International banking

Geopolitics and technology threaten America’s financial dominance

And now the covid-19 pandemic is precipitating a split, says Matthieu Favas




IN JANUARY AN American former general spoke at a gathering of senior global financiers.

Used to thinking about strategy and hard power, he warned that America is dealing poorly with its most complex array of threats since the cold war—from Iran and Russia to the novel coronavirus. But he also spoke of a much less visible threat: how, through its aggressive use of economic sanctions, America is misusing its clout as the predominant financial power, thereby pushing allies and foes alike towards building a separate financial architecture.

“I’m not sure of the decider-in-chief’s appreciation for how the financial system works,” he said. That a former general would be thinking about the global financial system says much about how significant that danger has become.

The system is made up of the institutions, currencies and payment tools that dictate how the invisible liquidity feeding the real economy flows around the world. America has been its pulsating centre since the second world war. Now, though, repeated missteps, and China’s growing pull, have begun to tear at the seams.

Many assume the status quo is too entrenched to be challenged, but that is no longer the case. A separate financial realm is forming in the emerging world, with different pillars and a new master.

The hegemon-in-waiting financially, as geopolitically, is China, whose rapid rise is tugging away at the system. The country today accounts for 15.5% of global GDP, up from 3.6% in 2000. Its economy, the world’s second-largest, is deeply woven within the fabric of global trade.

Yet it weighs little in the financial system.

China sees correcting this asymmetry as crucial to gaining great-power status. “The dollar dominance is being hollowed out from underneath,” says Tom Keatinge of RUSI, a think-tank. The covid-19 crisis threatens to give centrifugal forces a decisive boost.

The system’s first pillar was laid in 1944 with the founding of the World Bank, the IMF and the global monetary order at Bretton Woods, New Hampshire. Having supplied weapons to allies throughout the war, America owned most of the planet’s gold, in which it priced its wares. Much of Europe and Asia lay in ruins.

The interwar system of floating exchange rates had proved dysfunctional. It was thus decided that all currencies would be linked to the dollar, and the dollar tied to gold. That made the greenback the world’s new reserve currency. Two decades later the rising economic heft of Japan and Germany, coupled with vast money-printing by America during the Vietnam war, made the pegs untenable. The system disintegrated, but the “dollar standard” survived.

In the 1970s America also gained sway over the plumbing system that underpins global payments. American banks, then barred from operating outside state borders, teamed up to develop interbank messaging systems and nationwide ATM networks.

Lenders also clubbed together to form credit-card “schemes”—associations setting the rules and systems through which members settle payments in plastic.

Those worlds merged when two major card networks (soon rechristened Visa and MasterCard) bought the two largest ATM firms to expand overseas. By allowing individuals to shop anywhere, cards and cash machines became the dominant infrastructure for moving small sums of money across the world.

A revolution soon ensued in large-value transfers. In the old “telex” system, a cross-border payment between banks required the exchange of a dozen messages in free text, a process prone to human error. In 1973 a group of banks joined to create SWIFT, an automated messaging service assigning a unique code to every bank branch. It became the lingua franca for wholesale payments.

New technology boosted America’s banks, which became better equipped to follow clients overseas, and its capital markets, helped by the digitalisation of paper assets. Having rebuilt, savings-rich Japan and Germany parked their dollars in treasury bonds. A housing boom spawned asset-backed securities.

Between 1980 and 2003, America’s stock of securities grew from 105% to three times GDP, forming the international springboard for its investment banks. After a regulatory big bang in the 1990s, they merged with commercial banks. By 2008, 35 firms had become the big four—Citigroup, Wells Fargo, JPMorgan Chase and Bank of America—the last prong of America’s financial dominance.

America’s pull within the system remains huge. When disasters strike, the dollar surges. It is still the world’s safest store of value and its chief means of exchange. That makes the institution that mints it the metronome of global markets. In 2008 America’s Federal Reserve avoided a general cash crunch worldwide by offering “swap lines” to rich-world central banks, allowing them to borrow dollars against their own currencies.

When panic gripped markets again this March, the Fed expanded the offer to some emerging countries. In April it widened it further, allowing most central banks and international institutions to exchange their American debt securities against greenbacks, thus stalling the stampede.

The world’s financial plumbing remains under America’s thumb, too. SWIFT’s 11,000 members across the world ping each other 30m times daily. Most international transactions they make are ultimately routed through New York by American “correspondent” banks to CHIPS, a clearing house that settles $1.5trn of payments a day.

Visa and Mastercard process two-thirds of card payments globally, according to Nilson Report, a data firm. American banks capture 52% of the world’s investment-banking fees.

All change

Three things are driving change. First, the “push” factor of geopolitics. America’s centrality allows it to cripple rivals by denying them access to the world’s liquidity supply. Yet until recently it refrained from doing so. The financial system was seen as neutral infrastructure for promoting trade and prosperity.

The first cracks appeared after 2001, when America started using it to choke funding for terrorism. Organised crime and nuclear proliferators soon joined the list. It persuaded allies by presenting such groups as threats to international security and the integrity of the financial system, says Juan Zarate, a former adviser to George W. Bush who designed the original programme.




The arsenal gained potency under Barack Obama. After Russia’s invasion of Crimea in 2014, America punished oligarchs, companies and entire sectors of an economy twice the size of previous targets. “Secondary” sanctions were imposed on other countries’ companies that traded with blacklisted entities.

