The Deadly Mediterranean Route

EU Seeks to Ward Off New Refugee Crisis

By Christiane Hoffmann, Walter Mayr, Peter Müller, Christoph Schult and Wolf Wiedmann-Schmidt

 Photo Gallery: A Deadly Route to Italy

The number of migrants crossing the dangerous Mediterranean route has risen significantly since the beginning of the year. European officials fear the situation could further deteriorate.

So far, though, Brussels hasn't been able to agree on a solution.

During a meeting with senior security officials in the Reichstag, Germany's parliament building, a week ago, Angela Merkel didn't mince words. While praising the Schengen zone for the border-free travel it has granted Europeans, the German chancellor also said that it could only work if the European Union's external borders were adequately protected. Schengen, she said, means that Germany's neighbors are no longer Austria or Poland, but Russia, Turkey and Libya.

The 2015 refugee crisis, Merkel said, taught us "fundamental lessons," such as the fact that EU external border protection wasn't good enough. The situation has since improved dramatically, Merkel said, "but we haven't yet achieved everything that we need."

The chancellor, unfortunately, is correct. Merkel has promised that the refugee crisis seen two years ago will not be repeated: Never again will Europe see an uncontrolled inflow of millions of people.

The refugee deal with Turkey is working, we are repeatedly told, and the crisis is over. That, though, could turn out to be wrong.

With German voters set to go to the polls on Sept. 24, Merkel's re-election campaign hinges on there not being a repeat of the refugee crisis, even if it's not as substantial as the 2015 influx. But west of the closed Balkan route, a new migrant stream has been growing since the beginning of the year.

From Jan. 1 to April 23, 36,851 migrants have followed the central Mediterranean route from North Africa to Italy. That represents a 45 percent increase over the same period last year, when a record 181,000 people crossed the Mediterranean on the route. "The situation is worrisome," says Izabella Cooper, spokeswoman for the European border control agency Frontex.

Even more concerning is the fact that summer hasn't even begun. Experience has shown that most migrants only climb into the boats once the Mediterranean grows calmer. Italian authorities estimate that a quarter million people will arrive on its shores this year. "There are challenges ahead," says a senior German security official.

Berlin is particularly concerned because it's not just Africans who are taking the Mediterranean route to Italy. An increasing number of South Asians are as well, which could mean that the route across the sea to Italy is now seen as a viable alternative to the defunct Balkan route. People from Bangladesh now represent the second largest group of migrants that have crossed over from Libya this year. From January to March 2016, by contrast, exactly one Bangladeshi was picked up on the route. Pakistanis have also chosen the Mediterranean route more often in recent months.

Officials in Berlin and Brussels have thus far sought to play down the numbers. "We can't yet say if it is a temporary upward tick or if it is a trend," says one EU diplomat.

Thus far, the majority of newcomers have remained in Italy. But German Interior Minister Thomas de Maizière, of Merkel's Christian Democrats (CDU), nevertheless applied with the European Commission for permission to extend German border controls on its border with Austria beyond the May expiration date. On Tuesday, that permission was granted, with the Commission saying that the controls must be lifted by the end of the year. German conservatives are likewise demanding that controls be established on the country's border with Switzerland.

Restrictive Interpretation

The EU is currently working on an emergency plan in case a "serious crisis situation" develops. The discussions are focusing on a scenario under which more than 200,000 refugees would have to be redistributed each year.

An unpublished report by Malta, which currently holds the rotating European Council presidency, calls for a more restrictive interpretation of asylum rights in such a case. In other words, should too many migrants begin arriving, the EU will increase efforts at deterrence. Controversial proposals for reception camps to be established in North Africa also remain under discussion.

Most of those currently fleeing from countries like Nigeria, Guinea and the Ivory Coast are doing so to escape grinding poverty and in the hopes of finding better opportunities in Europe. Very few of them have much chance of being granted asylum. That reality has made redistribution within the EU even more difficult. According to current law, those with no chance at asylum are supposed to be sent back home as quickly as possible and not sent to other European countries.

The key to Merkel's solution for the 2015/2016 refugee crisis was the EU-Turkey deal. The agreement called for Turkey to improve monitoring of its Aegean Sea coastline, which was the jumping-off point for the Balkan route via the Greek islands. At the same time, a more rigorous deportation policy, which meant that refugees who reached Greece would be sent back to Turkey, discouraged many from making the journey in the first place. That deal, in combination with border closures, has meant that the route has largely been abandoned.

