distanced herself from the anti-regulatory rhetoric of the man who will decide whether to replace her—Trump.

She emphatically defended the web of regulations the Fed helped enact after the 2008 financial crisis, saying it helped restore the banking system's health and disputing criticism that the rules have hurt lending, AP reported.

Yellen said the Fed is prepared to adjust the regulations as needed to help financial institutions. But she implicitly rejected efforts by Republicans, including Trump, to scrap the 2010 Dodd-Frank Act as a threat to the economy.

During the election campaign, Trump repeatedly criticized the Dodd-Frank Act, arguing that the rules hurt the economy by discouraging banks from making loans to credit-worthy borrowers.

“The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system,” she said.

The Fed chair said some aspects of the Volcker Rule, which limits proprietary trading by banks, may be simplified while the Fed is taking steps to reduce “unnecessary complexity” in rules affecting small banks.

“Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” Yellen said, in what could be her final speech as Fed chair to the Jackson Hole forum.

Yellen said any rollback of post-crisis financial reforms should be “modest” because they’ve made the banking system safer and more resilient, rebutting Republicans in Congress and the White House who blame regulatory red tape for holding back the US economy.