The world economy

Markets are braced for a global downturn

The signals from bonds, currencies and commodities are increasingly alarming

LOOKING FOR meaning in financial markets is like looking for patterns in a violent sea. The information that emerges is the product of buying and selling by people, with all their contradictions. Prices reflect a mix of emotion, biases and cold-eyed calculation. Yet taken together markets express something about both the mood of investors and the temper of the times. The most commonly ascribed signal is complacency. Dangers are often ignored until too late. However, the dominant mood in markets today, as it has been for much of the past decade, is not complacency but anxiety. And it is deepening by the day.

It is most evident in the astounding appetite for the safest of assets: government bonds. In Germany, where figures this week showed that the economy is shrinking, interest rates are negative all the way from overnight deposits to 30-year bonds. Investors who buy and hold bonds to maturity will make a guaranteed cash loss.

In Switzerland negative yields extend all the way to 50-year bonds. Even in indebted and crisis-prone Italy, a ten-year bond gets you only 1.5%. In America, meanwhile, the curve is inverted—interest rates on ten-year bonds are lower than on three-month bills—a peculiar situation that is a harbinger of recession. Angst is evident elsewhere, too. The safe-haven dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to $60 a barrel.

Plenty of people fear that these strange signals portend a global recession. The storm clouds are certainly gathering. This week China said that industrial production is growing at its most sluggish pace since 2002. America’s decade-long expansion is the oldest on record so, whatever economists say, a downturn feels overdue. With interest rates already so low, the capacity to fight one is depleted. Investors fear that the world is turning into Japan, with a torpid economy that struggles to vanquish deflation, and is hence prone to going backwards.

Yet a recession is so far a fear, not a reality. The world economy is still growing, albeit at a less healthy pace than in 2018. Its resilience rests on consumers, not least in America. Jobs are plentiful; wages are picking up; credit is still easy; and cheaper oil means there is more money to spend. What is more, there has been little sign of the heady exuberance that normally precedes a slump.

The boards of public companies and the shareholders they ostensibly serve have played it safe. Businesses in aggregate are net savers. Investors have favoured firms that generate cash without needing to splurge on fixed assets. You see this in the vastly contrasting fortunes of America’s high-flying stockmarket, dominated by capital-light internet and services firms that throw off profits, and Europe’s, groaning under banks and under carmakers with factories that eat up capital. And within Europe’s stockmarkets a defensive stock, such as Nestlé, is trading at a towering premium to an industrial one such as Daimler.

If there has been no boom and the world economy has not yet turned to bust, why then are markets so anxious? The best answer is that firms and markets are struggling to get to grips with uncertainty. This, not tariffs, is the greatest harm from the trade war between America and China. The boundaries of the dispute have stretched from imports of some industrial metals to broader categories of finished goods.

New fronts, including technology supply-chains and, this month, currencies, have opened up.

As Japan and South Korea let their historical differences spill over into trade, it is unclear who or what might be drawn in next. Because big investments are hard to reverse, firms are disinclined to press ahead with them.

A proxy measure from JPMorgan Chase suggests that global capital spending is now falling. Evidence that investment is being curtailed is reflected in surveys of plunging business sentiment, in stalling manufacturing output worldwide and in the stuttering performance of industry-led economies, not least Germany.

Central banks are anxious, too, and easing policy as a result. In July the Federal Reserve lowered interest rates for the first time in a decade as insurance against a downturn. It is likely to follow that with more cuts. Central banks in Brazil, India, New Zealand, Peru, the Philippines and Thailand have all reduced their benchmark interest rates since the Fed acted.

The European Central Bank is likely to resume its bond-buying programme.

Despite these efforts, anxiety could turn to alarm, and sluggish growth descend into recession.

Three warning signals are worth watching. First, the dollar, which is a barometer of risk appetite. The more investors reach for the safety of the greenback, the more they see danger ahead. Second come the trade negotiations between America and China. This week President Donald Trump unexpectedly delayed the tariffs announced on August 1st on some imports, raising hopes of a deal.

That ought to be in his interests, as a strong economy is critical to his prospects of re-election next year. But he may nevertheless be misjudging the odds of a downturn. Mr Trump may also find that China decides to drag its feet, in the hope of scuppering his chances of a second term and of getting a better deal (or one likelier to stick) with his Democratic successor.

The third thing to watch is corporate-bond yields in America. Financing costs remain remarkably low. But the spread—or extra yield—that investors require to hold risker corporate debt has begun to widen. If growing anxiety were to cause spreads to blow out, highly geared firms would find it costlier to roll over their debt. That could lead them to cut back on payrolls as well as investment in order to make their interest payments. The odds of a recession would then shorten.

When people look back, they will find plenty of inconsistencies in the configuration of today’s asset prices. The extreme anxiety in bond markets may come to look like a form of recklessness: how could markets square the rise in populism with a fear of deflation, for instance?

It is a strange thought that a sudden easing of today’s anxiety might lead to violent price changes—a surge in bond yields; a sideways crash in which high-priced defensive stocks slump and beaten-up cyclicals rally. Eventually there might even be too much exuberance. But just now, who worries about that?

