A bigger dose

The world is spending nowhere near enough on a coronavirus vaccine

Far better to spend far too much

Consider the following thought experiment. If you fail to eat a pizza within an hour, you will die from hunger. What do you do? Most people would immediately order a pizza—and not just one Margherita, but lots of them, from several different parlours. In order to maximise the chances that at least one pizzeria got you what you needed in time, you would not care that some of the pizza would be sure to go to waste.

The world is hungry for a vaccine against covid-19. So far about 700,000 deaths have been recorded from the disease, and the total is increasing at a rate of roughly 40,000 a week. If you also include unrecorded deaths, the actual numbers are much higher. Meanwhile, the global economy is experiencing its sharpest contraction since the Great Depression, of perhaps 8% of gdp in the first half of 2020.

In the face of this catastrophe, scientists look likely to produce a vaccine much faster than almost anyone could have predicted at the start of the pandemic. Yet global efforts to manufacture and distribute vaccines do not measure up. A mere $10bn or so has been devoted to the cause—the equivalent of ordering one pizza, rather than the several that are needed.

The figures are murky, but on a rough estimate the world has bought about 4bn doses of covid-19 vaccines for delivery by the end of next year, which is in theory enough to give half the planet one dose. In practice, however, far fewer people will secure protection from the disease.

Some of the vaccines in production will fail to get regulatory approval, and a potential candidate that reaches a large-scale clinical trial—as several have—still has a 20% chance of failure.

Others will be approved but may not provide full protection. They may not be suited to the elderly, for instance, or they may stop people dying from covid-19 but not from passing it to others. Other vaccines will require more than one dose in order to be effective. Because of these contingencies, even those countries, such as Britain and America, that have bought more than two doses for each of their citizens have still not bought enough.

Instead of seeing unproven vaccines as an extravagance, the world needs to think of them as an insurance policy. Research suggests that if ten or more vaccines are in development, there is a 90% chance of finding one which works. Once one of these candidates proves to be effective, billions of doses will need to be distributed quickly. But it is impossible to know in advance which candidate will succeed.

Governments should therefore help pharmaceutical firms produce vast quantities of a range of different vaccines—ideally, numbering tens of billions of doses in all—long before regulatory approval is or is not granted. The winning vaccine could thus start to get to people quickly, even as doses of failed vaccines might be thrown away unused.

That may seem deliberately and needlessly lavish. Yet even boosting vaccine funding tenfold to $100bn or more, in line with the most ambitious proposals, pales in comparison with the $7trn which governments across the world have spent or pledged since the pandemic began in order to preserve incomes and jobs.

The real extravagance would be to wait until a successful vaccine candidate emerges before rushing to boost production. In terms of the economic output that is saved, to say nothing of lives, it would make sense for the world to spend as much as $200bn on bringing forward an effective covid-19 vaccine by just one week.

For some, the prospect of such a heavy investment raises fears of “vaccine nationalism”, in which rich countries outspend poor ones in an attempt to corner the market for their citizens. The world as a whole can wring the most benefit out of limited supplies of vaccine by pooling resources and allocating doses on the basis of need—health-care workers first, vulnerable people next, and so forth. Around 80 countries are interested in such a deal.

Unfortunately, however, politicians in some countries with manufacturing capacity are likely to put their own people first. One way to minimise the international scramble over who gets vaccines and when is to maximise supplies up front and to spread manufacturing capacity.

Vaccines for the poorest countries would need to be subsidised, perhaps through gavi, the alliance that already pays for other vaccines there.

The idea of deliberately overproducing something does not sit easily with politicians, especially in a world where there are so many claims on public funds. Faced with a large manufacturing capacity that turns out to be useless, politicians risk being accused of having wasted money—as the British government was when the emergency hospitals it had built early in the pandemic were not needed.

Yet politicians must be rational. You buy insurance before you know what will happen, not after.

How Brexit may strengthen the west

A revived EU will be a stronger partner for the US

Gideon Rachman

James Ferguson illustration of Gideon Rachman column ‘How Brexit may strengthen the west
© James Ferguson/Financial Times

The Brexit vote of 2016 was ardently wished for in Moscow. Vladimir Putin’s belief was that Britain’s departure from the EU would weaken the western alliance.