That strategy, however, won't work for the Mediterranean route to Italy -- neither the increased coastal monitoring nor the rapid deportations. There is no country, after all, to which the migrants could be deported. Almost all of them depart from what was once Libya, today a failed state where the government, clans and other power-hungry groups are engaged in constant combat.

The country is widely viewed as a basket case with little prospect for a stable government in the foreseeable future. One German government official says that "no positive trends" can be observed.

The problem, though, is that there can be no solution to the current refugee influx without Libya.

Fully 90 percent of the migrants who have set off across the Mediterranean for Italy started their journeys from the Libyan coast.

Low Risk, High Earnings

Without a functioning state in Libya, however, there can be no effective border controls. The situation is completely chaotic, notes a late-January internal report from the EU Border Assistance Mission in Libya (EUBAM), which is currently working out of Tunis. Migrant smuggling, the report notes, is an income source for organized crime organizations "with extremely low risks and high earnings."

Nevertheless, the Libyan government has presented the EU with a list of needs for the upgrading of its coast guard, including 130 vessels, some of them armed, along with additional equipment. The EU border control agency Frontex is skeptical, saying that before any equipment is delivered, measures must be in place to prevent it from falling into the wrong hands.

Italian Prime Minister Paolo Gentiloni reached an agreement in February with Fayez Serraj, the prime minister of Libya's unity government, for millions in aid to strengthen the country's coast guard. But Serraj doesn't even have control of the entire capital, Tripolis. And the coast guard that Italy is supporting sometimes works together with migrant smugglers.

Because protecting the coast is unfeasible, the focus has shifted to returning migrants to North Africa. Months ago, the German government discussed the establishment of reception camps not in Libya, but in its neighboring countries of Tunisia and Egypt. But Tunis and Cairo demurred.

Might such camps, then, be built in Libya after all?

On a recent Monday afternoon, the Home Affairs Committee in European Parliament met to review the situation in Libya, a country that has become so dangerous that many government officials, NGO workers and politicians no longer feel safe traveling there. The committee had invited Annemarie Loof, operations manager for the aid organization Doctors without Borders, and the pictures she brought along to show to the parliamentarians were difficult to look at.

Left in the Lurch

They showed overcrowded internment camps, children sleeping on bare concrete and undernourished migrants with skin diseases and signs of having been tortured. "Refugees are big business in Libya," Loof says. "If you pump more money in, things will only get worse."

That, however, is exactly what the Italians are planning to do. The country feels as though it has been left in the lurch by Brussels and on the eve of the EU summit in Malta in early February, Rome reached an agreement with Libya on the establishment of "temporary reception camps" to which refugees can be deported. Initially, they are to be financed by Italy, but Libyan officials will be solely responsible for operating them. Loof's report focused on the conditions that might develop in such camps.

"It would be crucial for the Europeans to inspect the camps to guarantee humane conditions," says Martin Kobler, head of the United Nations Support Mission in Libya. But nobody is willing to do so. It is simply too dangerous.

An alternative to improving Libya's coast guard would be that of monitoring the country's southern border to prevent migrants from entering Libya in the first place. Recent media reports have indicated that some in Brussels have begun mooting the establishment of a mission to do so. But the idea has not found widespread favor in the EU capital and Berlin, too, is opposed. "I don't think a European police mission is realistic at the present time," says one German official.

One reason, to be sure, are the challenges associated with doing so. Libya's southern border runs for 1,500 kilometers through an extremely hot desert controlled largely by local clans. But Luxembourg Foreign Minister Jean Asselborn believes that, despite the difficulties, exactly that strategy should be pursued. "Europe has to help Libya control its southern border," he says.

"That is the gate for migration to Europe. It isn't just when the refugees head out to sea."

