The Third Wave

Coronavirus Mutants Are Spreading Fast

The coronavirus mutants are spreading at breakneck speed in Germany. They have left puzzled researchers asking what makes them so highly infectious? And why are they infecting so many young people in Israel?

By Rafaela von Bredow und Veronika Hackenbroch

Parents and children enjoy a bit of winter sledding in a Berlin park. Foto: Maja Hitij / Getty Images

We can't take it anymore, raged Sonja Ultsch in a video on Facebook last week. "We've already let them slap us on the left cheek for Ischgl, now we have to turn our right cheek, too!" 

It was a reference to the Austrian ski town that was responsible for one of the biggest outbreaks of the novel coronavirus in Europe during the first wave last year.

As if in a commercial for pleasant skiing holidays, the hotelier filmed herself against a sunlit Alpine backdrop, railing against the Austrian government's efforts to seal off Tyrol because of a major outbreak of the South African B.1.351 virus mutant in the region. 

"I’ve had it, let them lock us in!” Ultsch railed, her eyes hidden behind sunglasses along with pink lipstick and light blond hair. 

"But then we’re going to open everything here!”

The defiant video went viral, and Ultsch certainly spoke from the heart of many a Tyrolean. 

And not only them. 

There is probably no country in the world where people aren’t fed up with the lockdown, which has transformed from an emergency measure to an entire new way of being. The frustration and suffering is growing louder because of the pandemic’s depressing and seemingly nonstop reign.

And ever since the virus mutants began spreading around the globe, even the last motivation for bravery is fading: the hope that the nightmare will soon end thanks to vaccination. 

Because as incredibly fast as it was possible to find and produce vaccines, the mutants were faster. And they are still faster.

For physicist and mathematician Michael Meyer-Hermann of the Helmholtz Center for Infection Research in Braunschweig, one thing is clear: "Vaccination isn’t going to help us slow down the momentum of infections until the younger population has been immunized.” 

And what about higher temperatures in the spring and summer? 

It might help a bit, Meyer-Hermann thinks, when people start spending more time outside. "But that alone will in no way suffice.”

Meaning that the virus could continue to run rampant until enough people have been vaccinated.

In addition, the South African and Brazilian variants have some particularly nasty characteristics. For one, it’s likely they can re-infect people who have already suffered from an infection with the original coronavirus. And the vaccines also appear to be weaker against the new strains.

It’s like a whole new pandemic has begun with the mutants. Things had been looking pretty good in Germany: The incidence rate was falling and continues to fall, and the measures seem to be working. 

But now, still invisible in the mountain of case numbers, the highly contagious mutants are spreading, most notably B.1.1.7, the virus variant that overran the United Kingdom in a matter orfweeks and led Portugal to have the highest incidence levels in the world. 

It will inevitably dominate infection trends in Germany, as well. The question is no longer whether the dangerous mutants will run rampant, only when.

This puts politicians in a bind. They are being forced to position themselves somewhere between two extremes, with one just as nightmarish as the other. On the one hand, you have the eternal lockdown, from which it is only ever possible to briefly emerge. 

On the other, by loosening up the measures, you risk giving the mutants free rein, which could push the case numbers in this country into the tens of thousands every day with many fatalities, including younger victims, people with long-term symptoms and constant series of new virus mutants.

Because this is also clear: High infection rates and increased numbers of people available for the virus to attack mean the virus can multiply freely. And with each replication, the likelihood increases of new mutations emerging. 

In most cases, more harmless, but also some more dangerous ones or even variations that are resistant to vaccines.

What, then, is the country facing? 

It’s as if the pandemic has transported us into a weird state of limbo where people who are already pandemic-weary, frustrated and angry are granted a brief respite in which everything now depends on how they behave and decide to act.

It is possible to stop the mutant through a hard lockdown, as we are currently seeing in the UK and Ireland. But it is not possible to sustain that lockdown until a larger proportion of the population finally gets vaccinated in the summer or autumn. 

How much opening, then, is possible without the situation spinning out of control again? 

Scientists and politicians around the world are currently wrestling with that question. 

Last Wednesday, German Chancellor Angela Merkel and the governors of the country’s 16 states debated the issue.

The federal government and the governors decided to extend the current lockdown until early March, with restrictions placed on social contacts, social distancing and bars. 

Restaurants have been ordered to stay closed until at least March 7. The only rule to be loosened is that hairdressers can open their doors to customers again at the beginning of March. The German states will decide on their own when to reopen schools.

Ultimately, the politicians had to yield, at least in part, to the findings of scientists worldwide who are rushing to do research on the new mutants. The calculations of epidemiologists, in particular, predict a disaster if a relaxation of rules were to take place now, even if it were at primary schools.

Still, that didn’t prevent individual governors from causing the usual local chaos in loosening the lockdown rules the day after the federal and state decisions were made. 

Just an example: On Saturday, flower shops were allowed to reopen in Lower Saxony. 

They were allowed to open in Bavaria on Sunday, too, but only because it was Valentine’s Day. 

On March 1, the northern state of Schleswig-Holstein will allow garden centers, zoos and nail studios to reopen.

"The current measures aren’t even sufficient for stopping the exponential spread of the new variant,” says Meyer-Hermann of the Helmholtz Center for Infection Research. 

The physicist plugged all the basic assumptions available about the new variants into his models and calculated how they would affect the development of infections.

What he’s saying is that a third wave is coming.

Beyond Meyer-Hermann’s models, the figures from neighboring countries also show what will happen in Germany. British researchers have created an animation showing Britain divided into counties. 

It shows how B.1.1.7 starts in the south, soaking the country in a pale pink all the way up to the north until it becomes deep violet at lightning speed in the disease's march to victory.

The UK example also shows how hard the lockdown has to be in order to stop the mutant’s spread. And in Israel, we are currently seeing how the virus can evade even an aggressive vaccination strategy. It appears that it then just starts infecting more children - another unpleasant finding.

The numbers illustrating the success the B.1.1.7 mutant has had are quickly outdated. 

