Present tense, future market

Is Wall Street winning in China?

As America tries to cut links, China is opening its door to foreign capital and firms




If you want a sure-fire way to get rejected, try asking Western financial firms for interviews about how geopolitical tensions have affected their strategies in China. “This topic carries some sensitivities,” one bank demurs. “We don’t want to end up in a Trump tweet,” says another.

The Economist sought interviews with 15 global banks, insurers and asset managers. All declined to speak—except on background.

Such bashfulness from the swaggering titans of finance is revealing in itself. They are on unfamiliar ground. For years the American government called on China to open up to foreign capital, while China dragged its feet. Suddenly, these roles have been reversed. President Donald Trump’s administration wants global financiers to pull back from China. But China is enticing them in, creating opportunities that few had expected to come so quickly, if ever.

It has made for a disconnect between the political and the financial realms. Many observers focus on the decoupling between America and China. Yet for those managing the trillions of dollars that flow through global markets every day, the main trend looks more like coupling. Consider these moves by investment and commercial banks in the past half-year alone. Goldman Sachs and Morgan Stanley took majority control of their Chinese securities ventures.

HSBC acquired full control of its Chinese life-insurance venture. Citi received a coveted custody license to serve institutional investors in China. Among asset managers, BlackRock received approval to sell its own mutual funds in China and Vanguard decided to shift its Asian headquarters to Shanghai.



Even more astonishing are the money flows. Roughly $200bn has entered China’s capital markets from abroad over the past year. Foreign holdings of Chinese stocks and bonds at the end of June were, respectively, 50% and 28% higher than a year earlier (see chart 1). Some of this reflects an inevitable pull as global index compilers such as msci add Chinese assets to their benchmarks; fund managers that passively track these benchmarks must allocate cash in line with the new weightings.

But it is more than that. China has made it much easier for foreigners to enter its markets, and it offers two things that are rare in the world at the moment: gdp growth and interest rates higher than zero.

Despite talk of a new cold war, there are two reasons to think that coupling, not decoupling, will remain the better description of Sino-American financial ties. The first is China’s own actions. It is pursuing what Yu Yongding, a prominent economist, has described as a “linking strategy”, seeking to create more connections with foreign companies.

Since late 2019 the government has lifted foreign ownership caps on asset managers, securities firms and life insurers. It has belatedly allowed MasterCard and PayPal to enter its payments industry. And it has let foreign ratings agencies cover more Chinese firms.

Even without the linking strategy, China has ample incentive to open its financial system more widely. Its current-account surplus has steadily narrowed as a share of gdp over the past decade (though it will soar this year because of the covid-19 impact); that puts pressure on it to attract more inflows through its capital account. At the same time reformist officials want greater foreign participation in the financial system.

Zhou Xiaochuan, China’s former central-bank governor, has argued that just as competition from abroad helped make Chinese manufacturers world-class, so it can elevate the finance industry. Regulators also want companies to raise more funding by issuing bonds and stocks, to lessen reliance on bank lending.

China’s regulatory relaxation dovetails with the second factor: the interests of foreign financial firms. The Chinese market is simply too big to ignore. The investable wealth of retail clients is projected to grow from about $24trn in 2018 to $41trn by 2023, according to Oliver Wyman, a consultancy. And few sophisticated, globally minded asset managers operate in China today.

Foreign institutions know better by now than to assume that the economy’s scale will directly translate into business for them. In the early 2000s China began opening its commercial-banking industry to foreigners, but their share of the market, always tiny, has shrunk over time, dipping to just about 1% of domestic-banking assets. They are bit players.

Yet foreigners may fare better in the sectors newly open to them. No global bank can compete for deposits against the likes of Industrial and Commercial Bank of China, which boasts some 15,700 branches. Success in investment banking and asset management, however, is more related to experience than to sheer heft.

Can an adviser help structure a cross-border acquisition? Can an asset manager offer the right interest-rate swaps to hedge currency exposure? “These are the areas where foreign firms feel they have an advantage,” says Mark Austen, head of the Asia Securities Industry and Financial Markets Association, a group that represents many of the world’s biggest financial institutions.

Not that China is going to make it easy. A taste of the potential complications came in the approval granted to BlackRock for a fund-management company. Unlike prior approvals for Chinese-owned entities, the regulator added a condition, demanding adherence to the Internet Security Law. BlackRock will need to store client data within China and authorities could demand access, likely forcing it to segregate its Chinese and global systems.