"The refugees must be stopped before they reach the Sahara," agrees Monika Hohlmeier, a member of European Parliament from the Christian Social Union, the Bavarian sister party to Merkel's CDU. "It's all a vicious circle: The more people we save in the Mediterranean, the more refugees end up in the migrant smuggling apparatus or die on the way." A strategy paper produced by the European Political Strategy Centre, a think tank under the authority of Commission President Jean-Claude Juncker, reaches the same conclusion. By limiting itself to merely saving migrants in maritime distress, Europe has "unintentionally encouraged smugglers to adopt new strategies enabling them to reap more benefits, while placing migrants even more at risk," the paper, published in early February, reads.

Brutal Treatment

Frontex has noted that migrant smugglers have recently become even more unscrupulous. They have, for example, begun packing up to 170 people onto inflatable rafts that can only safely transport 15 passengers at most. It isn't possible for such an overloaded vessel to make the entire trip across to Italy, nor is that the intention. The engines generally only have enough fuel to make it out of Libyan waters, with smugglers relying on the migrants being picked up by a passing ship. If not, well that's just bad luck. More than 1,000 migrants have already lost their lives trying to reach Italy this year.

Migrants who have been saved have told Frontex officials about the brutal treatment meted out by the smugglers. Those who refuse to board the overflowing boats in Libya are often forced to do so at gunpoint. Some are even shot or murdered. Frontex spokeswoman Cooper says that the border agency has repeatedly discovered migrants with gunshot wounds among those who have been saved from the Mediterranean.

It is a dilemma: The Europeans cannot simply stand by as increasing numbers of people drown in the Mediterranean. But the more active NGOs are in pulling people out of the water, the more cynically the smugglers take advantage of the help they provide. It has become something of a "taxi service to Europe" that has increased the incentive to risk the journey, complain high ranking German officials.

The Italian judiciary has gone a step further and accused some aid organizations of abetting human smuggling. "We have proof that individual NGOs maintain direct contact with migrant smugglers in Libya," claims Public Prosecutor Carmelo Zuccaro, based in Catania in Sicily.

"Telephone calls from Libya are made directly to these NGOs. The direction of travel to their ships are illuminated with spotlights."

For years, Italy has been among the European countries most affected by the refugee influx. The government in Rome, led by Paolo Gentiloni, is under extreme pressure. The hostels are overcrowded and there have been violent protests against newcomers in some Italian communities -- and populist politicians have been highlighting the issue ahead of upcoming mayoral elections. The head of the right-wing populist party Lega Nord says that "the invaders must be stopped and the illegals should be sent away." His party currently stands at around 13 percent in nationwide polls. Meanwhile, Senate Vice President Luigi di Maio, of the Five Star Movement, the strongest political party in the country, has been blasting away at the NGOs who save drowning refugees at sea.

Solidarity in Name Only

The Italian government has launched a variety of measures in an effort to regain control over the situation, but the number of new arrivals continues to climb. Shortly before Easter, Rome quickly issued a decree allowing for the more rapid deportation of asylum seekers whose applications have been rejected. In addition, Prime Minister Gentiloni and Foreign Minister Angelino Alfano are seeking to sign agreements with the most important countries of origin and transit countries in Africa. The president of Niger, for example, was recently promised 50 million euros during a visit to the Italian capital in exchange for tighter controls on the country's border with Libya.

The Italians do not believe that there will be a rapid breakthrough on the distribution of refugees throughout Europe. Recent years have shown repeatedly that solidarity exists in name only. In 2015, other EU members promised to take 160,000 refugees from Italy and Greece. Thus far, however, only 16,000 have been resettled.

During a breakfast meeting a week ago Wednesday, EU ambassadors from the 28 member states studied a six-page compromise paper presented by the Maltese council presidency: "The Solidarity Component of the Dublin System Reform." The paper envisions a system whereby Europe will classify immigration levels into three categories: normal refugee flows, strong increases and massive inflows in a crisis. Talks have focused primarily on the second category, with the third being classified as a "serious crisis situation."

Germany is insisting that as many European countries as possible accept refugees. To encourage countries like Hungary and Poland to accept such a plan, a compensation mechanism is under discussion which would include financial incentives for accepting refugees.

Countries that accept more than their quota would receive 60,000 euros per refugee within five years, whereas those who don't meet their quota would have to pay the same amount.

As a further concession, the proposal envisions the suspension of the distribution mechanism when more than a certain number of refugees per year need to be distributed -- the number 200,000 is currently under discussion. The measure, though, remains bracketed in the paper, which is EU diplomats' way of indicating that the debate has not yet been settled.