The week before last, the Robert Koch Institute, Germany’s center for disease control, reported that the share of the British variant in Germany was just under 5.6 percent. 

By last Thursday, though, that figure had doubled to 11.2 percent. Less than a week later, it had almost doubled again to over 20 percent.

A COVID-19 patient is transported by ambulance in Portugal: The country has the highest incidence of infection in the world. Foto: Duarte Sa / Reuters

On Thursday, the city of Düsseldorf announced that B.1.1.7 had been detected in every fifth infected person there. An outbreak had occurred in a homeless shelter, among other places. 

In the northern German town of Flensburg, about one in three infections with SARS-CoV-2 was an infection with the British variant. And in the northern Bavarian regions of Hof, Wunsiedel and Tirschenreuth, the proportion of new mutants in the positive tests is already at 40 to 70 percent.

In Cologne, too, at the initiative of Florian Klein, director of the Institute of Virology at the city’s university hospital, all positive coronavirus samples are currently being examined for the new variants using a special PCR test. Right now, B.1.1.7 accounts for around 15 percent of all cases and the South African mutant for around 5 percent.

But the increase didn’t surprise the virologist. "There is no reason to assume that developments in Germany should be fundamentally different from those in other countries,” says Klein.

The latest figures indicate that the mutant from the UK currently has a reproduction number of 1.3, meaning that 10 infected people spread the disease to 13 others. "Then the number of cases doubles about every one to two weeks,” calculates physicist Viola Priesemann. If it were to stay that way, there would be more than 30,000 new infections a day in Germany again after Easter, despite the extension of the lockdown.

"According to our predictions, if you were to relax the (lockdown) rules now, then one would expect that B.1.1.7 would be dominant sometime in March,” says modeler Meyer-Hermann. Dominant means that the mutant would account for half of all infections.

It's still not clear exactly why B.1.1.7, but also the South African and Brazilian variants, manage to infect so many people so easily. However, virologists have identified the mutation that enables the pathogen to do so: It’s called N501Y and it affects the binding of the virus to host cells. 

According to the initial findings, it helps the pathogen infect a human being in a significantly shorter amount of time. As such, the definition of what can be described as a close contact may have to be changed.

Initially, it appeared that the new variants were killing disproportionately more than the previous SARS-CoV-2 virus simply because they were infecting so many more people. More recent data, however, has led to the suspicion that they actually also cause more dangerous progressions of the disease. 

"There is a realistic possibility that infection with VOC (variant of concern) B.1.1.7 is associated with an increased risk of death compared to infection with non-VOC viruses,” stated a report by British government advisers in late January.

A lot will depend on how quickly vaccinations are now administered. In response, in the UK, where B.1.1.7 was first identified, the public health service has ramped up all systems, and just under one-fifth of the population has already been vaccinated. 

Clearly ahead in the vaccination race right now, though, is Israel, where 3.7 million people have already received their first dose of vaccine – 41 percent of the population. 

Meanwhile, in Germany, following the debacle surrounding the European Union’s vaccine orders, the government is promising to make "an offer of vaccination” to all adults by the end of summer.

"One would expect that B.1.1.7 would be dominant sometime in March."

The good news is that the vaccines available now provide reasonable protection against B.1.1.7, with minor declines in efficacy. But B.1.351 from South Africa and P.1 from Brazil, the so-called escape mutants, are proving to be more of a problem. 

The two SARS-CoV-2 variants each have another mutation in their genome: E484K. 

As if in some horror movie, American infectious disease specialists are now calling it the "eeek mutation.”

Experiments conducted in South Africa have shown that it helps the virus trick its victims’ immune systems. Researchers there mixed the mutated viruses with the blood serum of patients who had recovered from COVID-19. 

It turned out that the antibodies were only able to render the mutants harmless to a small extent, meaning the South African mutant could infect people who have already been sick with COVID-19 or were at least infected with SARS-CoV-2. 

In other words, people who were believed to have immunity. 

But this also means that treatments using monoclonal antibodies will no longer work as well. And that vaccines currently available are less reliable.

"The vaccines that were designed for the previous variants will lose effectiveness,” says Alex Sigal, who heads a branch of the Berlin Max Planck Institute for Infection Biology in Durban, South Africa. 

"This has been shown most dramatically with AstraZeneca’s vaccine.”

The vaccine had only 10 percent efficacy left, although these are preliminary and not representative results. 

"The solution is the redesign of the vaccines targeting the new variants," says Sigal. 

"What we are checking now is to see if antibodies to the new variants are cross protective, that is they can target both old and new,” he says. "If yes, this might be a solution.”

And if not? 

How will we deal with them? 

And how alarming are these findings? 

Austria was hit hard by the wave of the coronavirus that emanated from the ski resort town Ischgl – it should be an example of what people had been hoping for: that people can become immune to SARS-CoV-2.

But rather than having developed herd immunity, it appears that the E484K mutation is also reinfecting people who had earlier strains of the coronavirus. 

That would mean that in Germany, as is now the case in Tyrol, small islands of infection could form again and again where the disease had already passed through with a high number of cases – in Saxony in the east, for example, which has been hard hit, or Heinsberg, the site of the first major outbreak in Germany last year, or Tischenreuth.

And it wouldn’t necessarily take the South African or Brazilian variant for that to happen. 

Evolution seems to favor escape mutations everywhere where many immune systems are already armed against the previous, more harmless SARS-CoV-2. 

In Britain, B.1.1.7 has also further mutated to acquire the "eeek mutation," with which it may be able to reinfect people who have recovered from a previous coronavirus infection.

"We have already seen 28 cases of B.1.1.7 with the E484K mutation to date in Britain,” says Jeffrey Barrett of the Wellcome Sanger Institute in Cambridge, where more than 60,000 positive virus samples have been sequenced and analyzed since December. 

The mutation has now occurred at least three times independently. 

"Viruses are always mutating,” Barrett says. 

"The appearance of a worrisome mutation like E484K on top of the B.1.1.7 variant was inevitable.”

