The age of wealth accumulation is over

Voters and politicians agree it is time to slice the economic pie more evenly

Rana Foroohar

© Matt Kenyon

Roughly four decades ago, America kicked off the developed world’s last major economic paradigm shift — the supply side revolution.

Capital gains taxes were slashed. President Ronald Reagan and UK prime minister Margaret Thatcher took on air traffic controllers and coal miners. The power of unions faded and that of corporations grew. Some people got very rich. But inequality rose, and eventually, overall trend growth slowed.

Watching the Democratic presidential primary debates last week, I couldn’t help but think that we may be witnessing the next great shift, from an era of wealth accumulation to one of wealth distribution. Moderates like Joe Biden and John Delaney tried to argue for middle of the road answers on issues like healthcare and trade.

But the pole positions were set by Bernie Sanders and Elizabeth Warren, who hold similar views on everything from shifting Americans on to a national healthcare system and relief for indebted students. Both also seek higher taxes for the wealthy and tougher rules for corporations.

While little of this would seem radical in many other parts of the world, in the context of US politics, it was truly something new. The set point for economic debates, even for Democrats, used to be how the government could help the markets work better. Now it’s how the public sector can rein them in, and slicing the economic pie more fairly.

What’s more, it’s not only Democrats. Some Republicans are looking for a paradigm shift as well. Marco Rubio, an influential Republican senator who hopes to be president someday, recently put out a paper on the problems with shareholder capitalism and the merits of industrial policy.

The signs of this new post-supply side era are all around us. Witness the rise of the B-corporations, which balance purpose and profit, and the growth of investing based on environmental, social and governance factors.

In government, note the growing bipartisan enthusiasm for tougher antitrust scrutiny and calls for trade protection, as well as efforts to politicise the US Federal Reserve. It’s not just President Donald Trump’s tweet seeking rate cuts but also progressive Democrats who see “modern monetary policy” as a way to pay for their priorities without having to fund them through tax rises agreed upon by Congress.

These views are increasingly part of the mainstream. Last week, two senators introduced a bipartisan bill that would force the Fed to devalue the dollar in order to boost exports and balance current accounts with China.

This isn’t passing populism, but something much bigger, argues Kiril Sokoloff, founder of 13D Global Strategy & Research, who has been ahead on recognising previous turning points, from supply side economics and the slowing inflation that began in the early 1980s, to the rise of China and the spread of smartphones. “What we’re about to see is a backlash against the second gilded era, and it will have a massive impact on the world — and the markets.”

One likely impact will be fundamental changes in who holds wealth. The Democratic race reflects the growing conflict between two primary US voting groups — the baby boomers, represented by candidates like Mr Biden, and the millennials, who backed Mr Sanders in 2016, and now like him and younger candidates such as Pete Buttigieg. A decade of loose monetary policy has benefited the former, who have seen their assets appreciate, at the expense of the latter, who cannot afford to get on the housing ladder.

One of the big political battles will be over who gets what share of what looks to be a slower growing pie in what appears to be a slower growth economy.

Another battle will be between capital and labour. Rising wages are taking a bite out of US corporate profit margins and, frankly, they should. When consumer spending makes up 70 per cent of the economy, we need a bit of wage inflation to ensure that people have money to spend. That’s particularly true at a time when governments aren’t investing, and the shift from a tangible to an intangible economy has led to decreased private sector capital expenditure.

But it has taken trillions of dollars in unconventional monetary policy to cook up relatively small wage increases. And for many Americans the gains are immediately eaten up by increases in healthcare premiums or prescription drug prices, two other hot topics on the campaign trail.

That’s one of the reasons there’s now broad support for higher taxes on the wealthiest.

It remains to be seen when and what form tax rises will take. But the age of wealth distribution is coming and will have major investment consequences. The value of US equities has probably peaked, and hard assets like gold, other commodities, housing, even art — anything in fixed supply — may benefit relative to the equity and debt of multinational companies.

This isn’t the end of the world — we’ve been going through cycles of wealth accumulation and distribution forever. But it does mean that the rules of the road for investors are changing. Some asset prices may fall, but it’s possible income growth will be higher. That would come with an upside of its own, economically and politically.