President Donald Trump has since elevated the system for use as a weapon and used it against allies. In December it targeted firms building a pipeline bringing Russian gas into Europe. In March it toughened sanctions against Iran even as others channelled aid to the country.

The arsenal hardly feels impartial: since 2008 America has fined European banks $22bn, out of $29bn in total. In 2019 it designated new sanction targets 82 times, says Adam Smith of Gibson Dunn, a law firm.

Sanctions are now increasingly used in conjunction with other restrictions to throttle China.

The Department of Commerce maintains a jumble of lists of entities with which other firms cannot deal. One of them, the “unverified” list, bans exports to companies about which the ministry has questions. It has grown from 51 names in 2016 to 159 in March. Chinese entities make up two-thirds of additions. Other departments are also racing to be seen as the toughest on China.

In the short run the opaque nature of the whole system maximises the impact of sanctions. But it also creates a strong incentive for others to seek workarounds, and technology is increasingly providing the tools needed to build them.

Such advances result from the second driver of the new trends: the “pull” factor of attempts to meet the needs in emerging economies. Tech firms have sights on the world’s 2.3bn people with little access to financial services.

Helped by plentiful capital and permissive rules, they have created cheap-to-run systems they are starting to export. Some also aim to enable commerce in regions where credit cards are rare but mobile phones common. Propped up by their huge home market, China’s “superapps” run ecosystems in which users spend their way without using actual money.

It helps that many emerging markets, not just China, are keen on a rebalancing.

Most borrow abroad, and price their exports, in dollars. America was once the biggest buyer. Whenever the dollar rose, demand would follow, making up for costlier debt.

But a stronger dollar now means China, their chief trading partner, can afford less stuff. So demand falls just when repaying loans gets dearer.

And the stakes have risen: emerging markets’ stock of dollar debt has doubled since 2010, to $3.8trn.

The third factor helping insurgents is covid-19, which could lead to a tipping-point.

Already hobbled by rising tariffs, global trade is likely to fragment further. As disruption far away causes local shortages, governments want to shorten supply chains.

That will give regional powers like China more room to write their own rules.

The economic fallout in America—not least the fiscal impact of its $2.7trn stimulus measures—could dent confidence in its ability to repay debt, which underpins its bonds and currency.

Most important, the crisis harms other countries’ trust in America’s fitness to lead. It ignored early warnings and botched its initial response.

China is guilty of worse—its own missteps helped export covid-19 in the first place.

Yet it managed to curb cases fast and is now broadcasting a narrative of domestic competence.

America’s ability to guarantee global prosperity is the glue that holds the financial order together.

With its legitimacy badly hit, renewed assaults on the system seem inevitable.

On the front line are the dollar-system’s foot soldiers, the banks.

Keeping things cornucopious

The world’s food system has so far weathered the challenge of covid-19

But things could still go awry




IN LATE JANUARY China banned package tours from heading overseas for the lunar new-year holiday. This gave cold sweats to David Parker, New Zealand’s trade minister.

Fewer tourists were a disappointment, but planes that did not bring tourists in one direction would not take agricultural produce back in the other—significantly more worrying, given that China is New Zealand’s biggest customer for the food which is its biggest export.

So as airlines started grounding planes, the government engineered a deal with Air New Zealand; the airline would get a loan if it kept routes to China, Singapore and America open, thus allowing kiwi fruits and other delicacies out into the world even when the cabins above the hold were empty.

Mr Parker also offered support to airlines based in the Middle East. “It’s hard to grow some of the things they eat there,” he says. “There was a mutual interest in maintaining connectivity.”

Connectivity is what the world’s agro-industrial complex is all about. Four-fifths of the planet’s 8bn mouths are fed in part by imports; the $1.5trn that was paid for them last year was three times 2000’s bill. Battalions of lorries and fleets of ships connect tens of millions of farms to hundreds of millions of shops and kitchens.

The sophistication of the system, and the foresight of players within it like Mr Parker, has meant that, so far, it has held up to covid-19’s impacts on both supply and demand by dexterously swapping sources and rerouting supply chains. Prices for most staples have fallen so far this year (see chart 1).




The system’s complex architecture means it has many potential bottlenecks, and the pandemic’s global dislocation has found a fair few of them. Some have been dealt with quite well.

The enormous queues of lorries seen in central Europe in March, when concerns about where people were coming from took hold, have been largely eliminated with expedited controls. Others, such as the lack of capacity in America’s meat-processing sector due to slaughterhouse closures, have yet to be fully sorted out.

But the biggest problem lies not in the system’s bottlenecks. It lies in the effects on consumers of almost a billion incomes reduced or lost. The UN estimates that the economic fallout from covid-19 could see the number of people suffering from acute hunger double to 265m over the course of this year.

Developed countries are not immune. In America queues at food banks in some cities stretch for kilometres. In these circumstances even quite small dislocations in the food system could, by increasing prices further, lead to great suffering.

Play on

Although farms are, by their nature, local, much of the rest of the food industry is global. The supplies of seed, fertiliser, machinery and fuel that farmers need come from far afield. The companies that tie the system together—giant middlemen like America’s ADM, Bunge and Cargill, Louis Dreyfus, based in the Netherlands, and Olam International, based in Singapore—all operate on a worldwide basis, sourcing, storing and shipping agricultural commodities for foodmakers like Kraft or Unilever.

Their size and global reach lets them make a lot of money on quite narrow margins. They can quickly swap one source for another to accommodate changes in supply or demand, smoothing prices and keeping the system flexible.