Foreign firms will also face a ferocious battle with domestic firms on a playing field that is tilted against them. “They’ll never just completely open and be fine with us crushing the locals,” says one banker.

State-owned firms will reserve their juiciest deals for domestic banks. The government is engineering mergers to create what it calls an “aircraft-carrier” investment bank to repel foreigners. And global asset managers will have little choice but to distribute their products through domestic banks and tech platforms.

Chantal Grinderslev, founder of Majtildig, a Shanghai-based advisory firm, sees a split between foreign firms that commit capital to China for the long haul and those that are less patient. “If you have to be profitable in three years or less, this is not the market to enter,” she says.

JPMorgan Chase, she notes, is on track to buy out the local partner in its asset-management venture for $1bn, a 50% premium over fair value. That is expensive, but it also testifies to the weight that Jamie Dimon, the banking colossus’s chief, places on China. “He is looking to build a real business,” she says.

The political tussle with America looms over these corporate decisions. “Global headquarters asked us to develop optimistic, realistic and pessimistic scenarios,” says the ceo in China of an American bank. “I laughed because there’s no point thinking of things getting better.

It’s binary. Either we can continue in China or we can’t.” So far things have clearly remained on the remain-in-China side of the equation. America’s financial measures against China have thrown some sand in the gears but have not stopped them from turning.



The Trump administration has blocked a federal-government pension plan from investing in Chinese stocks. It has threatened to delist Chinese firms from American stock exchanges. And it has placed sanctions on Chinese officials in Hong Kong and Xinjiang. All three moves are, in the grand scheme, mild. The government pension plan that now excludes Chinese stocks represents just 3% of American pension assets.

China has until 2022 to stave off the threatened delistings, and has already proposed a compromise, giving American auditors more access to its companies’ books. In the meantime, the value of Chinese listings on Wall Street has risen this year (see chart 2). As for the sanctions, they can be painful for individuals, but would have harmed China much more if they had named entire banks.

It is only prudent for firms to prepare for America to take a tougher line against China. But the implications in the financial sector are different from, say, the industrial sector. Factories require a large fixed investment and carefully configured supply chains. Investments in bonds or equities are, by contrast, much easier to adjust—at least so long as China lets investors move cash out of its markets.

Even for firms building up brokerages or asset-management operations in China, the investments are small compared with their global footprints. The Chinese securities firm controlled by ubs, for instance, held just 5bn yuan ($730m) in assets at the end of 2019—bigger than any other foreign-owned securities firm in China but barely 0.2% of ubs’s global investment-banking assets.

The one American action that could almost instantaneously derail financial coupling would be to block China from the dollar-payments system. The administration could do so by pressuring swift, a Belgium-based messaging system that underpins most cross-border transfers, to boot out Chinese members. Or it could order the big banks which clear dollar payments in America to stop serving Chinese banks.

Chinese officials, alarmed by these once-unthinkable possibilities, have held meetings in recent months to discuss how they might respond. They have talked about promoting the yuan as an alternative to the dollar and home-grown payment networks as alternatives to swift. In practice, neither would help much. The yuan, constrained by capital controls, remains a weakling in global finance, while China’s would-be swift replacements have failed to gain traction.

The biggest constraint on America is the damage that it would suffer itself. Cutting China off from the dollar would undermine not just Chinese banks but also China-based companies that account for more than a tenth of the world’s exports.

This would trigger a collapse in international trade, massively disrupt supply chains and, quite possibly, deepen the global recession. The fact that American policymakers must contemplate such consequences is an argument in favour of China’s linking strategy.

“The only option is more openness,” says Larry Hu, head of China economics at Macquarie Group in Hong Kong. “You must create a situation where your counterpart has more to lose.” For foreign financiers in China, that, oddly enough, is music to their ears.

Home truths in the eastern Mediterranean

Europe can no longer rely on the US to act as referee in the Greek stand-off with Turkey

Philip Stephens


© Ingram Pinn/Financial Times


France sends a warship and fighter jets to support the Greek and Cypriot navies. President Recep Tayipp Erdogan responds with a warning that Turkey will “take what it is entitled to” in the eastern Mediterranean. German chancellor Angela Merkel’s mediation efforts falter as Turkish and Greek warships collide. Who imagined that the west’s next war might be fought within the Nato alliance? Welcome to the new international disorder.