As the Fed Frets, Retailers Rake in Sales

Strong results from Target, Lowe’s are latest indication the U.S. consumer is doing just fine

By Justin Lahart

Target Corp., the nation’s eighth largest retailer by sales, said Wednesday its sales and profit rose in the latest quarter. Photo: David Williams/Bloomberg News

Before Federal Reserve ChairmanJerome Powellputs the finishing touches on a speech he is delivering Friday, maybe he should take some time to listen to a playback of Target ’s earnings conference call.

Or Walmart ’s, Home Depot ’s and Lowe’s. Strong results from some of America’s biggest retailers suggest worries that an unsettled global environment is about to send U.S. consumers into retreat are overblown.

Target, the nation’s eighth largest retailer by sales, said Wednesday it earned $1.82 a share in its fiscal second quarter, with same-store sales up 3.4% from a year earlier, easily topping analyst estimates. Its stock rose around 18% in early trading.

Lowe’s, the country’s ninth largest retailer, on Wednesday also beat analysts’ estimates for second-quarter earnings and same-store sales, sending its stock up around 11%.

Those moves follow pleasing results from Home Depot, the sixth largest retailer, on Tuesday and Walmart, number one, last week.

Yet worries about the U.S. economy are pitched enough that the Fed appears on track to cut interest rates again when it meets next week. And at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyo. on Friday, Mr. Powell will likely point to the possibility of further rate cuts if those worries intensify.

President Trump, meanwhile, continues to castigate the Fed for not cutting rates enough, and said he is considering new tax cuts.

What makes the disconnect even more remarkable is that big retailers aren’t just reporting good results, they are expressing a lot optimism. Target raised its earnings forecast for 2019, as did Walmart. Home Depot said escalating tariffs with China might rattle consumer confidence, but also that real-time data don’t show this yet.

“Consumer confidence is near record-high levels, and wages are up over 3% from last year,” Home Depot Chief  Financial Officer Carol Tomé said.

To be sure, it isn’t sweetness and light for all retailers, with department stores such as Macy’s continuing to do poorly. But those woes seem to reflect shifts in the ways Americans shop rather than any downshift in overall spending. Unless the job market shows signs of faltering, it is hard to see why consumers might suddenly get cold feet.

At a certain point, the dangerous downshift in consumer spending the Fed is wary of is either going to come, or the central bank will have to conclude its fears were misguided.

With Troop Buildup, China Sends a Stark Warning to Hong Kong

By Steven Lee Myers and Javier C. Hernández

SHENZHEN, China — The Shenzhen Bay Sports Center rises along the shore with the green hills of Hong Kong visible across the water. It normally bustles with a variety of youth sports programs and dance, art and language academies, including one that advertises a “Hong Kong Style Education.”

In recent days, however, it has become a staging ground for olive-green military transports and armored personnel carriers that arrived on Aug. 11 and disgorged hundreds of security officers from the People’s Armed Police, a Chinese paramilitary force, who are loudly running through daily exercises and drills.

By massing the troops within view of Hong Kong, the semiautonomous territory convulsed by protests, China’s Communist Party is delivering a strong warning that the use of force remains an option for Beijing. It is also a stark reminder that military power remains a bedrock of the party’s legitimacy.

“It’s a credible threat,” Minxin Pei, a professor at Claremont McKenna College in California, said. “The Chinese government does not want to leave any doubt that, if necessary, it will act.”

China’s leader, Xi Jinping, has governed with an increasingly iron fist, including over the military. The deployment does not appear to be the prelude to a military intervention in Hong Kong, but few analysts expressed doubt that China would act if Mr. Xi believed the country’s sovereignty over the territory was jeopardized.

“How can he regard the Hong Kong movement as a pure democratic movement?” Tian Feilong, executive director of a research institute on Hong Kong policy in Beijing, said in an interview. Mr. Xi is likely to perceive the protests not just as a call for democracy in Hong Kong, but also as an effort to topple the Communist Party itself, he said. “He is very politically alert.”

Mr. Xi’s government, he said, has most likely completed preparations for an intervention but is holding off as long as the local authorities manage to keep the protests contained. That calculus could change, he and other analysts said, if the protests succeed in crippling the government or other institutions, like the courts, which will soon begin hearing the first cases of those arrested in the demonstrations. In what some observers see as a worrying sign, officials in Beijing have called the protesters’ actions “close to terrorism.”