In the past 20 years the industry has seen increased concentration of ownership as firms chase the advantages of scale. Half of America’s poultry market—the largest in the world—is now controlled by just four firms. Two of the six largest mergers in the 2010s were between companies in food and drink.

Emerging markets, where changing diets and urbanisation create fresh demand, have spawned giants of their own. Brazil’s JBS is the largest meat-processing company in the world. China’s largest food manufacturer, COFCO, has gobbled up a bevy of established traders as it keeps the grain flowing to Beijing.

The potential for efficiency and the capacity to absorb fixed costs that size brings has seen the system become increasingly sophisticated. The world’s breadbaskets have become more capital intensive. Autonomous tractors roam giant fields and machines handle cargo. Images from satellites, increasingly looked at through the lens of artificial intelligence, keep tabs on ships and storms as well as providing estimates of the season’s yields.

Excess of it

This refinement allows production networks to be very complex. Food, like cars, is often assembled close to the consumer from parts sourced anywhere but. Ukrainian wheat, milled into flour in Turkey, may be turned into noodles in China.

Frank van Lierde, who helms the food ingredients and bio-industrial units of Cargill, says it has “a far more diverse footprint” than 20 years ago. Next year the firm will open a factory in Brazil to make pectin, an orange-peel extract used to thicken jam and yogurt, which it will sell worldwide.

This globalisation means more countries depend on imports. Analysis done for The Economist by Josef Schmidhuber and Bing Qiao of the UN’s Food and Agriculture Organisation (FAO) shows that most countries are more dependent on imports today than they were 20 years ago (see map).

This has made observers worry that disruptions caused by covid-19 could trigger a repeat of the food crisis of 2007-08, when a sharp rise in prices was exacerbated by panicking governments. Some 75m people were pushed below the hunger threshold, sparking riots from Bangladesh and Burkina Faso to Mauritania and Mexico, and contributing to the conditions that fostered Syria’s civil war.
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But if most of the world is more import-dependent now than it was then, it is also on a more robust footing. In 2007 there had been poor wheat harvests in Australia and Europe and a poor corn harvest in America; grain stocks were at their lowest since 1973, says Caitlin Welsh of the CSIS, a think-tank.

Oil prices were sky high, which made making fertilisers and getting food to market more expensive. It also increased demand for crops, like corn and sugar, that can be used as feedstocks for biofuels.

Today cereal stocks are twice as high as they were then (see chart 2). Bulk shipping is 20 times cheaper and crude oil is just $30 a barrel. That makes all manner of inputs cheaper and pushes the price of fuel feedstocks like corn and sugar lower still to boot. If the number of importing countries has risen for most crops, so has the number of exporting countries. That makes trade more resilient to swings in supply and demand.




Those broad brush benefits do not mean that there are no challenges. Some have been on the demand side.

In March lockdowns and the prospect of lockdowns saw households rush to stockpile durable goods. In some countries sales of tinned goods and pasta went up sevenfold. Supply lines emptied. But alternatives can be found.

When Indian traders stopped signing new export contracts in April, Carrefour, a French supermarket group, found new rice supplies in Pakistan and Vietnam and opened a beef import route from Romania, says Hani Weiss, who heads the franchise across 37 emerging markets from his base in the UAE.

To guard against further trouble the company has increased its stock of essential items from 30 days or less to 90 days, he says. Not only is there produce to put on shelves, there are people to put it there. Tesco, Britain’s largest grocer, got 1.3m job applications in March, over ten times the usual number.

The appetite may sicken

Demand for such goods has now mostly fallen back to normal. Meanwhile demand for other forms of food is very low. Restaurants, cafés and cafeterias in schools and other institutions account for 30% of all calories consumed—and in many countries these venues are closed. This has left many farmers stranded without custom.

In theory they could redirect their produce to shops. But people staying at home do not just eat the same things they would at work or on an evening out. They tend to favour processed and pre-packaged products many chefs would not touch, and to use more basic ingredients when they cook: mince, not steaks. They also drink a good bit less milk than they would in a world of baristas and lattes.

Even when the food wanted for homes is the same as that which would be wanted by professional kitchens, there is an issue of quantum. Canteen chefs buy flour in 16kg bags; sourdough enthusiasts want it by the kilogram. Changing the size of the packaging is a lot of work for a processor. Getting supermarkets to approve new suppliers is a lengthy process, too.

As a result of these changes, some food producers are in trouble. French fishermen say they are throwing back two-thirds of their catch. Australia is facing an avocado glut. Alain Goubau, a farmer in Ontario, now feeds some of his milk back to his cows.

But there is a limit to what can be recycled; most of what cannot be sold will be wasted.

Millions of litres of keg beer is going stale. The EU is expecting to lose €400m ($430m) of potatoes. America’s food-waste ratio is set to rise from 30% to 40% this year, according to André Laperrière of GODAN, a group which promotes open data.

On top of changes in demand, there are also transport bottlenecks, some sudden and unexpected. In March Timbues, one of the main ports of Rosario, a region accounting for 80% of Argentina’s food exports, shut for nearly a week because of the disease. But grain still travels.

Things are made easier by increasingly automated food handling, says Tom Carr-Ellison, who runs a farm in Uruguay—a trend the pandemic will only encourage. Shipping is working so smoothly that India’s locked-down coastal states have opted to buy soyabean oil from Argentina rather than trucking it from inland.