Those mapping the contours of the international landscape now emerging from the ruins of the Pax Americana should cast a glance at recent events in the eastern Mediterranean. The global picture, of course, is being drawn by great power rivalry between the US and China. But the world is also witnessing the return of regional disorder. In the absence of an American referee, old wounds are being reopened, old enmities revived. 

The ingredients of the new instability — efforts to undermine the status quo by revisionist powers such as China, Russia and Turkey, the US retreat from past commitments and European reluctance to play geopolitical hardball — are on display in the waters of the eastern Mediterranean. The confrontation between Greece and Turkey presents a lesson in just how quickly restraints and accommodations that have been long woven into the regional fabric can fray. 

Flare-ups between Athens and Ankara in this part of the world are scarcely new. Cyprus is an open wound. So too is the disputed reach of the maritime borders of Greece’s Aegean Islands.

The discovery of rich undersea gas reserves has sharpened the longstanding tensions. The dash for gas has also drawn in other regional players and, with them, separate animosities. Israel and Egypt are already exploiting their offshore gasfields. Lebanon and Libya have interests.

There are joint exploration and production deals to be done, pipelines to be built.

None of the above should necessarily preclude a peaceful carve-up. Not so long ago Europe could have looked to the US. Washington would bang heads in Athens and Ankara and, if things got really tense, send a few ships into the Aegean. Those days have passed. The aircraft carrier the Dwight D Eisenhower was indeed in the Mediterranean in July. Not for so long, though, for anyone to notice.

Ankara has been emboldened by the absence of the US. The competing gas claims have become inextricably tied up with the opposing line-ups in Syria and Libya, and with Mr Erdogan’s drive to promote Turkey as the dominant regional power. The dispute with Greece is enmeshed in this broader regional power play as Turkey seeks to settle old scores, among others, with Egypt and the United Arab Emirates. 

Mr Erdogan is not alone in seeking to overturn the status quo. It is a rule of the new global disorder that when the US leaves, Russia will arrive. By backing Syrian leader Bashar al-Assad in that country’s civil war, Vladimir Putin secured a strategically important naval base in the Mediterranean. Now the Russian president is staking out Moscow’s interest in the Libyan civil war by backing the rebel leader General Khalifa Haftar. 

The US decision to pull back was not entirely that of President Donald Trump. His predecessor, Barack Obama, was never convinced that vital American interests were at stake in Syria and Libya. What he missed was the ripple effects of his decision. Mr Trump’s behaviour has been inconsistent and indifferent — a signal to everyone to take whatever they can grab. The president likes “strong men” leaders, so Mr Erdogan and Mr Putin get a free pass.

French president Emmanuel Macron’s conclusion that the EU had better take on the responsibility that has been given up by the US is inescapably right. So, too, is his judgment that European governments cannot shy away from hard power when dealing with leaders such as Mr Erdogan. Many of Turkey’s claims defy international law — a position underscored by Ankara’s refusal to join the UN’s convention on the law of the sea.

That is not to say Europe is united. France’s support for Greece happens to match its own drive to sustain its influence in the region. Italy and Spain are keen to avoid a military confrontation. Ms Merkel fears Turkish retaliation against the EU in the form of reopening its borders to allow the flight of Syrian refugees into Europe.

None of these differences are insurmountable. Under the old rules, they would have been subsumed by American intervention. What has changed is that Europeans must now hammer out an agreement among themselves. As long as Mr Erdogan can play one member state off against another, the EU has no leverage.

The answer is an EU policy towards Turkey that matches a tough stance in the eastern Mediterranean — backed up, if necessary, by a show of naval force — with greater economic engagement. In dealing with Turkey there is ample room for both Mr Macron’s military resolve and Ms Merkel’s diplomacy.

Mr Erdogan’s march towards authoritarianism has ensured that the prospect of Turkey joining the EU is as close to zero as it has ever been. That should not preclude better trade and investment relations between neighbours and a longer-term understanding on refugees. The starting point, though, must be an EU ready to think, and act, for itself.

Tesla and the audacity of hype

The carmaker’s valuation may seem crazy but bears have been wrong before

John Thornhill


© Ingram Pinn/Financial Times


Nikola Tesla was one of the world’s most brilliant, if eccentric, inventors. While not out feeding pigeons on night-time strolls, the Serbian-American engineer reimagined the uses of electricity, radio and robotics and patented 278 inventions. But he died in poverty in 1943. 