No Solution in Sight

In the case of a "serious crisis situation," the paper calls for "simplified legal procedures," which likely means that only the minimum standards laid out in the Geneva Refugee Convention would apply.

The proposals in the paper will not provide relief in the immediate future, which is why the Commission is urging EU member states to speed up deportations. Officials estimate that around 1 million people who sought asylum in 2015 and 2016 saw their applications rejected, meaning they were required to be sent home. But since 2015, not even half that number have been deported.

Repatriations to African countries are often unfeasible, says one EU diplomat. "Either the countries refuse to take their citizens back or the refugees who are to be deported have long since disappeared."

Meanwhile, demands are growing in Berlin for more intense monitoring of the German-Swiss border.

Germany's federal police force recorded 1,880 illegal entries through the border during the first three months of this year. It's not a huge number, but it has more than tripled relative to the same period in 2016 despite the lack of stationary border controls of the kind seen on the German-Austrian border. In other words, the true number of illegal entries is likely much higher.

"If the number of migrants coming across the Mediterranean continues to rise, we won't be able to avoid controls on the German-Swiss border," says Armin Schuster, a German parliamentarian with the CDU. Fellow conservative Stephan Mayer is demanding that the border be "tightly controlled, unilaterally if necessary, without EU permission."

Rigorous repatriations to source countries, border controls, measures to fight the causes of flight: Berlin and Brussels are deploying a broad variety of steps to prevent a new refugee crisis. The deepest crisis of Merkel's tenure taught the chancellor an important lesson: When a large influx of migrants begins pressuring Europe's external borders, Germany cannot look away. "We Germans," Merkel said in late August 2016, "ignored the problem for too long."

Today, government officials speak of the crisis as a "time when we weren't sufficiently aware of the problem." They say, however, that "we have learned our lesson." That seems to be the case. There is no lack of awareness for the problem this time around. But there is nevertheless no solution in sight.

 The Least Explicable Bubble

Of all the mini-bubbles now inflating out there, maybe the least explicable is the race among emerging market companies to borrow dollars. This has gotten them – and their governments — in huge trouble so many times in the past (see the Mexican default of 1982 and the the Asian contagion of 1997) that you’d think dollar debt would be kind of a hot stove thing for Brazilians and Mexicans. 
But no, they’re back at it:

Emerging-Market Companies Shrug Off Trump in U.S. Debt Binge
(Bloomberg) – Emerging-market companies are showing up to the U.S. debt market at the fastest pace ever, and finding plenty of appetite for their bonds.
Sales of dollar-denominated notes have climbed to about $160 billion this year, more than double offerings at this point in 2016 and the fastest annual start on record, according to data compiled by Bloomberg going back to 1999. Emerging-market assets tanked after Donald Trump’s surprise election in November, but they’ve quickly recovered, with bonds returning 4 percent this year and outperforming U.S. investment-grade and high-yield debt. 

The deluge of issuance began when companies anticipating a surge in borrowing costs amid economic stimulus from Trump rushed to sell notes before his inauguration Jan. 20. But the expected jump never materialized, extending the window for companies like Petroleo Brasileiro SA and Petroleos Mexicanos to pursue multi-billion-dollar deals.  
They found plenty of demand from investors keen to buy shorter-dated debt that’s better insulated against rising U.S. interest rates. 
Jean-Dominique Butikofer, the head of emerging markets for fixed income at Voya Investment Management in Atlanta, said he’s seen new interest in emerging markets from investors who already own U.S. high-yield bonds or emerging market sovereign debt that’s more vulnerable to rising interest rates. 
“You want to be less sensitive to U.S. rates, but you still want to diversify and you still want to play the EM catch-up growth story,” said Butikofer, whose firm manages $217 billion. “You’re going to gradually add emerging-market corporates.” 
The investable universe for emerging-market corporate debt is small, but growing quickly, with about $426 billion outstanding, according to Bloomberg Barclays Index data. That’s less than a tenth of the size of the U.S. investment-grade credit market. The notes have an average maturity of 6.3 years, compared with 10.8 years for investment-grade debt. 
Economic Shift 
Developing nations now rely less on exporting their goods to the U.S. and more on local consumption than in previous says, said Samy Muaddi, a Baltimore-based money manager at T. Rowe Price Group Inc., which oversees $862 billion. 
“The EM growth model has really shifted in the last 10 to 20 years,” Muaddi said.  
“Consumption has risen as a share of GDP in many of the countries we’re involved in.  
That growth driver is pretty durable irrespective of U.S. policy.” 
Debt from Indonesia, Argentina and Brazil is particularly attractive as those countries implement economic reforms, Muaddi said. While Trump’s trade policies may be bad news for Mexican companies if he scraps the North American Free Trade Agreement, he said many of the world’s biggest geopolitical risks are in developed markets — think Britain’s negotiations to leave the European Union or France’s election outcome. That’s upending the usual dynamic in which emerging markets are considered less stable. 