That’s exactly what can happen if vaccination is as slow as it is in the European Union, but where high infection rates are still raging: SARS-CoV-2 is adapting. That’s why it’s so important to keep the number of "new infections as low as possible everywhere in the world,” says Barrett.

So how smart is it in a situation where you have a high infection rate like the one seen in Germany to reopen schools for in-class teaching, as the eastern state of Saxony did this week? 

Or as other states are planning on doing in March? "By doing so, we risk letting B.1.1.7 slip out of our control," warns Meyer-Hermann of the Helmholtz Institute for Infection Research. "Because then we won't get into the low case rate zone in time.”

It is indisputable that schools, like any place where many people meet, contribute to the incidence of infection. 

Most recently, a large representative study of Austrian schools showed that children are just as likely to get infected as adults, including primary school pupils.

And since the mutants began their rampant spread around the world, another awful suspicion has been added to the list: that the new pathogens are increasingly infecting children. 

Tests in Corzano, for example, showed that 10 percent of the northern Italian municipality's 1,400 inhabitants were infected with B.1.1.7 and that 60 percent of those infected were primary school- and day-care aged children.

In Israel, doctors with the Association of Pediatricians recently sent an alarming letter to the country’s health minister. 

They had found that more than 50,000 children and teenagers had tested positive for SARS-CoV-2 in January – the largest number ever, even more than in the first and second waves. 

Cyrille Cohen of Bar-Ilan University told the British Medical Journal that since mid-December, when B.1.1.7 emerged in Israel, the proportion of new daily infections among under-10-year-olds has risen by almost a quarter. Although the vaccines haven’t been approved yet for use in children, Israel now wants to become the first country to vaccinate risk patients under 16 years of age.

Schools, which were supposed to reopen as part of Israel’s successful vaccine campaign, remain closed. 

"It is my opinion that we should still reopen gradually,” Cohen told the British Medical Journal, "until we understand better the infection pattern of this new variant.”

Still undetected at the time in autumn, the mutant in England spread primarily through schools. Observers were astonished at the number of cases, which increased especially among children and adolescents. 

As the incidence continued to skyrocket in November, pubs and restaurants were closed, people were strongly encouraged to work from home and the number of social contacts allowed was restricted.

But even with all those measures in place, they were unable to stop B.1.1.7.

In Canterbury, in the southeast English county of Kent, the weekly incidence rose to around 600 cases per 100,000 inhabitants. "And other places around here were much higher," reports a translator who has lived in Canterbury for years and keeps a close eye on the coronavirus situation.

It wasn’t until the strict "Tier 4” lockdown imposed by Prime Minister Boris Johnson just before Christmas in some regions that the tide turned. Many people are only allowed out of the house to buy groceries and rarely even go outside to get fresh air. "I haven’t been in the city center for ages,” says the translator.

The good news coming out of Britain is that it is possible to keep B.1.1.7 in check with strict containment measures. The number of cases has also fallen sharply in Ireland after strict lockdown measures there, as well. Schools and most stores in the country are closed. And people are only allowed to leave their homes if they have a valid reason.

"The more people that get vaccinated, the more likely it is that variants will spread in our country against which the vaccines aren’t as effective."

"Everybody has found this lockdown very difficult,” says Patrick Mallon, a professor of microbiology at University College Dublin and a doctor of infectious disease at St. Vincent’s University Hospital. "The mental health toll is considerable.”

But he says the situation at his hospital has since eased noticeably. The real challenge, Mallon says, will be when it comes to relaxing the strict regime again. Will that even be possible with the new variant without the case numbers immediately shooting up again?

"No one really knows,” Mallon says. "It's going to be an experiment.” He says it is important to get the number of cases down as low as possible.

That view is shared by the 14 scientists in Germany who have joined forces to form the "No Covid” initiative. With improved contact tracing in the public health departments – "faster and more automated” – Meyer-Hermann calculates that the reproduction number increased by the mutants to over 1 can be reduced, but not with the current high case numbers, according to the professor in Braunschweig. 

"That could be successful in the range of an incidence of 10" infections per week per 100,000 residents, he says.

Then the current measures, together with more efficient contact tracing, would make it possible to bring the reproduction number of B.1.1.7 down below 1.

But last Wednesday, German politicians voted against "No Covid,” at least for the time being. The only concession made to the idea of low case numbers is that the target is now 35 rather than the equally erratic and scientifically unfounded target of an incidence of 50 cases per week per 100,000 inhabitants.

The muddle of hair salon and school openings with contact restrictions continuing, however, makes it difficult to extend Meyer-Hermann's curves toward spring. No one knows exactly what will happen now. 

But it is considered likely that in the end, it won’t just be a single variant that prevails. 

In addition to B.1.1.7, the South African and Brazilian variants are also likely to spread in Germany.

It is conceivable, for example, that B.1.351 will soon be found increasingly in southern Germany because of its proximity to Tyrol – and everywhere where many people are already immune to the earlier coronavirus.

"The more people that get vaccinated, the more likely it is that variants will spread in our country against which the vaccines aren’t as effective,” explains virologist Timm.

Vaccine manufacturers are already working at full speed on new vaccines that they hope will also be effective against the new variants. But when they are used, they also nudge the evolution of the virus correspondingly – and the more people in multiplies in, the faster that happens.

"Viruses evolve to survive," says Dublin infectious disease specialist Mallon. That’s just what viruses do. "Unless you recognize and accept that, you will never be able to fight them successfully.”


China’s roll-out of covid-19 vaccines is slower than planned

Production bottlenecks and a perceived lack of urgency don’t help

In any other year, Mr Lai would have been among the millions who usually return to their ancestral homes for the spring festival, when families celebrate the lunar new year. 

But this year, to prevent outbreaks of covid-19, the government had urged citizens to stay put for the weeklong holiday, the last day of which was February 17th. 

So Mr Lai, a 40-year-old office worker in Beijing, was instead among the first in China, other than essential workers and employees of the state, to get vaccinated against the disease. 

Before the holiday, China had administered some 40m doses of Chinese-made vaccines to people such as medical and delivery staff, government officials, and students and workers going overseas. Now the capital is calling on all residents to volunteer for jabs.