By a cruel twist of fate, the electric car company named in Tesla’s honour has become one of the most extraordinary, wealth-creating stock market machines in history. In spite of the sharp sell-off in tech stocks this week, Tesla’s share price has more than quadrupled this year. Run by Elon Musk, Tesla is currently valued at about $379bn, one and a quarter times more than Toyota and Volkswagen combined.

If Barack Obama won the US presidency in 2008 on the audacity of hope, then the maverick Mr Musk has built his career on the audacity of hype. The fast-tweeting, pot-smoking, rocket-launching Mr Musk is not just selling cars but a ticket to the future, supporters claim. He promises yet another “mind-blowing” announcement about Tesla’s battery technology later this month.

The market euphoria surrounding Tesla has rubbed off on other electric vehicle companies as investors have scrambled to find the next wonder stock. Last week, Xpeng Motors, a Chinese EV manufacturer, jumped 40 per cent on its stock market debut in New York, benefiting from a “Tesla halo”. Its heavily oversubscribed listing valued the start-up at $10bn. 

Such nosebleed valuations surely scream: “BUBBLE!” And the market certainly paused for thought this week. No traditional investment metrics, such as price earnings ratios or dividend yields, can possibly justify Tesla’s stratospheric share price. Tesla makes minimal earnings and pays no dividend. 

For comparison, Toyota and Volkswagen jointly produced 21.8m cars and generated $15.6bn of free cash flow in 2019, according to JPMorgan. That same year, Tesla made 366,000 cars and $1.1bn of cash. Looked at another way, the stock market “values” every car Tesla sold last year at over $1m apiece. You can buy a Tesla Model 3 for $35,000.

A punchy bear case has been made by Jamie Powell on FT Alphaville who argues Tesla’s share price is unhinged from economic reality. We have returned to the world of “dot.comedy” of 2000 just before markets crashed. 

Such scepticism does not worry Mr Musk’s fans, who cheer his every move and aggressively troll his doubters. Nor does it seem to concern some mainstream investors, who argue Tesla is a bet on three big technological trends: electric cars, battery technology and autonomous driving. Morgan Stanley forecasts that Tesla will sell 6m cars by 2030 and can generate rapidly increasing high-margin revenue from services and batteries. The company is as much about software as it is about hardware, a bet that an iPhone on wheels is a lot more valuable than a tin can. 

This week, Baillie Gifford, one of Tesla’s biggest shareholders, cut its investment for portfolio weighting reasons, booking profits of $17bn in eight months. But the Edinburgh-based fund management group said it remained optimistic about Tesla’s future and retained a 4.25 per cent stake.

James Anderson, co-manager of Baillie Gifford’s flagship fund, says it is sometimes worth paying “unreasonable prices” for high-growth tech stocks. The bears have been blinded by misguided concepts of value investing and index tracking. To understand the new economy, Mr Anderson suggests, it is far more instructive to read the annual shareholder letters of Jeff Bezos, the founder of Amazon, than those of Warren Buffett, the high priest of the value investment movement.

Two contentions underpin Baillie Gifford’s investment approach. First, returns in stock markets are infinitely more extreme and concentrated than most people assume. Citing the research of Hendrik Bessembinder, a professor at Arizona State University, Mr Anderson says: “All the excess returns in world markets since 1990 have come from just 1.3 per cent of companies.”

Second, some of these intellectual property-rich companies, such as Google and Alibaba, generate increasing, rather than diminishing, returns because of scale effects in a networked world, as described by Brian Arthur, professor at the Santa Fe Institute.

To be sure, Tesla’s current valuation looks irrational. But rationality has been stretched thin in all kinds of ways in 2020. In a world awash with central bank cash, many other market valuations look just as screwy. There are now about $14tn of global bonds trading on negative yields.

The other big difference with 2000 is that many highly valued tech companies, if not Tesla, are massively profitable. From that perspective, Big Tech’s valuations may reflect an excessive concentration of corporate power. That should be of more immediate interest to antitrust regulators than short sellers.

At Baillie Gifford, Mr Anderson concedes it is pointless to try to time the market’s next move. But he remains convinced of the worth of active fund management and the long-term transformations wrought by technology. “Over the past 15 years we have made an awful lot of mistakes,” he says. “But our biggest mistake may be that we have not been optimistic enough.”