Donald Trump is wrong — drags on Chinese growth are homegrown

Post-crisis stimulus has sent debt rising to levels that limit Beijing’s options

James Kynge

The US trade war is having a marginal impact on China’s economic slowdown, the real weakness is homemade © AFP

As usual, there was a lot to unpack in Donald Trump’s tweet. The US president claimed that American tariffs were having a “major effect” on the Chinese economy, which this week posted its lowest level of gross domestic product growth for nearly 30 years.

“China’s 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving,” Mr Trump tweeted.

Some of this is perhaps half true. Several companies — including US tech behemoths such as Apple — are indeed considering shifting part of their supply chain out of China. And, yes, this potential shift is driven partly by the US-China trade war.

But the overall message of Mr Trump’s tweet — that US tariffs are dragging China down — relies on a simplistic reading of what animates China’s economy. The reality is that China’s dynamism these days comes mostly from within, from investment and consumer spending. Trade has long since ceased to be more than a bit player in China’s growth story.

“The Trump tensions have contributed to slower growth in China, but the biggest impact has been on sentiment rather than directly from trade,” said Andy Rothman, investment strategist at Matthews Asia. “Remember that last year, net exports accounted for less than one per cent of China’s GDP.”

Thus, Mr Trump’s claim that US tariffs have had a “major effect” is overblown. Equally misleading is the idea that Chinese growth has taken a big hit. Economic expansion of 6.3 per cent in the first half of this year, down from 6.6 per cent over all of 2018, hardly constitutes a rout.

When such numbers are expressed in US dollars, the vacuity of Mr Trump’s words becomes clear. Last year, China added $1.45tn to its $13.6tn economy, making it by far the biggest national contributor to global GDP.

For context, the extra $1.45tn in economic output that China managed in 2018 is roughly equivalent to the size of the Spanish or Australian economies. Even if China manages only 6.3 per cent growth this year, it will have added another “Spain”.

Such comparisons help to put the importance of China’s economy into context. But they do not take account of the country’s manifold frailties, many of which lie intentionally obscured beneath upbeat official narratives.

The main structural drags on Chinese growth are homegrown. They are hangovers from blistering stimulus binges launched since the 2008 financial crisis that have sent debts skyrocketing to levels which now limit Beijing’s policy options.

Total debt in China stands at over $40tn, or close to 310 per cent of GDP, according to the Institute of International Finance. This represents an explosion from levels of just over 150 per cent in 2008, revealing that much of China’s golden decade was borrowed rather than bought.

The frailty has forced Beijing to temper its ambitions. Officials routinely warn over the risks that could erupt from a vast, unregulated shadow finance system. Local governments, meanwhile, are navigating what S&P analysts Gloria Lu and Laura Li call a “debt iceberg with titanic credit risks”. Households are also increasingly maxed out.

The upshot of all this is that Beijing no longer enjoys the luxury of being able to buy growth by deploying credit to spur unchecked asset price inflation. Such limitations help explain why Beijing appears set against a return to the go-go policies of 2009 and 2015. Several analysts think that if a stimulus is launched to stem ebbing growth later this year, it will be a limited, piecemeal affair.

Staying Beijing’s hand over the liquidity spigot is the knowledge that more credit will inflate housing prices further out of the reach of a swelling middle class. “History has proven that every country relying excessively on real estate for economic prosperity would eventually pay a heavy price,” warned Guo Shuqing, China’s banking regulator, in June.

Yet Chinese policymakers also know that when property prices ease, households feel poorer and rein in their spending, having an impact on the broader economy. So a balancing act results. When growth slips too much, tax cuts, rebates and judicious injections of liquidity are deployed. If things overheat, some goodies are withdrawn.

The only escape for China comes from boosting productivity. And it is this that gives Mr Trump his leverage. Although US trade tariffs have little power to injure China, the prospect of a full-blown economic rivalry with the US that restricts Chinese companies’ access to US tech looms as a potent threat.

Thus, says Mr Rothman, China is likely to favour a resolution with the US to the trade war.

Without one, Beijing will struggle over time to ascend the technology ladder, making productivity gains harder to attain.

The bonds that tie

Argentina faces the prospect of another default

An opposition triumph in primary elections prompts a vicious sell-off

THE ELECTION of Mauricio Macri in 2015 was supposed to usher in a new era in Argentina, a country with a reputation for toothsome steaks, rapid inflation and defaulting on its debts. Mr Macri promised to tame soaring prices with tight monetary policy, a problem Cristina Fernández de Kirchner, Argentina’s previous president, had tried to obfuscate by publishing dodgy macroeconomic data and imposing currency controls.

Mr Macri abolished these, allowing the peso to float freely, and removed export quotas and tariffs. Investors applauded. After resolving long-standing disputes with bond investors, Argentina was able to issue debt once more. In June 2017 Mr Macri even issued $2.7bn worth of 100-year bonds at a yield of 8%. They were almost four times oversubscribed.

Good fortune did not last. Unexpected changes to inflation targets and rapid debt issuance alarmed investors in 2017. These qualms mushroomed into a currency crisis last year. As the peso plunged, the central bank raised interest rates to 40%.

Mr Macri was forced to seek a $57bn loan from the IMF. In order to satisfy the terms of the bailout, he has cut public spending and raised the prices of utilities, such as gas and electricity, and public transport. The crisis has taken a heavy toll on the economy. Argentina has been in recession for the past year; inflation is over 50%. The poverty rate, as measured by the Catholic University of Argentina, has climbed from 27% in 2017 to 35% now.