China is second only to America in terms of the absolute number of shots it has administered (America has dispensed more than 57m doses). But per head, China is dawdling. 

Just 3% of people in China have received a jab, compared with 17% of Americans (see chart). The country has not yet begun to inoculate its elderly, lacking data on whether local vaccines are safe for them. 

Beijing is so far the only city to have begun a mass inoculation programme. It covers those aged 18 to 59. Late last year the central government had aimed to administer 100m doses before the spring festival. 

Why is it falling short?

China got off to a quick start last summer, under an emergency-use programme that involved giving shots to soldiers, health-care and aviation workers and the staff of state-owned firms. 

To the alarm of scientists overseas, the Chinese vaccines had not yet made their way through the big “phase three” trials that are normally required for new vaccines. 

Such trials are still under way, but, in December, Chinese regulators authorised a vaccine by Sinopharm, the country’s largest maker of such products, for general use. 

This month they approved a second one, by Sinovac, a smaller producer. The two firms aim to make 2bn vaccines this year. Under a two-shot regimen, that would be enough to cover 70% of China’s population.

It is not that people in China are resisting vaccination. A survey in December by Ipsos, a pollster, found that four in five were willing to get a shot, the highest proportion among the 15 countries they surveyed. 

And they are keen on China’s own vaccines. The government’s effective crushing of the virus, in contrast with the rampant spread of covid-19 in much of the West, has boosted the credibility of made-in-China approaches. 

Many people say that, given the choice, they would prefer Chinese vaccines to Western ones. That is remarkable in a country which has been rocked by vaccine scandals. The most recent one erupted in 2019 after infants were given expired doses of the polio vaccine.

Official propaganda has helped. State media have questioned the safety of the mrna vaccines, such as those made by Pfizer and BioNTech, that are being used in the West. Chinese vaccines that use an inactivated virus have “more mature technology”, they insist. Mr Lai warns darkly that the mrna sort could “alter a person’s dna” (this is false).

Hesitancy in China appears to be not bottom-up, but top-down. If leaders are reluctant to roll out a mass programme nationwide, it is probably because there is still too little vaccine to go around, says Gavekal Dragonomics, a research company in Beijing. 

Ernan Cui, an analyst at the firm, has noted that although Sinovac is getting ready to produce over 1m doses a day, its factories were still only making less than half that number in January. 

It is hard anywhere to produce large quantities of vaccine quickly with inactivated viruses. It does not help that China also has to import most of the glass vials for its vaccines.

This has not deterred China from offering its vaccines abroad. Xi Jinping, the country’s leader, said last May that he would ensure that Chinese vaccines were made a “global public good”. 

Makers have already signed contracts to export half a billion doses to more than a dozen countries, including Indonesia, Brazil and Peru. According to state media, the government has also pledged to provide “vaccine aid” to 53 countries. 

It sees all this as an opportunity to give China’s pharmaceutical sector a shot in the arm, says Jennifer Bouey of Georgetown University. Some countries grumble that shipments from China are being delayed. But in some cases China may have no choice but to fulfil its commitments. 

Because it has all but eradicated the virus at home, it has had to look abroad for places to conduct phase three trials. In return, it has promised host countries priority delivery of its shots.

China may calculate that it can afford a leisurely inoculation campaign. Because of its success in eradicating the virus, there is little sense of urgency. 

In the Ipsos survey, a third of Chinese who said they preferred not to take the vaccine felt that the virus was not common enough to pose a threat. 

Few chafe at mask-wearing or at the tests they must take for some interprovincial travel. Almost all support China’s closed-border policy aimed at preventing the virus from being reseeded at home.

But China’s efforts to keep infections as close to zero as possible come with a cost. 

“Citizens will not tolerate a single case of infection either, now,” points out Huang Yanzhong of the Council on Foreign Relations, an American think-tank. As he notes, as long as China keeps its borders shut it will lack a clear incentive to vaccinate its citizens. 

That will mean herd immunity will take longer to achieve and delay China’s reopening to the world.

Virologists reckon that around 70% of the population needs protection, either from having caught the disease or through inoculation, to reach the herd-immunity threshold beyond which the epidemic abates. 

However this number is higher for new, more transmissible variants. 

For China to attain just 60% will take at least until the end of 2022, reckons the Economist Intelligence Unit, our sister company. That is a year longer than the briskest vaccinating countries will take to reach that level. 

If they open up while China remains shut, it will become harder for Chinese officials to convince citizens that their approach is sound. 

Sooner or later, says Mr Huang, “they will need to educate people to learn to live with this virus.” 

‘We expect Italy to do its homework’: Draghi and the EU recovery fund

Brussels has a huge amount of money to spend on its member states. So how will it use its leverage?

Sam Fleming in Brussels, Miles Johnson in Rome and Daniel Dombey in Madrid

© Emanuel Dunand/AFP/Getty

Nine years ago, Olaf Bussink launched a consultancy business for foreign online retailers looking to set up operations in Italy. His advice to them was simple: don’t.

Bussink discovered that rather than incorporating a company in Italy and setting up a warehouse there, it was easier to send packages to Italian consumers that were shipped in from the Netherlands.

Today his thriving business helps online retailers set up websites in Italian that target local customers, shipping products ranging from electric bikes to cosmetics from the Netherlands that beat local rivals on price and speed.

“It is slightly more expensive to send things from Holland but for my clients the cost of setting up a business in Italy is so much higher,” he says. “Italy has what I call a ‘bureaucracy tax’. My clients can add 10 per cent to their prices compared with Italy-based companies and still be very competitive.”

As Italy draws up the most ambitious reform plans in a generation to relaunch its sclerotic economy, powered by €200bn of EU funds, uprooting these deeply rooted barriers to investment will help define whether the scheme is a success.

Former ECB president Mario Draghi arrives for a meeting with the Italian president, who has asked him to form a government © EPA-EFE

The country is turning to Mario Draghi, the former European Central Bank president, to form a new government from the rubble of its latest political crisis. 