Chinese exercises at the stadium in Shenzhen have included drills on controlling crowds. Credit  Thomas Peter/Reuters

The use of force, however, would be fraught with risks for Mr. Xi, who is already juggling economic headwinds and deteriorating relations with the United States under President Trump.

The country and the party are still haunted by the use of the People’s Liberation Army to crush the Tiananmen Square protest movement 30 years ago this summer, which resulted in international isolation and sanctions. A military crackdown could spell the end of Hong Kong’s role as an international financial center and the unique political formula under which Beijing grants the territory freedoms unseen on the mainland.

“The military solution would have many urgent and disruptive effects,” said Wu Qiang, a political analyst in Beijing. “It would be political suicide for the Communist Party of China and the ‘one country, two systems’ arrangement of Hong Kong.”

More nationalistic voices have brushed aside such fretting, noting that China is a much stronger and diplomatically confident nation than the one that endured international opprobrium after the Tiananmen crackdown.

“The Hong Kong matter will not be a repeat of the political disturbance of 1989,” Global Times, a Communist Party newspaper, wrote Friday in an editorial, referring to the year that military troops in Beijing crushed the Tiananmen protests. It said Beijing had not decided to use force to intervene in Hong Kong, but had the legal right to do so if needed.

“Washington will not be able to intimidate China by using the turmoil 30 years ago. China is much stronger and more mature, and its ability to manage complex situations has been greatly enhanced,” the editorial said.

The deployment in Shenzhen was clearly meant to focus attention in Hong Kong and beyond. A white bridge that connects Shenzhen to Hong Kong is only two miles down the road.

The message was amplified by no less than Mr. Trump, who disclosed on Twitter that American intelligence agencies had spotted the Chinese troops massing at the border. “Everyone should be calm and safe!”

It remains to be seen how effective Beijing’s posturing will be. The authorities have from the start misjudged the depth of the anger driving people into the streets. While the deployment and increasingly blunt warnings from officials have rattled nerves, they seem to have had little impact on those who view the struggle as one crucial for preserving Hong Kong’s freedoms.

Fu Guohao, a reporter for a Chinese state-run newspaper, being rushed from Hong Kong’s airport last week after protesters tied him up and beat him.CreditLam Yik Fei for The New York Times

The growing threats of military action came as violent clashes have escalated. Public anger on the mainland spiked last week when protesters at Hong Kong International Airport tied up and beat two men from China.

Three days after protesters defaced the central government’s liaison office in Hong Kong with paint and graffiti on July 21, the chief spokesman of the Ministry of National Defense curtly noted that the People’s Liberation Army had the authority to intervene in the territory, if requested, to keep order.

The law that details relations between Hong Kong and the army limits its role to external defense, but allows it to intervene, when sought by Hong Kong’s leaders, to maintain public order or assist in cases of natural disasters.

The Hong Kong garrison of the People’s Liberation Army is based in what was formerly the British military headquarters. The garrison includes 19 sites around the territory, but many of its soldiers — estimates of the total vary from 6,000 to 10,000 — live and train in bases across the border in Shenzhen.

“Those who want to stir up unrest should know that Hong Kong has a P.L.A. garrison,” Han Dayuan, a law professor at Renmin University in Beijing, said during a government-organized news conference. “They should consider that for a moment when there is turmoil, there is also a need to resolve it quickly.”

The deployment of the People’s Armed Police, though, shows Beijing has options other than the army. The armed police force has a mission of maintaining internal security on the mainland, including responding to terrorist attacks, riots and rebellions.

Tens of thousands of protesters marched Sunday in Hong Kong despite a downpour, defying a police ban on extending the rally beyond Victoria Park.CreditLam Yik Fei for The New York Times

It was founded in 1982 and has 1.5 million members, making it bigger than most militaries in the world. It has in recent years been deployed extensively in Xinjiang, where the government has harshly cracked down on what it views as the threat of Islamist extremism among Uighur Muslims.

As part of Mr. Xi’s efforts to streamline the military command structure, a core part of his consolidation of power since 2012, the People’s Armed Police was put last year under the leadership of civilian party authorities and the Central Military Commission, which he controls as its chairman.