Risks still remain. A surge in the greenback could spell bad news for emerging-market companies with lots of dollar debt and revenue mostly in a local currency.  
The overseas debt binge has boosted their total foreign corporate debt due in the next five years to $1.58 trillion, according to the Institute of International Finance.  
About 80 percent of that is dollar denominated. 
‘Original Sin’ 
That could cause problems, according to Ricardo Hausmann, the director of the Center for International Development at Harvard University in Cambridge, Massachusetts. 
While developing nations and their companies aren’t as dependent on overseas debt as they were in the 1980s — when a similar pattern sparked a wave of defaults in Latin America — a rising dollar “will make it that much harder for companies and sovereigns with ‘original sin’ to pay,” Hausmann said. He coined the term in reference to developing countries’ reliance on overseas debt in an article for Foreign Policy magazine almost two decades ago. 
Investors seem unconcerned. They’ve poured $1.9 billion into mutual funds that purchase emerging-market debt denominated in dollars and other major currencies, according to data provider EPFR Global. The few exchange-traded funds that buy up the bonds have also had inflows of more than $200 million, Bloomberg data show. 
“There has been a lot of supply, but it’s been absorbed very well by the market,” said Daniel Senecal, a credit analyst at Newfleet Asset Management in Hartford, Connecticut, which manages $12 billion.

So…emerging market debt is a great way to diversify because these countries are no longer export-dependent, thus “insulating” them from the risk of rising US interest rates.

Furthermore, the developed world is where all the geopolitical risk now resides, so Brazil, Mexico (and Indonesia and Argentina!) have become safe havens.

If this seems to stretch the bounds of credulity, that’s because peak bubble rationales always do. In 1999 tech company earnings were “optional” and eyeballs were all that mattered. In 2006 home prices always went up so any price was a good price.

With today’s multiple bubbles such nonsense is everywhere. A college degree is worth millions over a lifetime so at a borrowed quarter-mil it’s a bargain. Modern cars will last decades so a 7-year auto mortgage is the best way to buy – especially if you have bad credit. Trump’s tax cuts will boost corporate profits without unduly increasing the deficit, so stocks at historically-high valuations are actually cheap.

But again, the craziest rationale has to be that since Latin American economies are now driven by local consumers, dollar-denominated debt is the best way for an Argentine copper miner to finance its expansion.

Here’s a quick scenario to ponder: The US blunders into another Middle-East war (or a stock market crash or unexpected slowdown when the auto, housing and student loan bubbles burst simultaneously) sending terrified capital pouring into Treasury bonds and pushing up the dollar.

That cheap emerging market dollar-denominated debt becomes 30% – 50% more expensive, causing a wave of borrowers to implode. And once again shell-shocked buyers of insanely-overvalued assets look back on their delusions and wonder what they were thinking.

The most consequential election of 2017

Even if defeated, Marine Le Pen has changed French politics

France is more divided than ever
AS FAMILY outings go, it was unorthodox. No fewer than 20 members of all ages travelled from Normandy to a soulless exhibition hall 20km (12 miles) north of Paris, to watch the nationalist Marine Le Pen take the stage for her last big campaign rally. The youngest in the troop was seven; there were several teenaged girls with pony-tails. But the family seemed thrilled. “For 30 years, politicians have ruined this country,” said Bernard, an uncle in the clan, who works in funeral insurance: “They tell us that we’re racist, but that’s nonsense. She’s the one who’s got concrete ideas to get us out of this chaos.”