But it now looks as if the Russian president got it wrong. Far from weakening the west, Brexit may end up strengthening it. Without Britain as a member, the EU is once again progressing towards “ever closer union”. And a stronger EU will be a more effective partner for a post-Donald Trump America.

In the long run, the relationship between the EU and the UK could settle down into something analogous to the relationship between the US and Canada. The Canadians/British have no desire to join the US/EU.

They accept that an asymmetry in power with a much larger neighbour is the consequence of maintaining their political independence. But both sides in these lopsided partnerships can still benefit from deep economic integration and strategic co-operation based on shared interests, values and geography.

To understand how things might develop, you need to grasp the significance of the most recent European Council meeting in July. After one of their longest ever summits, EU leaders agreed to borrow collectively on the financial markets.

Initially, the hundreds of billions of euros raised will be used to mitigate the impact of coronavirus. But the EU has realised that it can borrow large sums of money from the markets at very low rates. In future, this financial firepower could fund ambitious new projects, such as collective defence. Developing a large market for EU debt will meet investor demands for new safe assets and enlarge the international role of the euro, strengthening the EU’s political power.

This historic advance for the EU’s longstanding goal of “ever closer union” would not have happened if the UK were still a member of the club. The EU’s “frugal four” of the Netherlands, Austria, Sweden and Denmark fought hard against the agreement. With the UK still around, they could have relied on a British veto.

But, in the post-Brexit EU, a Franco-German combination is once again hard to stop. The issuance of common debt may, therefore, be the first of a series of steps towards closer political union. The establishment of common taxes to underpin the new debt is the obvious next step.

Watching this development forces me to accept that two groups I have often criticised — European federalists and Brexiters — both had a point. The federalists were right that Britain was blocking the progress of the European project. The Brexiters were correct that the UK was unlikely ever to be comfortable in the more deeply integrated EU that is emerging.

Of course, things could still go wrong. Progress could be blocked by national parliaments.

There could be a renewed economic crisis in southern Europe. But it seems more likely that, after a 20-year hiatus, the European project is regaining momentum.

At a time when the US is increasingly focused on rivalry with China, an intelligent administration will recognise the benefits of a strengthened EU. President Trump, who regards the EU as a dangerous rival, will not see things that way. But if Joe Biden becomes president, his administration would emphasise rebuilding America’s alliances.

The Biden camp knows that the US can no longer underpin the world order on its own. A more balanced western alliance, with a strengthened EU as its second pillar, looks like an attractive alternative to being the “sole superpower” — particularly if the Europeans used some of their new financial strength to build up their defence capabilities, responding to longstanding US concerns about “burden-sharing”.

A generation ago, the US might have feared with reason that a more integrated EU would see Washington as its principal global rival. But that kind of European thinking belongs to a bygone age of American unipolarity.

Looking at today’s world, EU policymakers increasingly understand that the long-term threats to Europe’s collective interests are China, Russia and instability in the Middle East and Africa.

A reliable US presidency, which may be just a few months away, would be an indispensable partner in tackling those challenges.

Where does Britain fit into all this? That, too, is becoming clearer. The toughest part of the post-Brexit talks still lies ahead. A “no deal” outcome is possible. Even a deal could leave lingering disputes on issues such as fish and finance.

But the new EU-UK relationship will eventually settle down. Even the dimmest Brexiters will grasp that the EU is not, in fact, the major threat to British interests and freedoms. On the contrary, Germany, France and the other European democracies are indispensable partners in dealing with threats beyond Europe — in particular, authoritarian powers and fragile states.

For its part, a stronger and more confident EU need no longer fear that Brexit is the first step towards the destruction of the European project. It could therefore afford to be less defensive and more creative in building a new relationship with the UK.

In the long run, Britain should aspire to establish a new “special relationship” with Brussels to complement its existing “special relationship” with Washington. These two key partnerships would place the UK back at the centre of a revived western alliance.

Berkshire Hathaway profits surge despite $10bn writedown

Second-quarter net income at Warren Buffett’s conglomerate rises by 87% on the previous year

Eric Platt in New York

Gains at Warren Buffett’s Berkshire Hathaway were propelled by a broad market rally © AFP via Getty Images

Warren Buffett’s Berkshire Hathaway reported a surge in profits in the second quarter as the value of its stock portfolio rebounded, offsetting a near $10bn writedown on its largest manufacturing business and a slide in operating earnings.