Video of its deployment in Shenzhen appeared in China’s state media within hours of the arrival of the vehicles at the stadium on Aug. 11. The reports said the troops there were taking part in a drill across all of Guangdong Province.

The troops at the stadium appear to have settled in on its grounds. Backpacks and other personal equipment could be seen neatly arrayed in the stadium’s causeways, while officers milled about during breaks from drills, which could easily be heard, if not seen, from the streets around the stadium.

One officer, when asked, said the deployment was a summer training exercise.

There appeared to be little effort to disguise the activity. The People’s Daily posted a video late Saturday showing the force in Shenzhen standing in formation and conducting mock clashes with protesters wielding sticks. One officer with a megaphone warned in Cantonese, the dialect spoken in Hong Kong: “Stop the violence, repent and be saved.”

The exercises do not seem to have resonated in Hong Kong, suggesting that Beijing’s messaging could be falling short.

For now, analysts said, officials in Beijing appear willing to watch and wait, continuing to offer support for Hong Kong’s beleaguered leaders, to dangle carrots and sticks at business and cultural leaders, and to try to undermine public support for the protests. Giving in to the protesters’ demands would be an unacceptable sign of weakness for them.

The deployment in Shenzhen of the People’s Armed Police, a paramilitary force, showed that China has options other than its army in seeking to maintain order. CreditNg Han Guan/Associated Press

Mr. Wu, the analyst in Beijing, said the government’s overriding goal now was “to prevent Hong Kong’s movement from spreading to the Chinese mainland.”

That effort at least appears to be succeeding here in Shenzhen, a factory town that kicked off China’s remarkable economic transition 40 years ago and that now has aspirations of being a global high-tech hub.

Two rivers and Shenzhen Bay separate the city from Hong Kong. So does a heavily fortified border with passport and customs checks at six crossing points. There is also a cultural and political gulf that has barely narrowed since Hong Kong was returned to Chinese control in 1997.

Shenzhen does not feel like a city mobilized for military action. Several people, when asked, said they had heard little of the protests, or declined to discuss them.

Others expressed support for Hong Kong’s police. Cathy Huang, who is 23 and works for an insurance company, said mainlanders attached “more importance to the police” than people in Hong Kong did.

“It is not that it cannot be solved by force,” she said in a shopping center a short drive from one of the border crossings. Her view starkly contrasted with that of many of Hong Kong’s protesters about excessive use of force, which has now become one of the complaints driving more protests.

“It depends on the attitude,” she said. “To a certain extent, we would even support the police adopting slightly harsher measures.”

Steven Lee Myers is a veteran diplomatic and national security correspondent, now based in the Beijing bureau. He joined The New York Times in 1989, and has previously worked in Moscow, Baghdad and Washington.

Javier C. Hernández has been a China correspondent in Beijing since 2014. He joined The New York Times in 2008 and previously covered education and politics.

Steven Lee Myers reported from Shenzhen, and Javier C. Hernández from Hong Kong and Beijing. Amy Qin contributed reporting from Beijing, and Christoph Koettl from New York. Claire Fu contributed research from Shenzhen, and Zoe Mou from Beijing. 

China, Mexico and US Trade

China is no longer the United States’ top trade partner. What does this mean for Mexico?

By George Friedman

Last week, it was widely reported that in the first half of 2019 Mexico replaced China as the United States’ top trade partner. China is now in third place, while Canada is in second. There has been a great deal of discussion in the media about what this means for U.S.-China economic relations. Much less attention has been devoted to what this new alignment means for economic relations within North America.
A Third World Country?
The importance of U.S.-Mexico trade may surprise some. In the minds of many Americans, Mexico is still a Third World country whose largest export is poor people looking for jobs. Truth is, Mexico has the 15th largest economy in the world measured in U.S. dollars. Australia ranks just one spot above Mexico, and countries like Spain, South Korea and Canada are not too far ahead either.

Measured in purchasing power parity, however, Mexico ranks as the 11th largest economy in the world. PPP measures economic activity against the ability of a country’s currency to buy goods. Both PPP and nominal gross domestic product measurements have their flaws. Measuring purchasing power in a country as diverse as Mexico is tough, to say the least. Measuring it against the dollar is also difficult, as currencies fluctuate against the dollar all the time, thereby changing their GDP totals and rankings even though the economy itself hasn’t grown or declined. (Those who already knew this – and those who didn’t want to know this – please forgive me for explaining this in detail.)