Economic hardship has not played well with voters. “We voted last time for the president because we wanted a better life, especially for our children,” says Mercedes, a shop assistant in Buenos Aires. “But life was worse under him. We worked more to have less.”

On August 11th they voiced their discontent in primary elections for the presidency. The opposition, led by a veteran Peronist, Alberto Fernández, with the former president Ms Fernández (no relation) as his running mate, won 47% of the vote. Mr Macri’s coalition won just 32%.

The reaction of investors was swift and vicious. On August 12th they rushed to dump Argentine assets. Mr Macri may not have been a panacea for all Argentina’s ills, but his stewardship of the economy was far more sober than that of his predecessor, who now seems likely to be restored to high office. Argentina’s stockmarket, the Merval, fell by 37%. At one point in the day the peso was down by 30% before the central bank intervened and raised interest rates to 74%. It still closed 15% lower.

In dollar terms, the stockmarket’s collapse is the second-biggest one-day drop recorded anywhere in the world since at least 1950. The 100-year bonds that investors had clamoured for when Mr Macri issued them are now worth just 54 cents on the dollar, implying a default risk of 57%.

The rout in asset prices was severe, first, because the hope that Mr Macri can recover is small.

On August 11th nobody actually won or lost office: the vote was technically a primary and the main candidates were uncontested in their parties. But since all Argentines over the age of 16 were legally obliged to vote, it functioned as a full dress rehearsal for the real election, which will be held at the end of October. If the Fernándezes win more than 45% of the vote again in October, they will seize victory in the first round.

Second, investors are rightly fearful of the policies the pair may put in place. Ms Fernández’s spendthrift reputation precedes her. Mr Fernández warned in the final days of the campaign that devaluation of the peso was coming. He also promised to renegotiate the $57bn IMF loan, and said that he could in effect default on Argentine bonds.

In the aftermath of the vote, Mr Fernández tried to strike a more moderate tone. “We weren’t crazy in government before,” he declared. Reducing expectations, one of his advisers points out that if Mr Fernández wins, a weak peso will make the job of being president “that much tougher”. But it may already be too late. As The Economist went to press, the peso had fallen by 25% against the dollar since the election.

A weaker currency will push up the prices of imported goods, causing inflation to rise even further. It also has adverse implications for the country’s bonds. Argentina has defaulted on its sovereign debt eight times since independence in 1816, most recently in 2014 when Ms Fernández clashed with hedge funds. Government debt in Argentina is currently worth 88% of GDP. Three-quarters of it is denominated in foreign currency. A falling peso will push up the burden of servicing it. Economists at Bank of America now think the probability of a restructuring next year is high, and that the recovery value of Argentina’s debt could be as low as 40%.

Could the markets’ collapse persuade Argentines to change their minds by October? Some voters surely took the chance to punish Mr Macri in the primary vote, and will come back to him in the real thing. But few think it will be enough. Eduardo D’Alessio, of D’Alessio/Berensztein, a polling firm, says it would take “a huge, obvious mistake” by los Fernández before October to keep Mr Macri in office. Inside the president’s camp, the mood was doom-laden. “This is a catastrophe,” said one of his advisers. “It’s almost impossible to come back from this.”

Mr Macri has vowed to fight back. On August 14th he told voters: “I understand the anger.”

He has introduced a $740m stimulus package of tax cuts, price freezes and higher benefit payments.

Maybe it will help him claw back some votes.

But whoever gets the job after the vote in October, it has just become much harder.


Lots of investors bet on “factors”, such as size, value and momentum

But what if the crowd catches on?

THE FINAL of the European Football Championship in 1976 was settled by a penalty shoot-out. The winning kick, scored by Antonin Panenka of Czechoslovakia, was a thing of beauty. From Panenka’s long run-up and body shape, the West German goalkeeper, Sepp Maier, guessed that the kick would go hard to his left. He dived in anticipation. But Panenka did something novel. He calmly chipped the ball down the centre of the goal, which Maier had just vacated.

Armed with this story, we come scrambling back to the present to contemplate another game of fine margins: investment. Here too success often depends on the ability to outwit others. Indeed proponents of factor investing—buying baskets of stocks with characteristics that have been shown to beat the market averages—say it works by exploiting the enduring weaknesses of investors. If the dumb money keeps shooting for the corners, you profit by going down the middle. Just hold your nerve. 
This requires a faith that the future will be like the past. And where there is faith, there is always doubt. The world of investing evolves, just as football has. As more players adopted the Panenka, goalkeepers cottoned on. A new category emerged: the failed Panenka. A consideration of this begs a scary thought for factor investors: what if returns will be hurt by the ubiquity of the strategy itself?

The roots of factor investing go back at least as far as a canonical paper in 1992 by Eugene Fama, a Nobel-prizewinning economist, and Kenneth French. They found that listed companies that were relatively small, or whose stock price was low compared with the value of assets, had higher-than-average returns. They proposed that size and value were factors that justified a reward over and above that for bearing market risk, known as beta. Subsequent research identified other winning factors for companies with strong dividends (the yield factor) or high profitability (quality); or with share prices that have risen a lot (momentum) or that fluctuate only a little (low-volatility).