Ahead of the run-off vote for the French presidential election on May 7th, Ms Le Pen trails her liberal opponent, Emmanuel Macron, by a hefty 20 points. But she has not given up the fight. On May 3rd she lashed out at Mr Macron in a televised debate against the 39-year-old one-time banker, casting the election as a referendum on globalisation and finance. She accused the former economy minister of being the candidate of “the system”, “Uberisation of society”, and “savage globalisation”.

In an echo of a campaign line used by François Hollande, the Socialist president, in 2012, Ms Le Pen told flag-waving supporters in Villepinte: “Today, the enemy of the French people is still the world of finance, but this time he has a name, he has a face, he has a party, he is presenting his candidacy and everyone dreams of him being elected: he is called Emmanuel Macron.”

It is a message that chimes with a big chunk of the electorate in a fractured country. Big cities and college-educated voters favour Mr Macron and his pro-European, business-friendly politics, while struggling smaller towns and rural parts lean to the protectionist, anti-immigration Eurosceptism of Ms Le Pen. Even some of those who recoil at her xenophobia turn out to loathe the world of finance even more. “Neither banker, nor racist” read a banner at a protest rally in Paris. Jean-Luc Mélenchon, a Communist-backed candidate who came a close fourth, refused to call for a vote for Mr Macron against Ms Le Pen. Fully 65% of his supporters said that they would abstain or spoil their ballot papers.
Ms Le Pen has made some gains. She secured the first national alliance in the 45-year history of her party, the National Front (FN), hooking up with Nicolas Dupont-Aignan, a right-wing Eurosceptic who scored nearly 5% of the vote in the first round. Ms Le Pen, who won 21%, has also tried to broaden her base by reaching out to the mainstream right (with its older voters) and the far left (with its younger ones). She lifted a stirring passage on regional identity from a speech by François Fillon, the defeated centre-right candidate, which her aides insisted was a “wink” at his electorate. Her team made an appeal on social media to Mr Mélenchon’s “unsubmissive” voters too, pointing to their shared positions such as distrust of NATO and desire for retirement at the age of 60.

Perhaps most striking, Ms Le Pen softened her position on the euro. Her vow to quit the single currency has long divided the FN: those around Florian Philippot, her lieutenant, consider it a centrepiece; those close to Marion Maréchal-Le Pen, her niece and an FN deputy, see it as a distraction. But it has turned into a liability for her run-off campaign. Older voters in particular worry that a currency devaluation could slash their pensions and savings. So Ms Le Pen has fudged the issue, with a muddled plan for parallel currencies instead. At a FN souvenir stand in Villepinte, offering such delights as pendants and earrings featuring Ms Le Pen’s blue-rose emblem, Anne-Claire, an off-duty police official, agrees: “The euro isn’t what matters; Marine is about defending the values of France.”

Nonetheless, it will be extremely difficult for Ms Le Pen to make up the gap between her and Mr Macron in the remaining days. No poll has put her remotely close to winning a majority.

She gets over 50% in only one region, Provence-Alpes-Côte d’Azur, the FN’s southern stronghold. In Brittany and greater Paris, her score drops to 31%. It would take a historic upset at this point for her to keep Mr Macron from the presidency. A loss for Ms Le Pen would be a symbolic defeat of the forces of nationalism and populism that have gained ground in parts of Europe. It could also put internal pressure on her leadership. “If she gets much less than 40%, the party will consider it a disappointment,” says Cas Mudde, a scholar of extremism.

Yet it would be a mistake all the same to understate Ms Le Pen’s achievement. With a first-round score of 7.7m votes, she has already set a historic record for the FN (see chart). In 2002, when her father, Jean-Marie Le Pen, also made it into the presidential run-off, there were demonstrations across the country and his opponent, Jacques Chirac, swept up 82% of the vote. This time, the streets have been mostly quiet, and she looks set to double his score. Mr Macron may well be safely elected on May 7th. But he will inherit a deeply divided country.

The Curious Case of Converging Yield Curves

The gap between two- and 10-year yields in the U.S. and Germany has converged

By Richard Barley

From one perspective, U.S. and European bond markets have diverged massively: the 10-year Treasury yield stands at 2.35% while 10-year German bonds yield just 0.39%. The Federal Reserve is raising rates; the European Central Bank is still deep in emergency-policy territory.