Moving perishables is more problematic. Fruit and vegetables, along with coffee and meat, usually travel by plane or in refrigerated containers on special ships. Slowdowns elsewhere in the trade system have led some to report problems with refrigerated containers, though these are not universal.

Janine Mansour of Port of New Orleans, America’s top coffee importer and second-largest poultry exporter, says throughput from its container business was up in the first quarter. Capacity in the bellies of airliners, though, is a problem for everyone. By the last week of March it was down by 80% worldwide.

When the means by which goods get to market vanishes that completely, the price the producer gets collapses. In Thailand wholesale prices of dragon fruit, which is a favourite in China, have dropped by 85%.

Meat offers particularly distressing bottlenecks. Demand is quite low. Carlos Rodriguez of AGRO Merchants, which provides cold storage in 11 countries, says meat fridges that once had spare capacity are now “totally full”. But supply marches on; and animals born must, at some point, be slaughtered.

This is hitting America’s pork industry in a big way. Shutdowns in giant abattoirs slashed the country’s pork slaughter capacity by 40%; every five days saw 1m “excess” pigs left alive on farms which have no space for them.

 President Donald Trump last week took on powers allowing the government to force processors to stay open. Many now are so; but absenteeism has soared.

In the rich world the result of such disruptions is not famine but inconvenience: dearer bacon and blueberries. But three dangers loom—and the longer the crisis lasts, the nastier they are likely to get.

The first is that farmers start producing less. Some lack labour. The closure of American consulates in Mexico could mean many of the 250,000 H-2A visas for agricultural workers do not get issued this year. Britain will see very few of the 90,000 pickers it normally gets from Europe.

Replacements are not easy to find. Australia has tapped backpackers taking refuge in the countryside, says David Sackett, who runs a $260m portfolio of farms.

In Britain, though, a scheme to move the unemployed to the fields has had a singular lack of uptake. And some farmers say unproductive novices are a waste of money.

Farms with capital will be looking ever more keenly at robots, as long as the boffins can get them to handle soft fruit well.

Withstanding capacity

Some farmers deprived of markets, and thus cash, by restaurant closures and the like will leave crops to rot rather than pay for harvest. Some will go bust. In countries with low interest rates the risk is lessened.

American farms pay much less to service their debt than they did in the 1980s, and are thus more secure. Capital-intensive farms in Latin America, where debt-to-equity ratios and interest rates are high, are much more exposed.



Scarce credit is the second risk. Supply chains run smoothly because short-term loans allow each link to pay for produce before selling it on. As operations slow down, the term of these loans is extended, trapping cash that could be lent elsewhere. And banks are currently wary of financing commodities deals of any sort, says John MacNamara, a former trade-finance boss of Deutsche Bank.

Volatile currencies, collapsing oil markets and the falling value of the grain that companies typically offer as collateral have them spooked. Multilateral institutions are doing their bit.

Over a fifth of the $425m in emergency trade cash provided by the Asian Development Bank in April covered food-security deals. But an official close to major banks says he “is hearing the cracks” in the system.

The third danger is that governments lose their calm. In 2007-08, 33 countries declared export controls. Those bans caused most of the 116% rise in rice prices seen then, according to a World Bank paper. This time 19 states have so far limited exports and the impact is much less. 2007-08’s control affected 19% of the world’s traded calories; this year’s so far affect just 5%.

But the market is nervous. Relatively small actions can cause a spike, especially in thinly traded markets. Sunny Verghese of Olam, the world’s second-largest rice trader, says only four or five countries grow more rice than they eat. That is why Vietnam’s recent restrictions on exports sent the price up sharply.

And export controls prompt buyers to stockpile, igniting a vicious circle. Many import-dependent nations hold “strategic” grain reserves, which typically cover three months of supply. They may now seek an extra month, says Jonatan Lassa of Charles Darwin University in Australia.

The combined effect of export controls and stockpiling could be devastating to poor countries.

Many have seen their currencies tumble and so already pay more to import food. Poverty is increasing at a time when the informal, and often crowded, markets where the poor tend to get their staples are closed in many places. Food inflation anything like that of 2007-08 on top of this would be a humanitarian disaster.

Global co-ordination could help keep that tragedy at bay. Last month 22 members of the World Trade Organisation, who between them account for 63% of the world’s agricultural exports, pledged to keep trade open, a good omen. More transparency on strategic stocks could diffuse tensions.

Mr Laperrière suggests that co-operation could help on local levels, too: supermarkets could launch inter-trading platforms, where they can exchange produce when faced with shortages.

If such co-operation and interconnection can be maintained, the worst of the covid-19 hunger may yet be averted..

How politics thwarted the UK’s Covid-19 response

Ministers failed to grasp the threat as Boris Johnson tried to swerve a tough response

Philip Stephens


© Ingram Pinn/Financial Times


When the inevitable national inquiry reports into Britain’s handling of the Covid-19 pandemic, the first item on the charge sheet will be a failure to act decisively at the outset to suppress the pandemic.

Some Whitehall insiders call this a stumble, a passing hesitation. Some talk about reckless complacency. Others observe laconically that Prime Minister Boris Johnson does not react well to bad news.

Britain lagged behind most of Europe in the spread of the infection. Yet, in spite of the lessons to be drawn from Italy and elsewhere, it has one of the highest death rates outside of the US.