Investors took notice. Trillions of dollars are now invested in factor-based or “smart-beta” strategies. A new paper by James White and Victor Haghani of Elm Partners, a fund-management firm, sets out the reasons to be sceptical about their continued success. A first problem is the muddle over why factor premiums exist at all. One view says it is all about risk. Small or lowly valued firms are riskier because they might go bankrupt in a really deep downturn. You may buy that. But it is harder to dream up a compelling risk story about, say, momentum or low volatility.

The alternative view is that factors exist because of the shortcomings of others. So momentum works because investors in general tend to react too slowly to good news about a company’s prospects. Other factor premiums are put down to industry frictions. If, say, pension funds have demanding targets, but are not allowed to use leverage to boost returns, a second-best strategy is to tilt the portfolio towards high-volatility stocks. Low-volatility stocks are thus unduly cheap.

The big question is whether we should expect these quirks to endure. Once a way to make above-market returns is identified, it ought to be harder to exploit. “Large pools of opportunistic capital tend to move the market toward greater efficiency,” say Messrs White and Haghani. For all their flaws and behavioural quirks, people might be capable of learning from their costliest mistakes. The rapid growth of index funds, in which investors settle for an average return by holding all the market’s leading stocks, suggests as much.

Part of the appeal of index investing is that it is cheap. Factor investing, by contrast, involves a lot of churn—and thus expense. A detailed study by AQR Capital Management, one of the big beasts of factor investing, finds that trading costs were around 40% of gross factor returns. The costs are mostly down to the weight of money moving stock prices unfavourably. This figure is high enough to warrant concern, say the Elm duo. It may go higher as more money piles in. If factor premiums are also slimmer in future, trading costs will eat up a larger share of the extra returns.

What worked in the past cannot always be relied on to work in future. Penalty shoot-outs used to be seen as lotteries; they are now exercises in data-mining. Every goalkeeper and kicker knows what his opponent has done in the past. The best penalty-takers still hope to induce the goalkeeper to move first. But goalies are not as easily fooled. They can hold their nerve, too.

The Exploitation Time Bomb

Worsening economic inequality in recent years is largely the result of policy choices that reflect the political influence and lobbying power of the rich. There is now a self-reinforcing pattern of high profits, low investment, and rising inequality – posing a threat not only to economic growth, but also to democracy.

Jayati Ghosh


NEW DELHI – Since reducing inequality became an official goal of the international community, income disparities have widened. This trend, typically blamed on trade liberalization and technological advances that have weakened the bargaining power of labor vis-à-vis capital, has generated a political backlash in many countries, with voters blaming their economic plight on “others” rather than on national policies. And such sentiments of course merely aggravate social tensions without addressing the root causes of worsening inequality.

But in an important new article, University of Cambridge economist José Gabriel Palma argues that national income distributions are the result not of impersonal global forces, but rather of policy choices that reflect the control and lobbying power of the rich. In particular, Palma describes the significant recent increase in inequality in OECD countries, the former socialist economies of Central and Eastern Europe, and China and India, as a process of “reverse catching-up.” These countries, Palma says, increasingly resemble many unequal Latin American economies, with rent-oriented elites grabbing most of the fruits of growth.

In his earlier work, Palma showed how middle and upper-middle income groups’ share of total income has remained remarkably stable in most countries over time, at about one-half. Changes in aggregate income distribution, therefore, resulted largely from changes in the respective shares of the top 10% and the bottom 40% of the population (the ratio between these shares is now called the “Palma ratio”).

In other words, the huge variation in inequality across countries, and particularly between middle-income economies, is essentially the outcome of a fight for around one-half of national income involving one-half of the population. Only in cases of extreme inequality (such as South Africa) did the top 10% also manage to encroach on the income share of the middle.

It is misleading, therefore, to view rising per capita incomes in middle-income countries as indicating a general improvement in standard of living. In unequal middle-income economies such as those in Latin America, the incomes of the top 10% are already on par with those of their rich-country counterparts. The incomes of the bottom 40% are closer to the Sub-Saharan African average.

The driving force behind these trends is market inequality, meaning the income distribution before taxes and government transfers. Most OECD countries continually attempt to mitigate this through the tax and transfer system, resulting in much lower levels of inequality in terms of disposable income.

But fiscal policy is a complicated and increasingly inefficient way to reduce inequality, because today it relies less on progressive taxation and more on transfers that increase public debt. For example, European Union governments’ spending on social protection, health care, and education now accounts for two-thirds of public expenditure, but this is funded by tax policies that let off the rich and big corporations while heavily burdening the middle classes, and by adding to the stock of government debt. As Palma puts it, “in their new tax status, corporations and the very rich now prefer to part‐pay/part‐lend their taxes, and part‐pay/part‐lend their wages.”

In rich countries, middle-income groups have largely maintained their share of national income. But their living standards have fallen, owing to the rising costs of essential goods and services (such as housing, health care, and education), falling real pensions, regressive taxation, and rising personal debt. Most emerging-economy governments, meanwhile, are not implementing significant fiscal measures to reduce market inequality.

The dramatic increase in market inequality reflects the ability of the top 10% to extract more value created by others and to profit from existing assets – including those that should be public property, such as natural resources. Specifically, this increase in value extraction is the result of policies for which the rich have actively lobbied: privatization; deregulation of share buybacks that artificially inflate stock prices; patent laws that make drugs much more expensive; reduction or elimination of top marginal tax rates; and much else.