His programme involves harnessing a once-in-a-generation package of grants and loans underwritten by all 27 EU member states, while also pushing through often unpalatable reforms aimed at energising an economy that in real terms has failed to grow since the start of the millennium.

It is hard to overstate the stakes. Draghi’s success or failure in deploying the recovery fund and embarking on key reforms will be critical not only for Italy’s future, but also for the credibility of the EU’s most ambitious joint economic undertaking since the birth of the euro.

“This is a historic chance for the country to invest in its economy and prepare for the future with an ambitious reform plan,” says Manfred Weber, the head of the European parliament’s powerful European People’s party group. 

“We expect Italy to do its homework, like we expect from all member states. Don’t forget it is an explicit part of the deal. We will stick to it.”

The news that Draghi had been approached by the Italian president to form a government was greeted with huge relief in Brussels and other EU capitals given his reputation as the man who saved the single currency during the sovereign debt crisis.

In a brief speech accepting the request, delivered inside the Italian presidential palace on Wednesday, Draghi made explicit reference to the challenge of ensuring the EU recovery plan is a success.

“We have the extraordinary resources of the EU at our disposal — we have the opportunity to operate with a careful eye on future generations,” he said.

Yet to do so he must first convince enough of Italy’s warring lawmakers to provide him with a stable majority in parliament. 

This will require bringing politicians into his cabinet from different parties who will have strong views on how the money should be spent.

Draghi’s entrance last week shook the Italian political establishment, prompting fissures in parties and political alliances and forcing leaders to make decisions over supporting him that will define both their own and their country’s future.

Disagreements over how Italy should deploy what is expected to be the biggest chunk of the EU’s recovery fund triggered the series of events that resulted in Draghi receiving the emergency call.

League party leader Matteo Salvini and audience in Italy’s Senate last month. The exit of the small Italia Viva party caused the coalition government to collapse © EPA-EFE

Toxic politics

The country’s unstable previous coalition government, led by the lawyer Giuseppe Conte, was born in 2019 out of an unlikely alliance of the one-time anti-euro Five Star Movement and the staunchly pro-European Democratic party as a way of blocking Brussels antagonist Matteo Salvini’s bid to become prime minister.

Last month, however, former prime minister Matteo Renzi began to attack the coalition’s handling of the recovery spending plans. The former Democratic party leader pulled his small Italia Viva party out of the government, stripping it of its majority in Italy’s upper house and leaving Conte crippled.

As the toxic politics that have already blighted Rome’s plans to tap the fund show, reaping the benefits of this European bounty is far harder than it might look.

The EU has deliberately avoided going down the route of the last sovereign debt crisis, in which the technocratic government of Mario Monti was under pressure to enact brutal economic programmes and a hard-charging austerity drive.

The EU has this time suspended its fiscal rules, allowing the Italian public debt to exceed 150 per cent of GDP, while putting the might of stronger treasuries, including Berlin’s, behind an unprecedented commission borrowing programme.

But that does not mean the new recovery fund riches come without strings attached.

Accessing the money will require a member state to sign up to a swath of regulatory and administrative reforms. 

These will need to be delivered according to timelines and milestones set in conjunction with the commission, led by president Ursula von der Leyen, as part of so-called recovery and resilience plans.

Historic opportunity

The idea of common European borrowing was profoundly controversial among fiscally frugal northern EU states such as the Netherlands when they agreed to the concept last July.

They signed up in the belief, however, that the commission would enforce tough reforms alongside investment plans aimed at making weaker economies more resilient the next time a crisis comes along.

“The commission is really serious about these reform programmes,” says one senior EU diplomat. “They won’t let us get away with anything.”

Graffiti depicting Matteo Renzi in the centre of Rome. Last month the former prime minister began to attack the government’s handling of the recovery spending plans © RICCARDO ANTIMIANI/EPA-EFE/Shutterstock

Paolo Gentiloni, the Italian commissioner who oversees EU economic policy, sees a big difference between the expected Draghi government and the technocratic Monti regime that led Italy between 2011-13.

The latter served at a time when sovereign debt yields were unsustainably high and the “troika” of the commission, the ECB and the IMF was imposing deeply unpopular reforms on beleaguered euro members such as Greece.

“The Monti mission was a rescue mission. This is a mission to avoid missing out on a historical opportunity — that is why Draghi’s leadership is so important,” explains Gentiloni, himself a former Italian prime minister.

“It is a very different environment from the one we had eight or nine years ago. Some of the problems are still there, but now there is the opportunity to address them in a positive context of a strong boost to growth and the recovery, and not in the context of saving the country from the troika.”

The European Commission headquarters in Brussels draped in a ‘Next Generation EU’ banner © Olivier Hoslet/EPA-EFE

Italy has made advances in areas such as pension and labour market reform in recent decades, Gentiloni says in an interview with the Financial Times, but he cautions that there had been less progress in areas such as speeding up the judicial process and reforming competition rules, as well as curbing red tape.

“I am sure that he [Draghi] will use his extraordinary experience and his strong leadership to make the right things happen,” he adds. “He knows very well all the bottlenecks, the difficulties, the challenges involved in making reforms happen in Italy.”

The country has, for example, one of the slowest legal systems in Europe. A 2018 study by the Council of Europe concluded that the average time for commercial legal cases to be settled was 514 days, among the worst in Europe and longer than in Malta and Turkey.

In 2016, Italy had 4.1 civil and commercial litigation cases pending per 100 inhabitants, compared with 2.4 in France and 0.9 in Germany.

Partly as a result, the country was ranked 58th globally in the World Bank’s Ease of Doing Business report for 2020 — with low results for features such as enforcing contracts and paying taxes. That put it just below Romania, Kosovo and Kenya.

Lucrezia Reichlin, a London Business School professor and former head of research at the ECB, stresses that Draghi is not “some technocrat coming down from the sky” who plans to push the country through “a crash course in liberalising its economy”.

The focus of his proposals to the commission needs to be on addressing “Italy’s structural incapacity to spend money, which is related to the public sector’s ability to make decisions, pursue transparent processes, and undertake auditing,” she says.