Management failures in procurement and distribution compounded political mistakes in depriving it of critical resources such as ventilators, testing capacity and personal safety equipment.

The postmortem, one old Whitehall hand says, will be “bloody”.

Ministers and political aides are already privately shuffling off responsibility to institutions such as Public Health England and the civil service, suggesting they have been slow to react to fast-moving events.

Prudent officials say they are keeping detailed personal diaries to record the advice they offered to Mr Johnson and his ministers. Some mistakes were inevitable. Covid-19 is a new disease. There were genuine uncertainties and differences among epidemiologists.

The UK is not alone in facing problems. Scientists often disagree with each other. So do clinicians and public health experts. And Britain is caught up in the worldwide scramble for essential equipment to treat patients.

The crisis has also exposed longstanding structural weaknesses. The top jobs in Whitehall go to talented policymakers rather than managers schooled in complex logistics. Public Health England has stuck rigidly to “peacetime” rules on equipment standards when the nation is fighting what officials call a war.

A decade-long financial squeeze has left the National Health Service ill-equipped.

Standing above all the tactical mis-steps, however, was the strategic misjudgment made by Mr Johnson and his colleagues at the outset. Until well into March ministers refused to grip the gravity of the threat because Mr Johnson did not want to contemplate a draconian response.

This failure was evident in February when Mr Johnson chose not to attend several meetings of the emergency ministerial group Cobra. It has haunted the UK’s effort ever since, helping to explain why, even now, the pandemic is sweeping through care centres for the elderly, why medics and care workers are scrabbling for safety clothing when treating Covid-19 patients, and why Britain is behind nations such as Germany in mapping the virus through testing and contact tracing.

In the words of one top official: “Every road leads back to the slow start.”

Britain has been “behind every curve”, another insider says. One consequence was a failure to build up testing capacity, another that it came late to the global competition for ventilators and protective clothing.

Mr Johnson’s breezy confidence was on display in early March when he volunteered that he had been “shaking hands with everybody” during a hospital visit. He said everything about Britain’s response — its scientists, the NHS, its testing and surveillance — was “fantastic”. Britain could busk its way through the crisis.

The prime minister’s default response to bad news, say officials who have worked closely with him, is a cheerful assertion that things will sort themselves out. Even as the virus took hold in early March, he was horrified, a ministerial colleague says, by the idea of imposing shutdowns or quarantines.

For a time, the advice of two leading scientists unwittingly conspired with this approach. While other nations followed Italy into lockdown, chief scientific adviser Patrick Vallance and Christopher Whitty, the NHS’s chief scientist, backed a strategy of “mitigation”. Generalised testing was halted in favour of a policy of self-isolation and efforts to shield the most vulnerable.

The goal was “herd immunity”. In Sir Patrick’s description: “Our aim is to try to reduce the peak, broaden the peak, not suppress it completely; also, because the vast majority of people get a mild illness, to build up some kind of herd immunity so more people are immune”.

Other scientists argued the strategy was better suited to a seasonal flu epidemic. With Covid-19, it would threaten hundreds of thousands of potential deaths and overwhelm the NHS. By the time this view prevailed, the virus had taken firm hold.

The prime minister was among the victims.The U-turn might have led to a candid conversation with the nation to rebuild public confidence. Instead ministers persist with a never-give-an-inch communications strategy more suited to election campaigns.

Every mistake invites a denial. Targets for testing and equipment are missed and promises broken. After a period of recuperation, Mr Johnson is preparing to return to his desk. His ministers have fallen to arguing about when to relax the lockdown.

The answer should be obvious. The government should proceed with extreme caution. It should follow the example of Germany in sharing the uncertainties with citizens.

The choice between beating the virus and economic recovery is a false one.

The government must start telling the full truth.

Central Bankers Must Expand Their Imaginations

Japan is usually on the frontier of monetary policy experimentation. But it seems to be out of ideas.

By Mike Bird



The Bank of Japan 8301 -1.92%▲ announced a raft of new policies Monday, as the coronavirus punishes global growth. Unfortunately these initiatives are old wine in new bottles.

Japan is often at the forefront of monetary policy, with a central bank that began experimenting to try to defeat slow growth and low inflation decades ago. But the decisions it made this week show it isn’t just the tool kit of the world’s central bankers that needs replenishing, but the imaginations of both fiscal and monetary policy makers.

The BOJ said it would purchase an unlimited amount of Japanese government bonds. That might once have been seen as a credible commitment to large-scale stimulus.


BOJ Gov. Haruhiko Kuroda. The bank announced a raft of new policies Monday.
Photo: Shinnosuke Ito/Bloomberg News .


But the central bank isn’t changing its yield-curve control framework, and 10-year bond yields are currently inside the trading band the BOJ aims for. So why any more government bonds would be purchased is a mystery.

Yield-curve control was introduced in the first place because the bank’s rapacious purchases of bonds were turning a once-active market into an elephant graveyard, where trading volumes had collapsed.

The BOJ also announced an expanded corporate-bond purchase program. That can reduce yields on short-term commercial paper a little, but will likely have very limited impact relative to equivalent schemes elsewhere.

The risk associated with longer-dated Japanese corporate bonds never really rose at all this year. The total increase since 2020 began has meant less than a 0.1 percentage point rise in spreads on the ICE Bank of America Japan Corporate Index, compared with around 1.5 percentage points in the eurozone and 3 percentage points in the U.S.