But from the perspective of the yield curve, the two sides are closer than you might expect.

The yield curve can help provide a window into the economic outlook. Yields on two-year debt tend to be affected most directly by central-bank actions, while 10-year yields paint a picture of longer-term expectations about growth and inflation. A steepening curve can be read as a sign of brighter economic prospects, and was one of the key signals last year that the market was embracing reflation.

A flatter curve could signal economic concerns.

Since the start of the year, the gap between two- and 10-year yields in the U.S. and Germany has converged, strategists at ING note, with both measures now just over 1 percentage point. That is unusual: the U.S. curve has been persistently steeper than its German peer since 2013.

But now the sands are shifting. The U.S. yield curve steepened sharply in the wake of President Donald Trump’s election victory but is now back close to levels seen before the vote, in part reflecting disappointing economic data. The German curve, by contrast, is still some 0.3 percentage point steeper than it was before the U.S. elections; it steepened again Thursday in response to another strong eurozone purchasing managers index Reading.

The factors behind the curves are different. In the U.S., the yield curve seems likely to respond most to Mr. Trump’s policy actions, and whether they are less underwhelming for investors than in his first 100 days. In Europe, it is economic data and monetary policy that are the bigger forces, with markets focused on even tiny shifts in the ECB’s dedication to ultraloose policy.

It is only one indicator of course. But the yield curve moves are another sign that it is Europe, not the U.S., with the stronger economic winds at its back.

Has U.S. Productivity Gone Hiding Overseas?

Companies’ shifting of profits overseas to avoid U.S. taxes may have artificially lowered U.S. productivity statistics

By Justin Lahart

Construction workers work on a high-rise condominium project on Biscayne Boulevard, in downtown Miami. Photo: Alan Diaz/Associated Press        

Where did America’s productivity go? Some of it may be hiding in Bermuda.

First-quarter productivity figures came out Thursday, and they weren’t good. With the economy faltering even as employers expanded payrolls, the Labor Department’s measure of how much a typical worker produced in a typical hour fell an annualized 0.6% from the fourth quarter. Versus a year earlier, productivity was up just 1.1%—a miserable number that is in keeping with the weak productivity growth that has taken hold over the past decade.

Productivity is a key driver of economic growth, and economists have struggled to explain the slowdown. Some argue it is a result of weak capital spending, some say innovations aren’t coming as fast as they used to. Still others say there is no slowdown and government data don’t capture the gains from new technologies and from the harder-to-measure service sector.

But provocative new research argues that some of America’s productivity gains are effectively being hidden offshore.

American companies have expanded their overseas operations in recent years. Commerce Department figures show that nonbank U.S. multinationals’ net income from overseas production came to about $1.2 trillion in 2014 versus $500 billion a decade earlier. Much of that was the result of companies stepping up their global operations, but some of it was a result of them moving intangible assets such as intellectual property overseas in order to shift income to low-tax countries.

Commerce Department figures tell the tale. In 2014 U.S. multinationals held about $1.8 million in assets overseas—anything from factories to patents—for each worker they employed overseas, but that varied a lot by country. In Canada, for example, they held $1.2 million in assets per employee, but in Ireland and Bermuda—popular destinations for their low tax rates—it was $10.3 million and $117 million, respectively.

The outsize asset-to-employment ratios of some countries are an indication that a lot of economic activity is being assigned there, argues University of Minnesota economist Fatih Guvenen. Because the activity isn’t being assigned to U.S. workers, they appear less productive.

That wouldn’t matter if, as appears to be the case in Canada, that economic activity is coming from workers doing their jobs. But Bermuda, where it looks as if assets such as intellectual property have been stashed, appears to be getting credit for productivity that really occurred in the U.S.

Mr. Guvenen and colleagues from Penn State and the Commerce Department calculate that from 2004 to 2008—the period when the U.S. productivity slowdown manifested itself—productivity growth would have been about 0.25 percentage points higher than the 1.5% annual rate shown in the official statistics. That doesn’t overturn the fact of the productivity slowdown, but it does mitigate it.

And it makes a difference in dollar terms. The economists’ productivity adjustments imply U.S. gross domestic product grew $250 billion a year more than the official numbers show since 2005. It doesn’t take long for that to really add up.