Giving the rich all this additional income has not resulted in higher investment rates in the OECD or in unequal middle-income countries. Instead, the rich are content to pluck the low-hanging fruit of rent extraction, market manipulation, and lobbying power. High profits therefore coexist with low investment and increasing market inequality, in a self-reinforcing pattern. This trend not only magnifies the risk of economic stagnation and market failures; political changes around the world suggest that it has also become a profound threat to democracy.

Addressing this dangerous state of affairs will require that governments use their power to tax and regulate to channel more private capital into productive spending and increase the amount of public investment financed by progressive taxation, along the lines of a Global Green New Deal. If policymakers fail to mount a response that is proportionate to the problem, the rich will continue to get richer, and the poor to get poorer, faster than ever. Who will address the problem then?

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University in New Delhi, Executive Secretary of International Development Economics Associates, and a member of the Independent Commission for the Reform of International Corporate Taxation.

The Walton family gets $100 million richer every single day

By Nicole Lyn Pesce

The family behind Walmart tops the Bloomberg list of the world’s wealthiest families

In the hour that it takes a new Walmart employee to earn the $11 starting wage, the family that owns the retail giant has banked $4 million.

In fact, the third-generation heirs of Walmart WMT, -1.52% founder Sam Walton have amassed a $191 billion fortune to top Bloomberg’s list of the richest families in the world. And that has grown by $39 billion since the Waltons topped the list last year.

The report breaks that out to the Walton fortune increasing by an eye-watering $70,000 per minute, $4 million per hour or $100 million per day.

Walmart rang up $514 billion in sales from more than 11,000 stores across the globe, Bloomberg added. And the family holding company Walton Enterprises owns a 50% stake in Walmart, which paid out $3 billion in dividends last year.

It’s been a good year for all 25 of wealthiest families in the world, however, who collectively control almost $1.4. trillion in total wealth, which is a 24% increase from last year.

And American dynasties took the top three places on the elite list. The candy-making clan behind Mars Inc. is in second place with $127 billion in wealth that was sweetened by $37 billion since last year. And the industrialists/politicians behind Koch Industries take third with $125 billion.

The Saudi royal family lands at No. 4, with Bloomberg estimating that the House of Saud is worth $100 billion — although the report notes this is a lowball figure drawn from cumulative payouts that royal family members are guessed to have taken over the last 50 yeas from the executive office of the king. The total wealth controlled by its 15,000 extended family members from its oil reserves, land deals and government contracts is probably much higher.

Family-owned fashion houses Chanel and Hermes, the beer makers at Anheuser-Busch InBev BUD, -1.62%, as well as Nutella-makers Ferrero also rank highly on the list.

Here are the top 10 richest families in the world, as reported by Bloomberg.

The Walton family, behind Walmart: $190.5 billion

The Mars family, behind Mars: $126.5 billion

The Koch family, behind Koch Industries: $124.5 billion

The Al Saud family: $100 billion

The Wertheimer, behind Chanel: $57.6 billion

The Hermes family, behind Hermes: $53.1 billion

The Van Damme, De Spoelberch and De Mevius families, behind Anheuser-Busch InBev: $52.9 billion

The Boehringer and Von Baumbach families, behind Boehringer Ingelheim: $51.9 billion

The Ambani family, behind Reliance Industries: $50.4 billion

The Cargill and MacMillan families, behind Cargill Inc.: $42.9 billion

Toward an Ever-Closer European Unión

The EU was designed for a world that no longer exists. To survive, it will have to reprogram itself.

By Jacob L. Shapiro    

The European Union is a victim of its own success. The challenges the EU faces today are a direct result of its achievement of the objectives with which it was charged by the Maastricht Treaty in 1992. The problem bedeviling the EU in recent years lies in the difficulty of reprogramming a living, breathing political entity after its creation. Bureaucracy has a way of creating its own objectives. Democratic virtues become vices when systemic overhaul is the primary item on the agenda. Reprogramming, however, is exactly what the incoming leaders of the EU’s institutions aim to do if their political experiment is to evolve.
Peace in Europe
When it was founded in 1992, the European Union was charged with five key objectives: monetary union, a common defense policy, European citizenship, cooperation on judicial and home affairs, and expansion of EU law. The EU never really had to generate a common defense policy – it already had NATO (though the atrophy of the alliance’s military mission in recent years has raised new questions in the EU about what a robust and independent defense policy for Europe might look like). On every other score, the European Union succeeded. The problems came with what should happen next. The EU was designed to be a broad institutional framework that respected the national identities of its member states, but bureaucratic manifest destiny turned the apparatchiks’ focus toward emphasizing European-ness rather than preserving the union.

This resulted in a deep disconnect – both within the European Union and within the member states themselves – which can be summed up by a single question: What is the proper relationship between European identity and national identity? The European Union has existed for 27 years – long enough for an entire generation of young people to come of age without knowledge of a pre-EU world, to travel with EU passports and to work almost anywhere on the Continent they please. Some of these young people – and plenty of older ones – genuinely identify as European. And yet there are others for whom such thinking is anathema – for whom the sacrifice of national sovereignty to Brussels is a perfidious betrayal. What is life without history, tradition and family – without national distinctiveness? What was the point of all that war if national sovereignty is to be ceded to an external power anyway?