The BOJ has all but exhausted its space on interest rates. It could cut again by a fraction of a percentage point into further negative territory, but the screams of fragile regional banks whose income has been crushed by low rates would grow louder.

Most of the options left are fiscal, and would require the BOJ to cooperate with the Ministry of Finance, which is inclined toward an austere view of state finances. Japan’s 1947 Public Finance Act prohibits direct monetary purchases of government debt.

Lifting that moratorium would allow the BOJ to engage in the same backstopping of government debt that finance minister Takahashi Korekiyo pursued during the Great Depression, or in policies like helicopter money, with direct payments to households financed by the central bank.

Short of such radical moves, it is hard to see what room the Bank of Japan has left to help. It can prevent a blowout in spreads, but that alone will do very little to juice activity when lending is constrained by a lack of reasons for companies to borrow.

Investors who have claimed central-bank ammunition is exhausted have been wrong-footed in 2020. The Bank of Japan’s problem isn’t that monetary policy options are nonexistent. Rather that the current framework—and the imagination required for a new, more radical one—truly is.

Italy: Leading the Charge in Europe’s North-South Divide

By: Caroline D. Rose


As the coronavirus pandemic has taken hold of Europe, the deep divide between northern and southern states has intensified.

The outbreak has spurred a recession.

The International Monetary Fund forecasts a 13 percent bump in eurozone debt this year alone, with indebted southern countries such as Italy, Spain, Portugal and Greece taking the largest toll.

This will be the second recession to hit Southern Europe in a little over a decade, as countries are still recovering from the eurozone sovereign debt crisis and the 2008 recession.

The popular belief is that northern countries will likely experience faster recovery rates, widening the wealth gap between northern and southern economies as Southern Europe shoulders heavier long-term debt.

Tension between the European Union’s northern and southern members is not new, and GPF has examined the north-south divide before.

Now, the coronavirus and its accompanying recession have intensified north-south disagreements over debt issuance and financial assistance, emerging as a potent threat to not only EU consensus but the European project itself.

Italy Appeals to the EU

Southern Europe has grown increasingly loud in its demands for unconditional EU financial assistance and medical supplies in the wake of the pandemic.

At the helm of southern demands has been Italy, one of the countries affected most by the coronavirus and the EU's economic paralysis.

Italy’s battle with the coronavirus has exacerbated a series of cracks in the country’s foundation: regionalism, political factionalism, constituent mistrust and chronic infighting.

These intensified internal disputes have limited the government’s ability to wage an effective crisis response.

Italy’s coalition government under the leadership of Prime Minister Giuseppe Conte is on war footing. The Italian parliament has always been a theater for domestic squabbles, but the shifting coalitions and power struggles have further fragmented Italy’s government as it fights the coronavirus.

The coalition government, led by the Democratic Party and the populist 5-Star Movement, is shaky, plagued with chronic infighting and significant ideological differences. And it’s also had to face an opposition, the far-right League party, committed to obstructing nearly every policy the government proposes; the League even opposed Conte’s 7.5 billion-euro ($8.1 billion) national stimulus plan in favor of a 50 billion-euro emergency package in early March.

The League’s recalcitrance almost drove Conte to resign back in June 2019, and its role as the rock in Conte’s shoe now prevents the political unity typically demanded during a national crisis.

Conte has come under fire for his handling of Italy’s northern provinces. He was sluggish to respond to Italy’s first coronavirus case on Feb. 18 in the Codogno, Lombardy region. And he was slow to ramp up measures to stricter levels, as requested by parties such as the League, because he was wary of inflicting economic and psychological damage on Italians.

Conte also received heat from southern provinces after news of a lockdown in Lombardy was leaked to Italian media on March 8, prompting over 90,000 southern Italians working in the north to defy curfew and travel restrictions to flee back to the south.

The medical structure in southern Italy (particularly Calabria and Molise) is underprepared and has experienced a severe deficit of personnel, funding and personal protective equipment in local hospitals.

Conte has adopted a more hardline position in recent weeks, closing schools, nonessential shops, bars, restaurants and public meeting spaces, and imposing police-enforced quarantines nationwide.

The regional tension has driven the Italian government into a tight corner. At this point, Conte must balance his squabbling coalition parties and deliver crucial assistance to regions like Lombardy and Veneto while still keeping political distance as northern Italy has transformed into a liability.

Facing demands and pressure from all sides, Conte has turned beyond Italy’s borders to the European Union, hoping to receive a larger baseline of support. But it has had little luck.

Italy’s fervent bid for European support, joined by other hard-hit countries like France and Spain, has met resistance from more fiscally cautious countries like Germany and the Netherlands, compounding a north-south divide that has troubled the EU since the eurozone debt crisis.

While certain parties have pointed fingers at the Italian government, many citizens have recognized the split coalition government’s limitations and have also begun directing their frustration at Brussels. Polling in Italy reveals narrowing support for all political parties and an overall more fragmented political landscape.

But perhaps more significantly, polls have indicated that anti-EU feelings are on the rise among Italians. Euroskepticism was already brewing in Italy, particularly following the eurozone crisis, which left many Italians feeling ignored by Brussels.

At the end of 2019, an EU poll recorded that just 37 percent of Italians saw EU membership as a “good thing,” while 17 percent saw it as “bad.” Now, even some of the most pro-EU factions within parties, such as the Democratic Party, are voicing criticism of the bloc’s agenda and its response to Italy’s coronavirus crisis.