The important point here is that Mexico’s economy, whether it’s ranked 11th or 15th, isn't a developing economy. It is a major economy and a major target for investment. Some parts of Mexico, particularly those in the south and some areas of major cities, resemble the Third World. But most countries have major regional inequalities. Mexico’s are somewhat larger than the average, but its economy is nonetheless substantial. The U.S. and Chinese economies are highly intertwined, but so too are the U.S. and Mexican economies – Mexican auto parts, for example, are indispensable to U.S. car makers. Mexico is also an aeronautical hub, housing Airbus and Bombardier manufacturing plants.

We’re presented, then, with two geopolitical realities. First, North America’s trading bloc is now larger than the European Union in terms of both population and GDP. Many believe that the alternative to globalism is insular nationalism. Many also believe that the only path to regional integration is a high degree of political integration. The European Union demonstrates that excessive politicization of a trade block can breed potentially uncontainable tension. The North American trade system has no significant joint political structure. The U.S., Canada and Mexico have not compromised their sovereignty, yet they are part of a successful trade system that was renegotiated in such a way that maintained the level of interdependence between the three major trade partners, despite expectations that renegotiation would lead to a decline in trade.

The second geopolitical reality is that increased trade creates increased vulnerability. China learned that excessive dependence on exports to the U.S. gives Washington leverage. Exports are essential to economic development but pose political risks. Interdependence – particularly in economic terms – seems an innocuous concept. But it also means vulnerability to forces in other countries that are less reliant on the trade relationship.

In Mexico’s case, the sense of vulnerability goes back to the 19th century, when the United States defeated Mexico in the Mexican-American War and seized much of what is today the American southwest. Mexico remained in a subordinate position to the United States for more than a century. In emerging from its past and becoming an increasingly potent economic player, Mexico can neither avoid the relationship nor feel comfortable with it. The size of the U.S. economy makes it less dependent on Mexico than the Mexican economy is on the United States. And that leads to political friction.

Political friction between nations is inevitable. It also exists between Canada and the U.S. The U.S. has the same economic advantage over Canada that it has over Mexico. But having economic advantage doesn’t necessarily mean a country will use it – at least, not without political cause, as the U.S. had with China. Even in unequal relationships, the less powerful party can still have an economic impact on the more powerful party.
The Migration Issue
The problem is that there are both historic and contemporary political issues with Mexico, primarily over migration. Mexican migration to the U.S. has declined significantly. Mexicans used to migrate north for economic reasons, but economic conditions in Mexico over the past few years make it more attractive to remain in Mexico than to go north. The current wave of migrants crossing the U.S. southern border comes from Central America. In an ironic twist, Mexico doesn’t want Central American migrants to enter Mexico, but like the U.S., it can’t seal its southern border to stop them from crossing into its territory. Until recently, Mexico did not want to give them asylum, and those it could not block or expel were permitted to move north to the U.S. border.

Migrants are often the cause of tensions between and within countries. Historically, the U.S. metabolized Mexican immigrants. Mexico has had more difficulty metabolizing Central American migrants because the regions they entered in the south were among the poorest in Mexico, Mexican institutions are not well-equipped to handle the influx, and some Mexicans have objected to the influx. Mexico, therefore, sought to shift the burden north, triggering a political confrontation with the U.S.

Mexico knows that it cannot press the U.S. too hard. Mexican politicians threaten impractical retaliations, but they know the U.S. can absorb an economic rupture with Mexico more than Mexico could bear one with the United States. The U.S. can’t press Mexico too far, either. Imposing a heavy economic penalty on Mexico would not only disrupt access to the agriculture and manufacturing supplies on which the U.S. economy depends and hurt the economies of border states like Texas and California, but it would also threaten to energize 130 million people with a historic grievance and an economy that is now world-class.

Mexico has come a long way and is now the United States’ leading trade partner. But that position makes it vulnerable and limits its political options against the U.S. China has discovered what that vulnerability can lead to if it engages in political actions unwelcomed by its biggest trade partner. Mexico understands the U.S. far better than China did. But what will happen if Mexico moves from the 11th-largest economy to the fifth-largest? At a certain point, the risk-reward ratio shifts.