The point, of course, was to bring peace to Europe. In that limited sense, the European Union hearkens back to the Concert of Europe. That informal 19th-century system was an attempt by Europe’s most powerful states to establish a stable balance of power. Their primary goal was twofold: weaken revolutionary forces like nationalism and communism, and prevent any single European power from dominating all the others. Reflecting the optimism of its time, the Maastricht Treaty imagined a European continent unshackled from over a century of almost constant war, never to find itself beset by such tragedy again. It aimed to accomplish this by tying the economic fate of Europe’s most powerful countries together to a historically unprecedented degree. The primary goals of the EU are still the same: dull revolutionary political forces and prevent any single European power from dominating the others.
European Obsolescence?
As it turned out, what European politicians failed to grasp in 1992 was the extent of Europe’s impending global obsolescence. Previous attempts to create European unity were designed for an era during which European states competed for global mastery, and the EU was modeled on these attempts. Today, European countries face a very different kind of challenge: to avoid being dominated by the very world they once ruled. A recent PwC study projected that, by 2050, there will not be a single EU country in the G-7 – the group comprised of the world’s seven largest developed economies. Already in terms of population, no EU country is in the world’s top 15 (Germany is 17th with a population of roughly 83 million). Previous attempts at European unity always failed because the geopolitics of the Continent resulted in perpetual, internecine conflict. In today’s world, the opposite is true. European unity is in the interest of EU countries because as individual states, their strength pales in comparison to the powers rising on the European periphery.

It is hard to overstate the novelty of this reversal. Europe’s internal dynamics always threatened to tear asunder the artificial chords that Maastricht wrought. Now, however, as a result of external challenges like the United States’ trade wars, China’s Belt and Road Initiative, Russia’s renewed assertiveness in its borderlands, an increasingly independent and powerful Turkey, and a rapidly changing demographic profile, the interests of EU countries are converging. The problem is that the European Union was not designed to manage a convergence of interests; it was designed to manage forces of divergence. At a time when the European Union might focus on marshaling the collective resources of all its 27 members – a force that when combined still ranks among the world’s most powerful, despite Britain’s impending departure – the EU has instead focused on rule of law issues in Poland and Hungary and on rapping Italy over the knuckles for irresponsible government spending. It is hard to fault the EU’s bureaucratic institutions for doing this – they are doing what they were created to do. The problem is that their design is obsolete.

Europe’s most powerful leaders (namely, French President Emmanuel Macron and German Chancellor Angela Merkel) know this. (It is a strange irony that the two countries that arguably played the biggest role in destroying Europe in the 20th century, and for whom the EU is supposed to function as a de facto cage, now must work together to save it.) It is not a coincidence that the recently elected new President of the European Commission, Ursula von der Leyen, is German, and that the presumptive next head of the European Central Bank, Christine Lagarde (who resigned from her post as head of the International Monetary Fund on Wednesday) is French. It is also not a coincidence that Macron and Merkel found a way to sideline the European Parliament’s choice of candidate – though this was made easy by the fact that the candidate could not carry the voters needed to win. Von der Leyen barely could herself, eking out 383 of 747 votes on Tuesday. If Germany and France are to achieve comprehensive EU reform, they will need plenty more of the past few weeks’ backroom wizardry: Getting 27 countries to agree to cede even more sovereignty to Brussels is as close to impossible as it gets in politics.

Complicating matters further is that not even France and Germany see eye to eye on the exact nature of those reforms. Macron has led the charge for reform since his election in 2017. He envisions a “two-speed” EU, where countries that want to pool their resources together to be governed by a stronger, more centralized authority can do so without fundamentally undermining the EU’s overall structure. Merkel, in part because of her domestic political weakness, has been less vocal about what reforms she thinks are necessary, but she has been conspicuously tepid on the specifics of Macron’s proposals. Von der Leyen will not have the luxury of silence – as her candidate’s speech for president of the European Commission made abundantly clear. To the chagrin of many of her more conservative supporters, von der Leyen spoke of a $1 trillion “Green Deal for Europe” that would cut carbon dioxide emissions in half by 2030, a capital markets union designed to strengthen Europe’s small and medium-sized enterprises, an EU unemployment benefit reinsurance scheme, and an undefined new “EU-wide rule of law mechanism” to defend “the cradle of European civilization.”

But not even these radical suggestions will be enough for Macron, who told Serbian President Aleksandar Vucic on Monday that the EU was too dysfunctional to consider further expansion in the Balkans, and who earlier this month characterized the horse-trading process of selecting new EU leaders as a “failure.” It may, however, be a place to start. And while the EU’s would-be reformers face a difficult situation, it’s not an impossible one. With the exception of Greece, popular sentiment toward the EU remains predominantly positive despite large and extremely vocal minorities of euroskeptics throughout the bloc. Now Germany and France have their handpicked candidates at the EU’s helm and can credibly push for a mandate to consider broad and deep-reaching EU reform – reform that must involve real French and German compromises if they are to be welcomed by other EU countries. Both Italy (minus the League party) and the Visegrad 4 (the Czech Republic, Hungary, Poland and Slovakia) reportedly supported von der Leyen’s appointment, a small sign that they at least like what they heard behind closed doors. As for von der Leyen, she, like Macron, understands that the EU has reached a “reform or die” moment. What is less clear is if she understands that, for the Herculean task ahead of her, a national interest-based pragmatism will be a far deeper well from which to draw than an unnecessarily ideological European-ism.