In a survey conducted in March by Tecne, 67 percent of Italians said they believed belonging to the European Union was a “disadvantage” for their country, up from 47 percent in November 2018.

And another survey recorded that, in late March, 72 percent of Italians thought the European Union had not contributed “at all” to pandemic assistance, with those trusting the EU declining from 34 percent when the pandemic first arrived in Italy to 25 percent.

Italian National Parliament Voting Intentions, 2020


Italy’s divergence with the European Union’s wealthier, northern members during the coronavirus crisis has enabled a euroskeptic platform to seep into the mainstream as Italians feel increasingly abandoned by Europe and demand a more self-reliant Italy.

More than 22 percent of Italy’s population is older than 65 — the second-highest level in the world — and behind the country’s eyebrow-raising death toll is particularly acute economic devastation.

Italy is no different from other countries in that this pandemic has paralyzed its economy; businesses are closed, workers are laid off, and consumer spending and demand are dangerously low.

But Italy was barely treading water before the coronavirus hit, making this oncoming recession an even more severe blow to the Italian economy.

Recent polls show one in three Italians fear that they will be laid off and fear for the future of the economy — and they have reason to be concerned. Italy’s lack of liquidity has posed a problem for citizens seeking to buy groceries at the beginning of every month, with 22 percent of Italians saying that they have difficulty shopping.

And with Italy’s rescue package potentially amounting to as much as 50 percent of the country’s gross domestic product, experts expect its debt-to-GDP ratio to grow past 155.7 percent (it is currently 135 percent) after the crisis.

The EU’s Inadequate Response

Hesitance among northern EU members such as Germany and the Netherlands to issue financial assistance outside existing EU mechanisms has provoked ire from southern states — particularly those heavily overwhelmed by COVID-19 like Spain, France and, of course, Italy.

Italy, already the slowest growing economy in the bloc, has forecast a 3 percent hit to its economy this year due to COVID-19. (And that’s a conservative estimate; the International Monetary Fund predicts a 9 percent drop in GDP).

Conte, recognizing Italy’s upcoming economic predicament, pleaded to the European Union earlier this month: “What will we tell our citizens if Europe does not prove capable of a united, strong and cohesive reaction in the face of a symmetrical, unpredictable shock of this historical magnitude?”

The European Union, however, has stalled in its financial and medical response to members hit hardest by the virus. When Italy first appealed to activate the EU Civil Protection Mechanism, which depends on member states to give assistance, no member state offered operational assets, relief items or experts. Simultaneously, many European states began implementing protectionist policies by banning the export of medical equipment, inflaming tensions in northern Italian hospitals overwhelmed with patients.

Conte has led the charge in proposing EU joint debt issuance to keep afflicted members’ borrowing costs low, first in a proposal popularly known as “coronabonds,” supported by eight other member states: Spain, Greece, France, Portugal, Belgium, Ireland, Slovenia and Luxembourg.

The reluctance of Germany and the Netherlands to agree to the coronabonds proposal led Italy to change tack, pushing for EU-issued, unconditional grants to struggling European countries.

Heavily hit countries like Spain (still recovering from its 2008-14 recession) and France have joined Italy in advocating a common fund for all European states that would allow wealthier, less-affected countries to underwrite the costs for less-fortunate EU members.

The eurozone does already have an emergency rescue fund, the European Stability Mechanism (ESM), but Italy favors unconditional financial assistance, believing the ESM would come with conditions that could hurt Italy’s political and economic systems in the long run.

Countries including the Netherlands have advocated a loan-based system, but Italy and Spain have come out with fresh demands that the European Union provide 1.5 trillion euros to member states as real budgetary transfers in the form of unconditional grants.

The European Union has started recognizing its slow-paced response to the coronavirus pandemic; European Commission head Ursula von der Leyen even apologized for not acting sooner. And Brussels has begun to make amends, suspending budget deficit limits and easing rules governing state aid.

The European Central Bank (ECB), meanwhile, launched a hefty 750 billion-euro Pandemic Emergency Purchase Program and suspended some of its own rules so that it can prioritize buying Italian government bonds to keep borrowing costs low.

And after weeks-long discussions involving tense Italian-Dutch disagreement, European leaders reached consensus on a recovery plan that European Council President Charles Michel called an “unprecedented investment effort.” European leaders are now considering raising the European Union’s budget ceiling to generate 1 trillion euros in investment (though leaders in the European Commission suggest a release of 2 trillion euros to protect the single market’s integrity).

But even though the European Union has attempted to rise to the occasion, it may be too little too late. Europe’s initial delay in response has scarred Italians, driving increasing calls for a more self-reliant Italy outside of the EU framework.

When Italian hospitals initially swelled with patients, with few European aid offers outside of the ESM, Italy depended upon assistance from outside the Continent: Chinese, Russian and even Cuban contributions of masks, ventilators and test kits. China, in particular, was active in sending medical personnel to advise Italian caregivers working on the frontline.

This galvanized euroskeptic Italians; some hospitals in Lombardy have hung the Maoist flag next to the Italian tricolor, while a social media trend has emerged of Italians recording themselves burning EU flags while repeating “we save ourselves.”

A second EU investment package is underway, but the road to north-south unity remains long. Germany and the Netherlands have traditionally been opposed to debt mutualization because they saw it as violating long-respected EU laws that prevented individual member states from financing each other.

Northern countries have viewed the coronabond debate as an unnecessary distraction, asserting that the ECB package has been effective on its own in underwriting Italian and Spanish debt and that existing alternatives like the ESM would be the best move.