What my first flight for four months told me about the future of travel

‘Flying today is totally different from before the pandemic — but in many ways it might be better’

Leslie Hook


© Ulla Puggaard


Recently I flew from London to the West Coast of the US — my first time on an aeroplane in four months. This trip is one I took regularly in the pre-Covid era, to go see my parents, but this time each leg of the journey had an element of surprise.

Moving through an empty Heathrow airport, in which the hand-sanitising stations seemed to outnumber the travellers, was quieter and more pleasant than usual. But speaking to airline staff, when all parties are heavily masked, turned out to be difficult because of the muffling effect. Preparing for take-off, I suddenly appreciated the way the air stewards checked everyone was wearing a face covering. Landing in the US, passengers had to fill out a short health form for Covid-19.

Stepping on an aeroplane today feels a bit like stepping back into the early days of air travel. Each trip is rare, special — and a little bit nerve-inducing. Just as early passengers might have worried their aeroplanes would fall out of the sky, travellers today must grapple with whether they will contract a deadly disease.

Flying these days is totally different from before the pandemic — but in many ways it may be better. Health standards are higher, airports are not overcrowded and, perhaps most importantly, the decision to get on a plane is no longer something that can be done on a whim. Gone are the days of cheap and easy air travel: coronavirus has forced everyone to be much more thoughtful about when and how they fly.

Right now, global air travel is just about half of what it was this time last year, according to airline consultancy OAG. Flight data show some countries are rushing to the airports. In China, passenger flights in August were nearly on par with the same month last year. Friends who have taken domestic flights there report they are completely full. (The fact that Chinese authorities report no cases of local Covid transmission since mid-August has helped.)

Meanwhile, Europe has been slower to return to flying. In Germany and the UK, the number of flights is just one-third of normal levels. As a result, six of the world’s 10 busiest airports were in China in August, up from two out of 10 during the same period last year, according to OAG data.

This decline in air travel has been great news for the environment. Before coronavirus, aeroplanes accounted for just over 2 per cent of global emissions. But as lockdowns tightened in March, emissions from air travel fell by a third, and they have continued to be far below normal levels.


As an aside, I was surprised to learn during my trip that being inside an aeroplane does not appear to be significantly more dangerous, in Covid terms, than many other social activities. The air in their cabins is typically filtered and recirculated every four minutes. Very few cases of Covid transmission on aeroplanes have been reported; those that have involve passengers within two rows of the carrier.

Many of the hygiene-related changes are likely to stick around. As airlines struggle to recover their business and reassure passengers, their Covid-related safeguards will go up, not down. Some are already handing out plastic face shields at boarding and making it mandatory to wear them along with a mask.

Routine Covid testing at airports could be the next step in this game. Some airports already offer Covid tests for travellers (Frankfurt is one example), and Heathrow has built a testing centre that is waiting for government approval to open. Just as security measures changed permanently after September 11, the health safeguards put in place now could be here to stay. Wearing a mask feels awkward at first but — just like packing toiletries into a clear plastic bag — is something we will quickly get used to.


It’s harder to say whether the behavioural changes will persist — and how long our reluctance to get on planes will last. The pandemic has made frequent travellers aware of how many of their pre-Covid flights were less than absolutely necessary (I am certainly guilty on that front).

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This is a welcome shift. Among people who are already flying again, anecdotal evidence suggests they are making fewer trips and staying for much longer when they do travel. This practice has long been advocated by the climate-conscious, but never really caught on. Now that we are counting not only the climate toll of flying, but also the health toll, it changes the calculus about what is worthwhile.

There is a risk, though, that the health-related changes prove to be longer-lasting than the behavioural ones. People may rush back to flying as Covid fears recede — the full domestic flights in China suggest that is already happening there.

But it’s also possible that we will never view flying in quite the same way — jumping on a plane to go to a conference or an interview may not be as commonplace as it once was. Just like in the early days of travel, flying could be a special adventure, one that is not undertaken lightly. That would be better for the planet, as well as our health.


Leslie Hook is the FT’s environment and clean energy correspondent; leslie.hook@ft.com; @lesliehook. Gillian Tett is away

Monetary Policy Expert David Marsh

"We Are Witnessing the End of Independent Central Banks"

Former investment banker David Marsh is critical of the European Central Bank and the U.S. Federal Reserve for having transformed themselves into political instruments. Inflation, he says, isn't dead - and it will come back.