This points to one of the commission’s biggest questions about Italy and the recovery fund: whether the country is up to the task of spending such a vast quantity of money wisely over a contracted period of time. Italy’s history here is far from encouraging.

Along with Spain, Italy has one of the worst track records for efficiently spending EU structural funds. In the 2014-20 EU budget period, Spain managed to spend only 36 per cent of those funds by late last year, with Italy only a little better at 43 per cent. By contrast, France’s absorption rate was 61 per cent, and Finland’s was 81 per cent.

Protesters in Rome in 2017 brandish signs demanding less bureaucracy. Italy has what one business owner calls a ‘bureaucracy tax’ © Giuseppe Lami/EPA

Yet together Italy and Spain will receive no less than 40 per cent of the EU recovery fund harvest — dominating the spending programme. 

This means the reputation of the entire project rests on those countries’ ability to come up with credible programmes that meet the commission’s green and digital priorities and minimise boondoggles, waste and fraud.

Some officials hope the Next Generation EU project — which is officially designed to be temporary — could become a permanent feature of Europe’s set-up. But as Erik Nielsen, chief economist at UniCredit, says, that dream “only has a chance if the money is well spent and certainly not wasted”.

Windfall fears

To date officials have been more encouraged by what they see from Spain than by the draft proposals that have been discussed in Rome. Madrid expects to receive some €70bn in grants over the next three years, followed by roughly the same amount in loans in the period up to 2026.

It has already approved a budget that allows it to borrow €27bn against future grants from the fund, passed legislation last month to eliminate bureaucratic bottlenecks in disbursing the money, and drawn up a list of some 170 reforms to submit to Brussels.

European Commission president Ursula von der Leyen. The commission is preparing to police countries’ recovery fund spending © Olivier Hoslet/Pool/EPA-EFE

Among the top priorities in the country’s recovery and resilience plan are the digitalisation of Spanish business and the transition to green energy. Big corporates are hurrying to register themselves as possible beneficiaries. Other goals include turning Spain into a hub for the video games industry and boosting the country’s sport sector.

“The country cannot wait for the funds,” says Manuel de la Rocha, the official entrusted by Prime minister Pedro Sánchez to keep track of the resources. “We have a very difficult economic situation, with an 11 per cent fall in GDP last year, and we need to inject funds into the economy right now . . . and accelerate the absorption of these resources.”

But critics of Sánchez’s Socialist-led government demand more transparency over how the funds will be allocated, as they voice concerns about the power the prime minister will wield over the resources.

The anti-bottleneck legislation, which set out the government structures responsible for co-ordinating the funds, was opposed by the main opposition People’s party, the centrist Ciudadanos grouping and Catalan nationalist MPs — only passing because of the abstention of the hard-right Vox party. 

Pablo Casado, the PP leader, argued it would give the prime minister “a free bar” and lead to “clientelism” that ends in corruption.

The government has rejected opposition calls for an independent agency to administer the funds, arguing that setting up such an institution would waste valuable time and that it would be overwhelmed by the task.

“The government has shown it is willing [to carry out reforms], but governance is a huge issue, with political fragmentation and the rise of populism across southern Europe,” warns Toni Roldán, director of the centre for economic policy at Esade business school in Madrid.

“I fear that with this windfall of money, there will not be substantial reforms. And the commission has little room for manoeuvre, since they would be terrified of assuming the political cost [of halting payments of funds].”

Italy’s unstable previous coalition government, led by the lawyer Giuseppe Conte, was born out of an unlikely alliance of the Five Star Movement and the Democratic party © Cecilia Fabiano/AP

Similar concerns swirl around Italy, which is acknowledged among EU officials and diplomats to be behind Spain when it comes to drawing up its recovery plan ahead of an April 30 target date. 

Business leaders warn that the existing draft plan, which set out priorities including digitalisation, energy transition, health and education, lacks crucial detail on governance and procedure.

The commission itself also faces a prodigiously difficult task as it prepares to police the countries’ plans. Withholding disbursements of recovery fund money if countries fail to hit their reform and spending deadlines and targets would trigger political uproar. 

Yet Brussels cannot afford to preside over a project that becomes tainted by squandered billions, abandoned projects and lost opportunities for economy-boosting reform.

Bussink, who has profited by finding ways to navigate Italy’s administrative barriers, stands to lose out if Draghi is successful in overhauling Italy’s economy as part of its recovery plan. But surveying the scene today, he is not overly concerned.

“If shipping got super-efficient here it would hurt me for sure,” he says. “That still wouldn’t take away the bureaucracy. That is the most painful thing, and the hardest thing to resolve”. 

Credit-Card Companies Should Open Their Wallets

Bank investors appear to be focused on expenses right now, but that might not be the right way to gauge which lenders will be best positioned for the future

By Telis Demos

American Express noted higher usage of travel-related benefits in the fourth quarter of 2020. / PHOTO: JENNY KANE/ASSOCIATED PRESS

Banks and credit-card lenders need consumers to get spending. But they might need to do some spending of their own, too.

As credit measures continue to perform much better than feared, with still-low delinquency rates and rising loan-loss provision releases, investors seem to have found another reason to be worried about banks: their noninterest expenses. 

Fourth-quarter expenses at the very largest banks as a percentage of revenue rose by 3 points year over year on a median basis, according to analysts at Goldman Sachs Group. 

Out of 24 large banks’ earnings tracked by Autonomous Research, analysts’ consensus forecasts for 2021 expenses have risen for 22. 

Higher costs eat away at preprovision net revenue, which is already depressed by low interest rates and tepid loan growth.

It is true that banks have had their cost issues, highlighted recently by the recent focus on financial-crime monitoring, plus a continuing surge of fintech competition that forces banks to continually beef up their technology. 

But investors still may not be best served over the longer term by being too focused on margins right now, especially amid the earnings noise of the pandemic and its related effects. 

Certain spending today might be the key to outperformance in the post-pandemic future.

Card companies, in particular, ought to be viewed over a longer time horizon, given depressed customer spending in key categories such as travel. 

