Traditionally, popular perception of diplomacy is one of meticulous negotiations conducted by career diplomats and foreign ministers, culminating in grand summits, eloquent speeches and the inevitable signing ceremony. Recent years have provided a new twist on this worn narrative, with diplomatic initiatives having on occasion become more direct, impromptu and not shy about harnessing the power of social media as a mean of influencing third-party opinions.
Yet beneath the noise and clamour of these visible negotiations lies the quiet hum of far less perceptible - but no less important - other forms of international cooperation. Altogether less flashy, they unfold quietly and continuously, providing a stable bedrock for interactions between different countries and institutions. One such example is the quiet diplomacy of central banks.
The conventional view and, indeed, one of the cardinal principles of central banking, is that they are apolitical institutions. Central bank independence is a cornerstone of Eurosystem regulations; for sound economic reasons, governments should not intervene in or influence the policy decisions of their national central banks. This rule cuts both ways; central banks are not foreign ministries and they must remain focused on and accountable to their mandate, usually primarily price stability, financial stability, and in some cases economic growth.
The thorny circle that this particular arrangement must square, however, is that central banks neither exist nor operate in a cosy little bubble set apart from the events of the wider world. It is all very well to refrain from political actions or commentary, but what is the solution when political decisions send prices soaring and central banks suddenly have to scramble to react? In the post-war globalised economy money and finance are inherently international. Capital flows across borders in mere seconds, exchange rates respond instantly to global news and financial stress in one country can quickly spill over into others. Within this reality of international co-dependence, prudent central banks must maintain an international and proactive outlook.
Resolving this conundrum has led central banks to engage in what is termed as 'quiet diplomacy'; not in the form of signing treaties or issuing joint statements on geopolitical matters but rather in sustained cross-border dialogue and cooperation that helps underpin global financial stability. In an increasingly uncertain international environment that shows little sign of abating, this understated role has become more vital than ever.
One of the clearest-cut examples of this cooperation is that which occurs during periods of heightened financial instability. Operating through pre-existing channels, during global crises central banks step in to provide liquidity not only to their own financial systems but, indirectly, to others. Currency swap lines - agreements that allow central banks to temporarily exchange currencies - are a prominent case. These arrangements help ensure that banks and firms have access to key currencies, reducing panic and preventing disruptions from spreading contagion across borders. Swap lines are technical instruments, but their implications are simultaneously diplomatic and function outside of the political spotlight.
While coordination during crisis management is critical, even more so is preventing the state of affairs from escalating to that point. Governors and senior officials regularly meet at international forums such as the International Monetary Fund, and also communicate bilaterally. These meetings are not characterised by sweeping agreements that attempt to upend the world order at the stroke of a pen; rather, they are about exchanging views, comparing experiences and learning from each other as fellow professionals, as well as to address challenges in a co-ordinated way where this could create better outcomes, especially given the higher degree of interconnectedness in a globalised world.
Technical assistance is another soft but significant channel of international engagement. Many central banks provide training and support to peers in emerging and developing economies, helping them strengthen monetary frameworks, payment systems and supervisory practices. These efforts constitute a critical element in building long-term capacity and trust on both institutional and personal levels. Over time they also contribute to a more resilient global financial system; an outcome that benefits all parties.
As with every other aspect of central bank operations, quiet diplomacy is contingent on credibility and non-partisanship. Central banks are able to cultivate lasting relationships and engage across borders precisely because they are perceived to be professional, non-politically aligned institutions focussed exclusively on their mandate at law. Retaining this legitimacy cannot be compromised by any other consideration.
The soaring instability of the global environment has only strengthened the need for this quiet diplomacy. Geopolitical tensions, trade fragmentation and the disruption of global supply chains all have monetary and financial implications. Inflationary pressures, exchange rate volatility, and shifts in capital flows increasingly reflect global rather than purely domestic events. While central bank diplomacy has clear limits and operates in an environment dominated by political decisions, its judicious use can ensure that central banks neither become passive spectators nor helpless victims.
From a public perspective, the invisible, overlooked nature of quiet diplomacy is its greatest sign of strength. Central bankers stepping onto the podium in times of crisis is not necessarily an indication of their failure. It may, as Mario Draghi did so memorably in 2012 when he pledged to do 'whatever it takes to preserve the euro', even be the catalyst towards averting greater catastrophe. However, ideally the quiet diplomacy of central banking, especially through established institutional channels, would serve to avert the need for such occasions from arising in the first place.
Matthew Zammit is a senior expert within the International Relations Office with the Central Bank of Malta