The industrial conglomerate, which owns insurer Geico, the BNSF rail company and ice cream purveyor Dairy Queen, said net income rose 87 per cent from the year before to $26.3bn, or $16,314 per class A share, for the three months to the end of June.

The gain was propelled by a broad market rally that helped lift the shares of iPhone maker Apple, its largest stock investment, 43 per cent in the quarter. Its stake in Apple was worth $92bn at the end of June and accounted for 44 per cent of Berkshire’s $207bn equity portfolio.

But the earnings of the dozens of companies Berkshire owns outright fell 10 per cent from the previous year to $5.5bn, which included large declines at Precision Castparts, the aerospace parts supplier that Berkshire acquired in 2016 for about $37bn.

Berkshire said it would take a $9.8bn writedown on the unit, reflecting the deep contraction in air travel since the onset of the coronavirus pandemic. Precision Castparts embarked on what Berkshire characterised as an “aggressive restructuring” to cut costs in the first half of the year as demand for aircraft fell. The group has reduced its workforce by 10,000 employees, or roughly 30 per cent of its headcount at the end of last year.

Line chart of Year-to-date performance (%) showing Berkshire Hathaway has lagged the broad market this year

“We believe the effects of the pandemic on commercial airlines and aircraft manufacturers continues to be particularly severe,” Berkshire disclosed in a regulatory filing on Saturday.

“The timing and extent of the recovery . . . may be dependent on the development and wide-scale distribution of medicines or vaccines that effectively treat the virus.”

The company said its aircraft rental business NetJets and pilot training group FlightSafety had also recorded asset impairments and restructuring charges, weighing on their earnings during the quarter. It said it could take further writedowns if the impact from the pandemic on its businesses is worse than it currently forecasts.

“They paid up for that deal and I would not characterise the integration of Precision Castparts as a stunning success,” said Cathy Seifert, an analyst who covers the company at CFRA Research. “Now we are seeing tangible proof of that.”

The writedown of Precision Castparts came just months after Mr Buffett conceded that he had bet wrong on the airline industry. Berkshire in April sold all its holdings in American Airlines, Delta Air Lines, Southwest and United Airlines.

Despite the weakness across many of Berkshire’s businesses, the company’s cash pile climbed to a record $146.6bn in the second quarter, up from $137.3bn at the end of March. The company said it had used $5.1bn of its cash to repurchase shares in the quarter.

Column chart of Cash and cash equivalents ($bn) showing Berkshire's cash pile hits a new record

Investors and analysts have criticised the rising cash levels at Berkshire this year, particularly as the company’s stock has lagged the broader market. Berkshire class A shares are down 7.4 per cent so far this year, compared with a 3.7 per cent advance by the benchmark S&P 500.

Mr Buffett has shown some appetite for the dealmaking that helped make Berkshire a household name after mostly sitting on the sidelines during the worst of the market sell-off in March and April.

The company, which dumped $12.8bn worth of stocks in the second quarter, ploughed more than $2bn into Bank of America in late July. It reported buying shares of the US lender every day in the final two weeks of the month. In July it also agreed to buy the natural gas transmission business of Dominion Energy for $4bn and assume $5.7bn of the group’s debt.

James Shanahan, an analyst at Edward Jones, added that the company’s disclosure with the Securities and Exchange Commission indicated it had continued to buy back its own shares in July.

“I’m optimistic that if they are in the market buying shares of Bank of America, which they are required to report publicly . . . they are probably buying other stocks,” he said. “It is a really important catalyst for the stock given the growing cash balance and the drag that puts on earnings.”

Avoiding the Japanification of Europe

The COVID-19 crisis has upended many existing European Union rules and institutional guidelines. If EU leaders take this as an opportunity to pursue radical, forward-looking change, the COVID-19 upheaval could move the bloc to a better place.

Lucrezia Reichlin

reichlin22_Thierry MonasseGetty Images_christinelagardeeuflag

BOLOGNA – As monetary and fiscal authorities have acted aggressively to blunt the COVID-19 pandemic’s economic impact, public debt and central-bank balance sheets have swelled rapidly.