Interview Conducted by Tim Bartz




DER SPIEGEL: Mr. Marsh, the U.S. Federal Reserve (Fed) has just bid farewell to its inflation target and is now tolerating inflation rates above 2 percent. The European Central Bank (ECB) could soon follow suit. Will inflation soon be making a comeback?

Marsh: I wouldn't be so defeatist, but it is clear that a new era is dawning. The Fed is further constraining the ECB’s freedom of maneuver.

DER SPIEGEL: How so?

Marsh: The Fed has always been careful to keep inflation and unemployment under control with its monetary policy. That is now over. Because of the pandemic, unemployment has risen sharply, and at the same time, inflation has been very low for 10 years. There are reasons for this, but they have nothing to do with the central banks.

DER SPIEGEL: What are the reasons?


Marsh: People are getting older and saving more. Digitalization is covering companies' capital requirements. Globalization has brought millions of new people into the labor market, which has driven down wages. All of this has put the brakes on inflation. From now on, fighting inflation is no longer the Fed's most important goal. And we also have very low inflation rates in Europe.

DER SPIEGEL: If inflation is no longer a problem, why is the Fed's decision to tolerate higher consumer prices such a big deal?

Marsh: Because inflation is not dead, but can once again become a real danger given the debt-financed government spending deployed in the fight against the pandemic. The central banks should be ready to fight rising inflation rates. But they are abandoning the fight.



DER SPIEGEL: How much inflation are we actually talking about? There are some believe the global economy is heading back to the hyperinflation of the 1920s.

Marsh: I think that's completely exaggerated. If industry recovers from the corona shock, prices could rise by well over 2 percent. That would be just fine for politicians, because if prices rise, the nominal gross domestic product also grows. And as long as that increases faster than debt, the sovereign debt level will melt away essentially automatically.

DER SPIEGEL: What would be great for finance ministers …

Marsh: ... but would be accompanied by social injustice. Those who own their own homes or stock portfolios are happy because both become worth more with inflation. But those who have hardly any assets and live in rented accommodation feel rising prices much more directly. The gap grows bigger, which in turn helps the populists. We see this happening already.

DER SPIEGEL: Critics say that the basket of goods and services used by the ECB to measure the inflation rate, which in turn is used as the basis of its monetary policy, is calculated incorrectly. Do you agree with that criticism?

Marsh: I think so, yes. The real inflation is higher. As I said: Real estate prices, including rents, are decisive for the cost of living and the shopping basket does not reflect that. But that is not the real problem.

DER SPIEGEL: What is?

Marsh: The politicization of the central banks. The new Fed strategy is the strongest sign that the central banks are taking on more and more tasks for which politicians are responsible, such as fighting unemployment. The ECB, which intends to present its new strategy in 2021, will follow in the Fed's footsteps. We are witnessing the end of independent central banks - which was partly a myth anyway.

DER SPIEGEL: They were never completely independent …

Marsh: Ever since the Fed announcement, this myth has been shattered. The central banks are more politicized than they have been for decades. In Japan, this has been the case for a long time. In Europe, French President Emmanuel Macron set an example in this respect by cleverly taking Chancellor Angela Merkel by surprise and making Christine Lagarde president of the ECB.

DER SPIEGEL: So we have a situation in which inflation is higher than the official figure, which central banks tolerate – first tacitly, but now officially. And that is done as a way to support nation states? The accusation of central banks providing state financing is one of the harshest that can be made.

Marsh: It is more complex than that. In general, it is quite right that central banks support goals set by politics. But they must not lose the ability to do the opposite when necessary, for example when inflation rises. Central banks must not allow governments to use inflation as a weapon against debt.

DER SPIEGEL: Did Fed Chairman Jerome Powell cave in to Donald Trump? The president had been tweeting for quite some time that the Fed should ease the reins to allow more growth.

Marsh: On the one hand, Powell has adjusted strategy to reality. At the same time, the colossal public pressure that Trump has been exerting has had an effect. When Trump summoned him to the White House at the beginning of 2019, Powell should have said: "Get my secretary to give you an appointment, but not for six months." Of course, he didn't do that.

DER SPIEGEL: Monetary policy is never static, like politics in general. Powell's successor can change the strategy again if inflation rises too much.

Marsh: And he will. And that will be easier for the US Federal Reserve than for the ECB - a huge problem.