The Battle for Hong Kong Is Being Fought in Sydney and Vancouver

How Beijing is weaponizing social media in its fight to crush the Hong Kong protests.

By Louisa Lim

Ms. Lim, the author of “The People’s Republic of Amnesia: Tiananmen Revisited,” is writing a book about Hong Kong.

Protesters faced riot police during a mass demonstration at Hong Kong International Airport on Tuesday.

MELBOURNE, Australia — As the police deploy tear gas against protesters on the streets of Hong Kong, another battle is raging less visibly: the one for narrative control. After weeks of asserting that the unrest had been orchestrated by foreign “black hands,” Chinese officials on Monday accused protesters of showing the first signs of “terrorism.” Such messaging is key to Beijing’s public opinion operation, which has been turned up to full volume.

The weapons of this information war include a flood of social media posts from state-run media, some carrying misinformation. When a woman dispensing first aid was shot in the eye by the Hong Kong police, the state-run CCTV reported on its official social media account that she had been shot by protesters. It also accused her of handing out money to demonstrators.

Chinese readers are unlikely to question the veracity of such an authoritative source, and CCTV’s Weibo post, which says the movement is slandering the Hong Kong police by blaming them for the injury, has been liked more than 700,000 times.

Ten weeks ago, when Hong Kongers first took to the streets to protest disputed extradition legislation, Beijing censored all reports of this civil unrest. But in recent days, it has reveled in posting video of protesters purportedly using air guns, slingshots and petrol bombs against the police. The state-run Global Times has described protesters as “nothing more than street thugs who want Hong Kong to ‘go to hell,’” or as people who had “voluntarily stripped themselves of their national identity.” Such descriptions are aimed at delegitimizing the protesters’ cause, especially among educated mainlanders who might otherwise be sympathetic.

Chinese people living or studying overseas are another important audience for Beijing’s messaging. Their primary news diet is largely delivered via WeChat, a Chinese chat app where messages are subject to censorship, so they often still fall within Beijing’s propaganda orbit.

Recent pictures of an American diplomat meeting two activists, Joshua Wong and Nathan Law, were used to bolster Beijing’s claims of hostile foreign forces backing the protests. On Tuesday, scenes of a Chinese state media worker being tied up at the airport and beaten by young protesters flooded Chinese social media, bolstering calls for Beijing to intervene militarily in Hong Kong.

Such messaging helps to mobilize Chinese communities, especially newly arrived migrants in Australia, Canada, the United States and elsewhere, to support the official line from Beijing. One website for a planned protest this weekend in Sydney asks Chinese to stand together against “rioting” in Hong Kong, which it said was causing discrimination against Chinese in Australia.

The battle over Hong Kong is, in effect, being exported, pitting overseas Chinese communities against each other. Over the past few weeks, “Lennon Walls,” covered in colorful Post-it notes expressing support for Hong Kong, have been torn down by supporters of Beijing from Auckland, New Zealand, to Vancouver, British Columbia, and from Hobart, Australia, to Harvard Square. After a violent tussle between pro-China and pro-Hong Kong students in late July at the University of Queensland in Australia, the Chinese consul-general in Brisbane, Xu Jie, issued a statement praising the “spontaneous patriotic behavior of Chinese students.”

One reason this conflict is playing out on social media is that almost all of Hong Kong’s big media companies are owned by mainland business executives or groups with extensive business interests in China, so they have instinctively taken a pro-Beijing stance. This has left digital news outlets and the overseas media as the front line in the battle for public opinion. People trying to livestream the protests and foreign media are apparently already being targeted by the police.

In recent weeks, a BBC journalist was saved from injury only by his face mask, which shattered when the police shot directly at his head. Another reporter wearing a bright yellow press vest was crushed against a wall by three police officers. Two journalists were attacked by a gang of street thugs, and a well-known British livestreamer scratching his belly was publicly accused by a pro-Beijing politician of being a “foreign commander” sending hand signals to protesters. Such an accusation would be laughable had it not been so widely shared.

To counter what they say are lies and malicious distortions, the protesters have started to hold regular news conferences, with their representatives addressing the media wearing face masks and yellow helmets. The movement’s social media strategy has been to use colorful memes and videos tailored for different audiences, including large-print messages with floral backgrounds for elderly readers.

In recent days, the state-run Chinese media has begun sharing videos showing large-scale exercises featuring the People’s Armed Police, a paramilitary group, in the city of Shenzhen, over the border from Hong Kong. The same group, instead of the People’s Liberation Army, was used to crack down on protests in Chengdu in 1989. Hong Kongers may dismiss these provocations as bluffing, but it is a clear sign that the information war, like the battle for Hong Kong itself, is set to escalate further.

Louisa Lim (@limlouisa) is a senior lecturer at the Center for Advancing Journalism at the University of Melbourne, Australia, and the author of “The People’s Republic of Amnesia: Tiananmen Revisited.”

Is Your Sleep Cycle Out of Sync? It May Be Genetic

Sleep patterns often run in families, and researchers have been identifying genes that influence them.

By Jane E. Brody

Early to bed, early to rise — a fine plan for a dairy farmer who has to get up long before dawn to milk the cows. But if you’re someone who works all day with stocks and clients and may want to enjoy an evening out now and then, it would be better not to be getting up at 2 a.m. and have to struggle to stay awake through dinner or a show.