Additionally, northern European taxpayers would be expected to shoulder the burden in the long term, an uncomfortable prospect for countries like Germany and the Netherlands as they brace for their own ugly recessions.

While EU members have agreed on the premise of an investment package as part of the bloc’s 2021-27 multiyear budget, Spain, Italy, Germany and the Netherlands are still bickering over some of the most basic elements of the plan, such as the amount of funding and whether to issue money through grants or loans.

Northern European countries’ reluctance to reach further into the union’s pocketbook has incited criticism from much of Southern Europe, particularly inflaming Italians. Many Italians have even accused the European Union’s de facto leader, Germany, of moral absence, making analogies about Germany’s debt forgiveness from the Nazi era after WWII and its disciplinarian reputation in the bloc.

But Italy’s objections are not just personal jabs at northern countries. They are expressing larger questions about the European project itself.

The longer the European Union has hemmed and hawed over emergency response, the more Italians have bought into a narrative asserting that the bloc is ineffective.

Their rationale: If it can’t fight this, what is the use of the union?

Will Italy Quitaly?

Does this mean an Italian departure from the European Union is imminent? Not necessarily.

Since the eurozone debt crisis, the concept of an “Italexit” has been thrown around in far-right circles, but with little potential for coming to fruition — especially considering the declining support for the League party.

An Italian exit from the European Union and eurozone still remains unlikely; in the short term, after all, Italy and Europe must continue to battle a viral outbreak and an oncoming financial crisis.

But the trauma Italy has experienced during the coronavirus pandemic has lent momentum to greater north-south divergence in the union and is encouraging an Italian movement to more forcefully resist certain EU policies.

For many Italians, times are about to get tough. And in hardship, the public searches for someone or something to blame. As the Conte government tries to keep its coalition government together while facing allegations of mismanagement, the prime minister has turned to Europe to place responsibility.

While we may not be seeing an Italexit on the immediate horizon, Italian bitterness with the European Union will only widen Europe’s north-south divide and put further pressure on the already fragile European project.

Pimp the ride

The car industry faces a short-term crisis and long-term decline

It can still be viable, with the right fixes




Even before the recession, investors were deeply pessimistic about the car industry.

Sitting on $1.3trn-worth of legacy investments in factories that rely on a technology that ought to become obsolete—the internal-combustion engine—the likes of Ford, Renault and Volkswagen don’t exactly look well positioned for the 21st century.

Now, with car sales collapsing, a dinosaur business that employs 10m people directly faces a moment of truth. Long synonymous with hubris and the inept allocation of capital, it needs to look to the future.

Executives say they are better placed today than in 2008-09, when General Motors and others received bail-outs. Most firms have more cash and bigger margins. But this logic gets them only so far. Production in Europe and North America is now 50-70% lower than a year ago.

Car firms have high fixed costs, so when they run below capacity they lose money fast. The top eight Western carmakers could burn over $50bn of cash this quarter, reckons Jefferies, a bank. At that rate, they may run out of money by the end of the year.

There are other dangers. As recession bites, people may default on car loans, many of which are owed to carmakers’ finance arms.

The value of second-hand cars is dropping, harming these finance arms through their leasing operations. There may be a permanent fall in commuting, as more people work from home—road-passenger numbers in China are still 57% below their pre-covid level.

This prospect helps explain why oil prices have collapsed.

Investors are jumpy—on April 17th Ford raised $8bn of debt at painful interest rates of 8.5-9.6%. The only firm that commands their confidence is Tesla, an electric-car specialist, whose shares are up by 64% this year.

Given its carbon footprint, isn’t there an argument for the creative destruction of the car industry? If only it were that simple. Millions of jobs are at risk and the big firms account for about 60% of the industry’s investment, a rising share of which is, belatedly, going into green technologies.

Adaptation would be far preferable to extinction. And yet there is a risk that government aid ossifies car firms before they have modernised. State “cash for clunkers” subsidies—which are on the menu in Germany—could encourage consumers to buy dirty, internal-combustion-engine cars.

On March 31st America watered down emissions standards in order to help Detroit. Subsidies for idling workers help in the short run, but if they go on for long they risk preventing firms from shifting resources from old to new technologies.




The industry should take control of its own fate. Car firms need to be pioneers in operating factories under new health protocols, from redesigning the choreography of assembly lines to providing health tests for workers. Big Western firms are starting to re-open some plants.

This won’t be lucrative, but it will stem short-term losses.

Firms should also avoid slashing investment indiscriminately, as they did in 2007-09 when capital spending dropped by 29%. Most car firms have two parts, a vast legacy operation and a small, loss-making, fast-growing one making hybrid and fully electric cars.

The danger is that they cut spending on the new bit, slowing the development of battery technologies and the launch of new electric models. Better to pare dividends, loss-making foreign adventures and legacy investments.

The final priority is consolidation. Too many mid-sized carmakers are clinging to their global aspirations, despite a number of mergers in recent years, such as Geely’s purchase of Volvo and Fiat Chrysler’s planned union with psa (Fiat’s biggest shareholder owns shares in the parent company of The Economist).

The world still has more than 1,000 factories making legacy cars.

Renault and Nissan continue their halfway house of an alliance, which brings more complexity than synergy.

Adapt, invest in the future and join forces. That is the way to a viable car industry—for the climate, workers and investors, too.