Take American Express, for example: Falling expenses that vary with customer activity offset around 40% of the decline in the company’s revenue in the fourth quarter, down from about 50% earlier in 2020, the company said in January. 

But part of what was behind that smaller offset was an increased use of cardholder benefits—a sign that even as many spenders may not be doing the kind of shopping on travel and entertainment they once were, they still get value out of their cards. 

That is a possible sign of pent-up demand and a longer-term return to normal card behavior.

Likewise, Capital One Financial might look much more efficient at higher consumer-activity levels. 

The company said in January that some of its technology investment was aimed at more effective customer marketing, and it outlined a strategy of generating more new accounts now, with the longer-term aim of giving customers larger credit lines in a better economy. 

Credit cards are a rare kind of lending in which margins can stay strong even amid low rates, so banks will need to do a lot of it as demand returns.

As hard as it may be to imagine as pandemic life lingers into a second year, the best bank stocks in 2022 may be placing their bets now on what the future looks like.

Building Back Broader

Developed countries are spending enormous amounts of money in an attempt to recover from the pandemic, and should not waste it on old and tired schemes that have rarely worked. Instead, national or state governments should fund innovative local projects with high levels of community involvement and engagement.

Raghuram G. Rajan

CHICAGO – US President Joe Biden wants to “build back better” after the pandemic. It’s a widely shared goal. But what exactly does it mean, and how should we do it?

Clearly, we should build back with more equality of opportunity. 

Many communities in the United States and elsewhere in the developed world would not look out of place in a poor country: decrepit schools, crumbling infrastructure, and rising levels of social dysfunction, including crime and substance abuse.

These communities have shrunk as people with opportunities elsewhere have left, leaving everyone else in an even thicker miasma of hopelessness. 

Some of these communities have been disadvantaged for a long time, having been hammered by a previous wave of trade- or technology-induced joblessness. Others have fallen behind more recently, albeit for similar reasons.

But technology and trade have also created new possibilities for economic activity in these communities, and thus the potential for economic revival. 

The COVID-19 pandemic has forced many to work from home and connect with colleagues via the internet, greatly reducing any stigma previously associated with this arrangement. After the pandemic ends, many firms will offer their employees the option of coming to the office only when necessary.

In that case, a worker’s home need not be in the same county, or even the same state, as their office. As skilled workers in cities search for cheaper, less congested places to raise a family, some may want to return to their roots – to places they left long ago. 

And with in-person business meetings becoming more dispensable, entire firms also may relocate. These trends will boost demand for local goods and services, creating more local jobs.

Technology not only helps to spread economic activity geographically, but also can connect remote areas to markets everywhere. 

As Adam Davidson points out in his book The Passion Economy: The New Rules for Thriving in the Twenty-First Century, online platforms allow small enterprises to advertise niche products globally, and enable specialized potential buyers to find them. 

For example, the Wengerds, an Amish family in Ohio, have built a flourishing business selling state-of-the-art horse-drawn farm equipment – a niche market if ever there was one – to other Amish farms across the US.

Not every community can flourish even under these changed circumstances. 

Years of underinvestment in infrastructure, including broadband, parks, and schools, may render some communities unattractive to well-paid professionals and their families. 

High levels of crime and substance abuse could keep businesses away. And local workers may need retraining for new skilled jobs. 

Communities may need to change in order to attract economic activity, but how do they do so without more economic activity in the first place?

The tempting but wrong answer is to centralize the solution. 

Massive one-size-fits-all programs devised in a national or state capital cannot tackle a local community’s specific challenges. 

For one community, the biggest problem may be the absence of fast and affordable access to transportation networks; for another, it may be the lack of safe outlets for youthful energy. 

A community’s inhabitants are in the best position to understand the most pressing needs.

The answer certainly includes more outside funding, including further tax subsidies to encourage investment in “opportunity zones.” 

But that is not enough. Without a committed local leadership devising plans to address specific local challenges, and an engaged community to aid and monitor their work, funds are more likely to be wasted than not. 

Unfortunately, years of hopelessness can exhaust a community’s leadership and leave its members apathetic.

What could induce change? 

One possibility is for the national or state government (or philanthropic institutions) to create grant competitions to fund groups with innovative proposals for projects in their communities. 

Ideally, a project would have the backing of the official community leadership (such as the mayor’s office), but that need not be essential if it can proceed without their support.

The extent of proposed community involvement and engagement in the project would, however, be an important criterion for funding. 

So, for example, a public garden created and maintained by the community would be preferred to a contractor-built park. Stronger community leadership and broader local engagement should be important legacies of funded proposals.

Project leaders would also be given access to professional consultants, who could help remedy weaknesses in the proposal, as well as to leaders of similar projects elsewhere so that ad hoc support groups emerge. 

Not all proposals would be funded, of course, but the process of private citizens coming together to devise a project can create the kernel of a new local leadership if the current one is asleep at the wheel. If the grant competition can revive or generate broader local energy, it will have worked.

Moreover, unsuccessful applicants could resubmit their project proposals in subsequent competitions after addressing earlier weaknesses, thereby sustaining the enthusiasm the initial proposal engendered. 

Finally, the lessons from successful initiatives could be shared with other communities seeking projects of their own, with the aim of establishing a learning network that could share ideas, expertise, best practices, and common pitfalls.

This is not idle theorizing. 

Developed countries like Canada have been creating such networks to encourage bottom-up remedies to local problems that have hitherto defied solutions.

Developed countries are spending enormous amounts of money in an attempt to recover from the pandemic. It would be a real shame if this were wasted on old and tired schemes that have rarely worked. 

The money should go to those who desperately need new opportunities, and know how to create them. 

That may be one of our best hopes for building back better.

Raghuram G. Rajan, former governor of the Reserve Bank of India, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.

The Far East as an Obstacle to Russo-Chinese Relations

Territory and geography help to explain why the two neighbors can never seem to embrace each other. 

By: Ekaterina Zolotova

Russo-China ties have always been something of a MacGuffin in international affairs. 