In the European Union, this trend is compounded by a new €750 billion ($886 billion) COVID-19 recovery fund, which includes the issuance of so-called “recovery bonds” guaranteed by the EU’s multiyear budget and, possibly, by Europe-wide taxation.

From Latin America’s lost decade in the 1980s to the more recent Greek crisis, there are plenty of painful reminders of what happens when countries cannot service their debts. A global debt crisis today would likely push millions of people into unemployment and fuel instability and violence around the world.

This is a whole new world for all advanced countries except one: Japan. It is not the “nice” world of the 1990s, characterized by stable inflation, steady output, fiscal prudence, and a narrow central-bank focus on manipulating short-term interest rates to meet inflation targets. But nor does our turbulent world resemble that of the 1970s, marked by high inflation, volatile output, fiscal profligacy, and excessively accommodative monetary policy.

In today’s world, inflation is very low and is expected to remain so, and monetary authorities enjoy significant credibility – much more than in the past. Advanced countries are headed for a situation in which the distinction between monetary and fiscal policy is merely academic, and debt consolidation is unrealistic.

This has long been the case in Japan, with its very low inflation, negative interest rates, and a public debt-to-GDP ratio of 200%, 70% of which is held by the central bank. But most countries are not used to facing these problems. Addressing them – and avoiding a deflationary spiral – will require a creative and coordinated approach to monetary and fiscal policy.

The challenge will be particularly profound in the eurozone, which has a common monetary policy but lacks a shared budgetary policy, notwithstanding the new recovery fund.

Overcoming it will require an institutional setup that is very different from the one established in the Maastricht Treaty. Europe’s leaders must urgently begin discussing what that setup must be, and how to get there.

The European Central Bank’s current strategy review provides an opportunity to address some of the issues at stake. For example, the ECB could update the definition of price stability, so that it has the flexibility to overshoot the inflation target in the short term, thereby compensating for years of undershooting. This would help to prevent long-term inflation expectations from stabilizing at too low a level, resulting in real interest rates that are incompatible with full employment.

One solution could be to adopt nominal GDP targeting. That way, in responding to supply shocks that drive up prices and depress output, the ECB would weigh the two target variables equally. This would discourage policymakers from taking an excessively hawkish stance at a time when a range of factors – from climate change to pandemics to financial crises – threaten to produce many more supply shocks.

But such a change would go only so far. The vital issue – which will most likely demand some new piece of legislation and a departure from the Maastricht Treaty – is the relationship between monetary and fiscal policy. In a unitary state like the United States or the United Kingdom, monetary- and fiscal-policy coordination is possible in service of an agreed target – for example, in terms of nominal GDP.

For example, in circumstances when fiscal policy is more effective than monetary policy – such as when interest rates reach their effective lower bound – debt-financed tax cuts could be pursued, with the central bank acting as a buyer of government debt. The shared target, meanwhile, would ensure the credibility of the monetary authority, protecting it from so-called “fiscal dominance.”

In a monetary union, the dynamic is more complicated, making a formal structure for coordination all the more important. Monetary and fiscal policymakers should be working in concert to achieve the right combination of inflation, output, interest rates, and sovereign risk.

But such coordination would affect, among other things, the ECB’s bond-buying program, including how much risk it assumes and the geographical mix of the bonds it purchases.

Should the ECB now be purchasing relatively safe recovery bonds, or leaving those to the market, while directing its purchasing program toward riskier assets? This is a monetary-policy decision with fiscal consequences. It should not be left to the central bank alone.

What institutional changes could resolve this problem? To begin, the EU must consider the desirability of an independent fiscal authority with which the ECB could coordinate policy. The two bodies would meet regularly to set relevant targets – relating to deficits, interest rates, and prices – and to evaluate whether national policies are aligned with those targets.

The pandemic has upended many existing rules and institutional guidelines. For example, the EU has suspended its limits on fiscal deficits, which most economists think should not be reintroduced any time soon, especially not in their current form. If EU leaders take this as an opportunity to pursue radical, forward-looking change, the COVID-19 upheaval could move the bloc to a better place. Otherwise, conditions could become much worse. Just ask the Japanese.

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