In a world where financial instability is common, collaboration proves more effective than disorder

In the face of frequent economic shocks, governments and central banks are increasingly turning to coordinated fiscal and monetary policies to build resilience and cope with the fallout. This approach has been evident in recent years, particularly during the COVID-19 pandemic and subsequent economic recovery efforts.

The UK Chancellor, in response to shocks, may suspend her self-imposed fiscal rules and open up fiscal space for targeted interventions. This strategy was employed in the UK's recent Energy Bills Discount Scheme, which was aimed at energy-intensive industries. The scheme was a response to economic shocks and aimed to strengthen domestic production and reduce reliance on volatile markets.

On a larger scale, European governments and the European Central Bank (ECB) have implemented coordinated measures to combat economic shocks and inflation. These efforts included joint fiscal stimulus packages approved by member states and accommodative monetary policy measures by the ECB to support liquidity and stabilize inflation. The European Recovery and Resilience Facility has provided fiscal support to EU countries to aid businesses in a targeted way.

Across the Atlantic, the impact of Donald Trump's tariffs on the global economy has been a significant point of discussion. On the 7th of April, Trump imposed steep tariffs on the entire world. If these tariffs were to persist, it could be detrimental for the UK economy. The IMF has downgraded the UK's economic outlook as a result of the tariff announcements, with the OBR's latest forecast suggesting a 0.6% hit to the UK economy in the short term under a scenario where the US applies blanket 20% tariffs on goods from all countries.

In light of these economic shocks, the importance of a unified, collaborative approach to domestic monetary and fiscal policy is becoming increasingly clear. A paper from the European Parliament offers solutions for achieving cross-EU collaboration, while Gordon Brown has called for coordinating macroeconomic and financial policies across continents in response to the current crisis.

Monetary policy could be deployed to help protect domestic industry, such as by buying bonds from or offering discounted interest rates to businesses in key sectors like green energy. Higher uncertainty and supply chain fragmentation may reduce production, causing some prices to rise. In such cases, monetary policy can be used to maintain price stability and support economic growth.

However, it's not just about reacting to shocks. Increased fiscal space can be used to support the UK's upcoming industrial strategy, aiming to strengthen domestic production and reduce reliance on volatile markets. A unified, collaborative approach at home is essential in an increasingly shock-ridden world.

Even as we navigate these economic challenges, it's important to remember that the situation can change rapidly. Just three days after the tariff announcement, Trump changed his mind about the tariffs. The chaotic pivots by Donald Trump have massive implications for the UK economy, highlighting the need for flexible and adaptable fiscal and monetary policies.

In an increasingly uncertain world, the coordination and collaboration between fiscal and monetary policies will be crucial in helping economies weather the storm and emerge stronger on the other side.

In a world where financial instability is common, collaboration proves more effective than disorder