DER SPIEGEL: Why?

Marsh: Because eurozone member states are growing at radically different speeds. Germany could tolerate inflation rates of 3 to 4 percent, if only to reduce its export surplus. But that would be practically be the death knell for Italian competitiveness. The eurozone does not have a finance minister or an economics minister because there is no political union. This is the birth defect of monetary union.

"In terms of political cohesion in the eurozone, the ECB must take into account the wishes of countries like Germany."

DER SPIEGEL: ECB President Lagarde is urging eurozone member states to spend more money because the ECB is not omnipotent. Was that overdue?

Marsh: Yes, the monetary policy of the ECB was too lax for a long time, the fiscal policy of eurozone member states, especially Germany's, too strict. Fortunately, this has changed owing to the corona shock. The European Union’s recovery fund goes in the right direction. It's just as well that we British, the eternal nay-sayers, have departed. We would probably have prevented the fund from being established.

DER SPIEGEL: Is it not dangerous for governments to fund their aid programs with money generated by bonds the ECB buys on the market?

Marsh: It is. Germany is very sensitive to this type of public financing. This endangers the cohesion of the eurozone.

DER SPIEGEL: What should the ECB do?

Marsh: Announce in a sensitive yet decisive way that it will stop buying government bonds from mid-2021 if the economy has significantly recovered by then and if there is no further wave of infection. It urgently needs to signal that it is considering monetary policy normalization. Then, it can also be more flexible with regard to the inflation target. It must not give finance ministers the impression that it is always there for them. It was right for Lagarde to go all out in the pandemic. But in terms of political cohesion in the eurozone, the ECB must take into account the wishes of countries like Germany.

DER SPIEGEL: If the ECB stops buying sovereign bonds, two things will happen: Bond prices will fall, and interest rates will rise. It would be much more expensive for highly indebted countries like Italy, France and Spain to incur new debt. The alternative would be drastic austerity programs. That is something Macron will have to prevent if he wants to be re-elected in the next presidential elections in 2022.

Marsh: Despite difficulties from the Fed’s decision, the ECB must implement its own strategy, with subtlety and understanding. Otherwise it runs the risk of being made the scapegoat for everything that goes wrong.

DER SPIEGEL: Isn't it already too late?

Marsh: Not yet. That would only be the case if it buys government bonds directly from governments, or if the majority of central bank heads were ex-finance ministers like Lagarde. That is why it is so important to see who will succeed Yves Mersch of Luxembourg in the six-member ECB Executive Board at the end of 2020. If it were a politician, that would cross a red line.

DER SPIEGEL: Do you think that the ECB will be an issue in the 2021 election campaign in Germany, for example with regard to low interest rates and the German obsession with savings?

Marsh: I don't think so. Social cohesion in Germany is not working as well as it used to, because of the gap between the well-off and the less well-off. But compared to many other countries, the Germans are doing just fine. The outcry in Germany against the ECB’s bond purchases has been limited.

DER SPIEGEL: Will the eurozone survive?

Marsh: The error of not establishing a political union must be corrected. There are only two ways to get out of this impasse: Either the monetary union shrinks. Or it changes into a transfer union, for which the Germans in particular have to pay - with the danger of overreaching themselves. One of these two extreme options will prevail, probably the transfer union. Simply muddling through no longer works.

DER SPIEGEL: The Germans benefit most from the eurozone as an export market. Why should they overreach themselves?

Marsh: If it were so clear that the net effect is positive, then everything would be fine. But as so often, it depends more on perception than on reality. The next chancellor will have to take responsibility for this. It would need a chancellor with outstanding communication skills who can convey the benefits of the eurozone to the populace. Ever since Helmut Schmidt, Germany has not had such a politician. What is needed is a German Macron, but no matter how far and wide I look, I don’t see one coming.


David Marsh, 68, is a wanderer between the worlds. In the 1980s and '90s he worked as a journalist for the Financial Times, before then switching to investment banking and became a consultant. Marsh is British, yet he is also a profound expert on Germany and is the author of the standard work "The Bundesbank: The Bank that Rules Europe." He is also a recipient of the German Order of Merit. Today, as head of the Official Monetary and Financial Institutions Forum, the think tank he founded, he focuses on his favorite topics: Economic policy and central banks. The latter, he believes, are degenerating into appendages of governments because they are increasingly engaged in state financing.