Such is the challenge faced by a friend who has what sleep specialists call an advanced sleep phase. Her biological sleep-wake cycle, or circadian rhythm, is out of sync with the demands of the modern world.

My friend, who asked to remain anonymous, has always been an early riser, even as a teenager.

Getting up at 5 was an advantage in high school — she never had to worry about being late.

But as she aged, her nights kept getting shorter. Now at age 63 she’s ready to go to sleep before 9 p.m., but that rarely fits with the demands of her life. No matter how delayed her bedtime, she gets up by 4 in the morning — and sometimes as early as 1:30 — and can’t get back to sleep.

She said that given her stimulating job as an investment products specialist, she’s not sleepy during the day, nor does she nap. Still, she’s concerned about her short nights, partly because she’s read that insufficient sleep — especially not enough REM sleep, when dreams occur — has been linked to a possible increased risk of Alzheimer’s disease.
She knows that late dinners, especially with wine, contribute to her sleep problem. But it’s also likely that her lifelong dairy-farmer sleep pattern is programmed by her genes, not the result of unavoidable disruptions or unwise living habits.

And, it seems, her early-to-sleep, early-to-wake rhythm may not be as extremely rare as has long been believed. In a new study in the journal Sleep by researchers in San Francisco, Salt Lake City and Madison, Wis., of more than 2,400 patients who visited a sleep clinic for complaints like sleep apnea or insomnia, a small number of them were found to have a previously unrecognized familial form of advanced sleep phase, a kind of permanent jet lag that the study showed often runs in families.

The lead author of the study, Dr. Louis J. Ptacek, professor of neurology at the University of California, San Francisco, said the world is full of long and short sleepers — the so-called owls who stay up late and get up late, and the larks who go to sleep early and wake up early. These patterns, too, often run in families, and Dr. Ptacek and his colleagues have been identifying genes that influence them.

Such natural long and short sleep patterns fit into the normal distribution of people’s sleep needs. But those with an abnormally advanced or delayed sleep phase are different — they may need the same amount of sleep as the average person, but the times at which they need to sleep and wake are anything but average. Advanced sleep phase is now known to be determined by a single dominant mutation in a growing list of genes discovered in the laboratories of Dr. Ptacek and his collaborator Ying-Hui Fu.

“But while this mutated gene travels in families, its expression can vary based on what the rest of the genome looks like,” Dr. Ptacek told me. He and his colleagues concluded that “extreme morning chronotypes,” as people with advanced sleep phase are called, “are not exceedingly rare.” Their analysis showed that among visitors to a sleep clinic, some 3 in 1,000 have advanced sleep phase, and in two-thirds of those people, the pattern is familial.

Chances are, too, there are far more extreme larks than come to professional attention. The team pointed out that people with advanced sleep phase rarely consult sleep doctors or are studied in sleep clinics because most of those affected seem to like the pattern, perhaps because it fits well into the rhythm of their lives or they have selected or created a rhythm that fits into their sleep-wake needs.

The incidence of advanced sleep phase disorder is likely underestimated because it results in fewer social conflicts. People are not usually penalized for getting to school or work too early. Night owls, on the other hand, are more inclined to seek the help of a sleep specialist because it’s so hard for them to get up and get going in the morning to meet the demands of school, work or household.

“People with delayed sleep phase often suffer a great deal,” Dr. Ptacek said. “They may be unable to fall asleep before 2, 3 or 4 a.m. and then have to get up at 7. They tend to be chronically sleep-deprived and may not function well.”

Still, like my friend, not every early riser is happy about it. Dr. Ptacek told of one woman who at age 40 was getting up involuntarily at 4 a.m. and at age 50 at 3 a.m. Finally, at 69, she sought help from a sleep specialist because she didn’t like getting up at 2 in the morning when it was “cold, dark and lonely,” then being too sleepy to attend social events in the evening. “She was depressed because no one took her seriously and people thought she was being unfriendly when she declined their evening invitations,” the neurologist said, adding that the woman is now 90 and wakes up at 1 a.m.

I asked Dr. Ptacek whether advanced or delayed phase sleepers have to capitulate to their genetic heritage or might they be able to induce a more normal day-night schedule. He told me that in effect, it requires adopting behaviors like those used to overcome jet lag.

For example, exposure to bright light in the evening — especially the blue light from cellphones and most e-book readers — can delay the biological clock and help people to stay up later (or, in the case of insomniacs, make it harder for them to fall asleep). Those with a delayed sleep phase need exposure to bright morning light to stimulate arousal.

Taking melatonin might help, but only if it’s timed correctly. Naturally, melatonin levels begin to rise about two hours before sleep, so it may help night owls fall asleep earlier if it is taken orally two hours before their desired bedtime.

For those who awaken in the middle of the night, Dr. Ptacek advised getting regular exercise, avoiding a big meal close to bedtime and not stressing about not sleeping. “The more anxious you are, the less likely you’ll be able to fall back to sleep,” he said. Instead, he suggested, “Get up and do something kind of boring for an hour or so and then go back to bed.”

Jane Brody is the Personal Health columnist, a position she has held since 1976. She has written more than a dozen books including the best sellers “Jane Brody’s Nutrition Book” and “Jane Brody’s Good Food Book.”