Moscow and Beijing are neither bitter enemies nor close allies, so movement one way or the other in the status of the relationship tends to worry their neighbors as well as the United States, whose primacy could in theory be undermined by a combining of these great powers.

Even so, Russia hopes that 2021 will be a special year for bilateral relations as the parties celebrate the 20th anniversary of the signing of the Treaty on Good-Neighborliness, Friendship and Cooperation. 

At the end of 2020, Russian President Vladimir Putin described his relationship with Chinese President Xi Jinping as businesslike and trusting, noting that Moscow and Beijing have similar interests in many areas. 

Just a few years ago, Russia and China set an ambitious goal of increasing trade to $200 billion annually by 2024 – a reflection of how natural their business partnership could be, considering Moscow is still under sanctions from the West.

But a deeper dive shows that such a partnership is not as ideal or as easy as it seems. 

Their histories are rife with tension and conflict, and their respective domestic imperatives often clash with their foreign imperatives.

Territory and geography partly explain why. 

China and Russia share two borders: a shorter one of about 50 kilometers (31 miles) along the Altai Republic, and a longer one in the east that touches Zabaykalsky territory, the Amur region, the Jewish Autonomous Region, Khabarovsk territory and Primorsky territory – which together constitute Russia’s Far East. 

It’s one of the most remote regions of Russia, far removed from the capital of Moscow but extremely strategically important for its access to the Pacific Ocean and oil, as well as gas transport lines, which enable energy products to be transited to customers in Japan and China without having to be piped through foreign territory. 

Even when territory didn’t change hands, bilateral ties have often been volatile over their 400-year history. As often as they were at each other’s throats, they were just as often guided by mutual benefit and pragmatic partnership. 

Now is the moment when cooperation is beneficial to China – Russia is not in a position for any military conflict and facing economic conflicts with the U.S., and China would prefer to have an ally against the U.S.

Moscow believes that the Far East would be the biggest beneficiary of a strategic partnership between Moscow and Beijing, but the growing Chinese presence there could aggravate tensions with the Russian government and stoke fears of Chinese expansion. 

For all the hype in the media about improved Russia-China ties, there are limits to their cooperation, now as always.

Agreed Borders

In October 2004, Putin and then-Chinese President Hu Jintao signed a final agreement on the establishment of the Russian-Chinese border, which was contested, sometimes violently, in the past. Moscow had to reassure nearby residents of the document’s practicality, but they still had their doubts. 

In the mid-17th century, the Amur region was taken by the Russians and incorporated into Russia, then ceded under the Treaty of Nerchinsk in 1689 to China. 

After the treaties of Aigun (1858) and Beijing (1860), the Amur region, and then Primorsky, were returned to Russia.


The Chinese people don’t necessarily believe the topic is settled either. 

According to Chinese bloggers, when Russia annexed Crimea, it did so because it was preparing to give parts of Sakhalin, Vladivostok and Tuva to China. 

Not so long ago, Chinese media criticized a statement the Russian Embassy posted on Chinese social media dedicated to the Far Eastern Federal District. 

Though it is hard to believe Chinese authorities feel the same way, it’s impossible to deny China’s presence in the Far East.

This presence worries Russian citizens, some of whom fear that it will change the demographic balance in the region (and thus the country). 

That could, they say, lead to more political and territorial demands on Russian governments. According to the results of a Levada Center poll published in 2020, more than half of Russians (52 percent) are in favor of limiting Chinese migration. 

Some 30 percent of those surveyed favor only a temporary stay for Chinese immigrants, and 22 percent are in favor of a complete ban.

Though these figures frequently reflect local attitudes in contested border areas, official statistics show that relations between the Far East and China were always closer than interstate relations, since Russia's eastern territories more often had cooperation with the peripheral regions of northeast China. 

These regions heavily depend on China as their most important trade partner and as a major investor in the region. 

According to the deputy director of the International Department of the Ministry for the Development of the Russian Far East and Arctic, China accounts for 63 percent of total foreign investment in the Far East. 

Most of this goes to agriculture and forestry, construction mining, services and seafood production. 

These figures exclude small business investments, informal commercial activity, Chinese businesses that may be listed as Russian, and farmland purchased licitly or illicitly by Chinese citizens, so they could be even higher. 

The broader point is that there is often a lot of confusion in areas, and Chinese finance is no different


Likewise, it’s difficult to quantify just how many Chinese citizens are living there. 

According to official data, there are not so many, especially when compared with Central Asian migration in Moscow. 

But here again, official data doesn’t paint the full picture. Before the pandemic, in 2019, more than half of all quotas the Ministry of Labor issued in the Far East were issued to Chinese citizens. 

And though the absolute figures are relatively modest – a little shy of 30,000 people – not all Chinese workers are working there legally, and those with dual citizenship are excluded from the numbers.

Blessing in Disguise?

Thus was Russia’s dilemma in the Far East: to allow or encourage more Chinese investment and migration, or to increase funding for the Far East out of its own budget. 

Neither is without some risk – the first could rile the Russian public, while the latter could cost Russia a chance to cooperate with a power on the rise – so Moscow has simply hesitated to choose.

However, the weak Russian ruble and later the COVID-19 pandemic and its associated economic malaise sort of solved the problem. 

It has become more difficult for Russia to attract Chinese labor, the government has begun to steadily legitimize gray market businesses, and the competition for land resources has started to grow. 

The pandemic necessitated migration restrictions for the sake of public health and thus prevented Chinese workers from arriving. 

Local industry managed to survive the shortage of cheaper Chinese labor, and the lower yield in crops did not fundamentally affect the Russian economy. 

The border has been closed indefinitely, so entrepreneurs are already making plans for the next season, focusing only on Russian workers. 

Smaller Chinese enterprises are gradually leaving and will be replaced by Russian manufacturers.

Even so, the problems Russia has in developing its remote territories haven’t gone away, and though the pandemic enabled Russia to forestall its decisions on China, other problems became more pronounced. 

Investment issues have not been resolved, and funds for territorial development have not been found. 

Russia and China will continue to cooperate in various ways and will loudly announce their successful cooperation to the world when they do, but the Far East will only make it harder.