A final point on what Mexico becoming the United States’ largest trade partner means for China. China is following Japan’s path. Japan was the leading exporter to the United States in the 1980s, but it was increasingly squeezed by higher costs, falling profit margins and competition from other countries. There was also significant political tension between the United States and Japan over informally closed Japanese markets. It did not lead to massive tariffs because Japan buckled under the weight of its own economic weakness and became a less-important trade partner for the U.S.

China was doing the same before the U.S. imposed tariffs. Its products were facing stiff competition, inflation was pushing its own costs higher, and profit margins in key sectors were falling. As with Japan, China faced serious problems with its banking system. U.S. tariffs compounded China’s problems and perhaps accelerated the process, but the path it is following is not new.

The Fed as Trade-War Enabler

The re-escalation of President Trump’s trade spat with China make more rate cuts from the Federal Reserve seem like a certainty

By Justin Lahart

Federal Reserve Chairman Jerome Powell Photo: andrew caballero-reynolds/Agence France-Presse/Getty Images

The U.S.-China trade fight has suddenly heated up again, and it now looks as if the Federal Reserve is going to be cutting rates much more deeply than seemed likely just last week. It all feels a bit familiar.

The tariffs President Trump imposed on a broad range of Chinese goods last year, and the countermeasures taken by China, stirred worries about U.S. growth, pushing stocks sharply lower late in 2018. Ultimately, the Fed decided to stop raising rates, sparking one of the sharpest U.S. stock rallies ever to start a year. Then Mr. Trump stoked tensions again in May. By June, the Fed signaled it would be cutting rates.

When it did last Wednesday, Chairman Jerome Powell indicated that it might hold off on further cuts if economic data didn’t worsen. The next day, Mr. Trump, who had asked for a deeper cut and said that Mr. Powell “let us down,” announced the U.S. would set new tariffs on Chinese goods starting in September, sending stocks sharply lower. On Monday, China allowed its currency to break through a key psychological threshold, hammering stocks. Suddenly, more rate cuts seem like a sure thing.

The risk is that the Fed and Mr. Trump have entered into an adverse feedback loop, Bank of America Merrill Lynch economists warn. In it, the Fed cuts to steady the economy in times of stress. But when worries subside and stocks recover, the Trump administration re-escalates the trade fight, leading to renewed risks that prompt the Fed to ease up again.

If a loop has taken hold, there is really no way for the Fed to break free from it. It is mandated by Congress to support the economy, not to pass judgment on policy. And the belief that China’s trade policies, in particular, have been unfair is one area where Mr. Trump draws some support from Congressional Democrats.

But this can’t go on forever. The Fed’s target range on overnight rates is now just 2% to 2.25%, and investors now expect it to be at least a half-point lower by year-end. That is starting to get uncomfortably close to the so-called zero bound.

Even now, overnight rates are dangerously low. To combat past recessions, the Fed typically has had to cut rates by about 5 percentage points. If a downturn really hits, the central bank will again have to tap unconventional policies such as bond buying. Those haven’t proven nearly as effective in restarting the economy as deep rate cuts.

That could throw everybody for a loop.

Fed Chairman Powell Calls Rate Cut a ‘Mid-Cycle Adjustment’
At a press conference following the Federal Reserve’s rate-cut announcement, Fed Chairman Jerome Powell explained that there was an “insurance aspect” to the decision. Photo: Reuters

ECB Loosening Is Not Enough

The European Central Bank's negative interest rates and quantitative easing measures cannot by themselves address the pervasive risk aversion holding back the eurozone economy. Eurozone policymakers must, therefore, find the political will to design a comprehensive package of financial and fiscal measures aimed at injecting new energy into the European Project.

Lucrezia Reichlin


LONDON – If indications of disappointing economic growth in the eurozone are confirmed, the European Central Bank will loosen monetary policy further in September. Last week, outgoing ECB President Mario Draghi signaled a further likely cut in the ECB’s rate on commercial banks’ overnight deposits with the central bank, which is already -0.4%. In addition, the ECB is discussing a new program of asset purchases.

Economic stimulus is clearly needed. Annual inflation is well below the ECB’s target of “close to, but below 2%,” and financial markets expect it to remain so for years. What’s more, the eurozone has grown more slowly than the US economy since the 2008 global financial crisis. Growth has flagged since peaking in the third quarter of 2017, and slowed again in the second quarter of this year.

It is also clear that national governments in the eurozone are reluctant to provide a coordinated fiscal stimulus, despite the urgings of the ECB and many economists. Willingly or not, the ECB remains the only game in town.

The question is whether monetary policy alone can help to improve real growth and the inflation outlook in the eurozone. Monetary policy can be a powerful tool. The key to President Franklin D. Roosevelt’s successful effort to revive the US economy in the 1930s was not deficit spending, but rather the large monetary stimulus resulting from America leaving the gold standard before continental European countries did. Today, the ECB needs to engineer something similar with different tools.

In principle, taking the ECB deposit rate further into negative territory should remove the restriction on future expected short-term interest rates turning negative, and therefore flatten the forward yield curve. A rate cut should also put downward pressure on the euro’s exchange rate, potentially making eurozone exporters more competitive.

But such a move would be controversial, in particular because it would dent the profitability of banks that cannot pass on negative ECB deposit rates to their customers. Such policies have heterogeneous effects across banks, and mitigating action, although feasible, requires complex engineering.

According to an analysis by the ECB’s staff, “strong” eurozone banks are able to pass on negative rates to their corporate clients; “weak” banks cannot.

The ECB is therefore considering ways to mitigate this – in particular by granting very favorable conditions on the special loans that it will offer under the TLTRO III program, which are likely to be taken by the “weak” banks. In addition, a tiering system is being considered in which reserves below a certain threshold would not be subject to negative rates. But this is likely to benefit the strongest banks of stronger core eurozone countries such as Germany, France, and the Netherlands, which together hold about one-third of total deposits at the ECB.

Beyond these technical considerations, policymakers must grapple with two root causes of excess demand for central-bank reserves among strong eurozone banks. One is very high demand for safe assets in general – and banks in core eurozone countries have little incentive to hold their own governments’ debt when the interest rate is below the ECB deposit rate.

Another cause is the segmentation of the eurozone’s interbank market, which, if the ECB implemented tiering, would prevent strong banks from benefiting from arbitrage opportunities by lending to weak banks at a rate above -0.4%. Both causes are the result of the eurozone’s dysfunctional banking system, in which demand for safe assets involves both a “home bias” and a strong demand for core countries’ sovereign debt.

In these circumstances, the ECB will not find it easy to implement a policy that would remove the constraint of the zero lower bound on interest rates, while ensuring that the policy’s distributional effects on banks and EU member states are neutral. Doing so will involve many instruments and complex design, far from the simple one-tool-for-one-target framework that was best practice before the financial crisis.

Moreover, negative rates become less effective over time and, if protracted, may have undesirable effects – for example, by inducing savers to de-risk, thereby potentially generating asset-price bubbles and increasing financial disintermediation. The positive stimulus from the depreciation of the euro’s exchange rate could offset these effects, but only if other central banks – and in particular the US Federal Reserve – do not ease at the same time. And on July 31, the Fed announced a widely expected quarter-percentage-point cut in its benchmark interest rate, while further future cuts cannot be excluded.

But the main problem is that neither negative rates nor quantitative easing can by themselves address the pervasive risk aversion holding back the eurozone economy. The ECB is trying to discourage demand for safe assets by making them more expensive to hold, but it cannot address the causes of the increase in such demand.

This is a global trend driven by several factors, including demographic changes, widespread uncertainty linked to technological transformation, and political risks such as trade wars and nationalism. But in the eurozone they are exacerbated by the lack of reform of the single currency.

More than ten years after the financial crisis, the eurozone’s financial markets are still fragmented, and the supply of safe assets is limited by the conservative fiscal policy of northern European countries, particularly Germany. Eurozone policymakers must, therefore, find the political will to design a comprehensive package of financial and fiscal measures aimed at injecting new energy into the European project. Such a combined approach is essential to address the deep-rooted risk aversion sapping growth across the eurozone.

In the 1930s, America’s key stimulus was monetary rather than fiscal, but a vital ingredient of success was a comprehensive set of reforms coupled with a strong message capable of unifying the country. Today, Europe needs a twenty-first-century version of that policy.

Lucrezia Reichlin, a former director of research at the European Central Bank, is Professor of Economics at the London Business School.