Buttonwood

Italy is central to the bull case for euro-zone stockmarkets

Might there be a Draghi effect?



Pity the broker of European shares. 

He spends his afternoons making calls to investors in America. 

Few are returned. 

His clients are tired of Europe and its vaccine snafus. 

Even a good-news story, such as Mario Draghi becoming prime minister of Italy, has little traction. 

Italy is central to the fortunes of the euro zone. 

Mr Draghi is a reformer to be reckoned with. 

But a lot of people think the country cannot be fixed. 

“If God descended from heaven and became Italy’s prime minister,” says a hedge-fund boss, “the market still would not rally.”

The story of 2021 is that America’s economy is reopening with a bang. 

By comparison, everything in Europe looks sluggish: gdp growth, the roll-out of vaccines, the deployment of fiscal policy, slow-moving companies, and so on. 

That lack of urgency extends to the stockmarket. 

Europe has no fomo (fear of missing out), says Graham Secker of Morgan Stanley, a bank. 

It is wholly lacking in the froth so evident in America. 

Yet that is probably a good thing. 

Because—whisper it—so far this year the euro-zone stockmarket has managed to keep up with America’s.

Among non-us stocks, the euro area looks attractive on a price-to-earnings basis, says Mr Secker. 

The perennial appeal of Europe is that it is cheap. 

That is not always, or even usually, decisive in stock investing. (Cheap for a reason, sneer the sceptics.) 

But since November, when news first broke of an effective vaccine for covid-19, “value” stocks (ie, those with a low price relative to earnings or book value) have generally done better than “growth” stocks, their antithesis. 

This rotation towards value ought to favour Europe, where bourses are crammed with cheap-looking banks, widget-makers and commodity firms, the sort that tend to do well in periods of reflation, such as now.

Investors looking for deep value could do worse than consider Italy. 

In any event, if you take a punt on the euro zone, you are in effect taking a punt on Italy. 

Its stockmarket is more European than most. 

It is chock-full of energy and financial companies, the kind that have been out of favour with investors until recently, and of which Europe has lots. 

But this is about more than just the make-up of its stockmarket. 

Italy is the weakest big economy in continental Europe, itself a locus of weakness. 

If Italy can do better, then there is upside for the region as a whole.

Enter Mr Draghi. 

He is not quite a deity, though he came close to being one in his euro-saving eight-year stint as boss of the European Central Bank. 

Last month he was asked by Italy’s president to form a government. 

Parliament quickly fell in behind him. 

He has since set out some broad reform goals: to fix Italy’s tax code, its sclerotic bureaucracy and its sluggish courts. 

Each is a bar to enterprise and a stronger economy. 

Mr Draghi has picked the right spots and is the right man to tackle them. 

But after an early burst of euphoria in Italy’s markets, doubts have crept in. 

A big one is that his time as prime minister is likely to be short-lived. 

There is also the question of whether a few bits of legislation can make a difference. 

Italy is a low-trust economy. 

This is reflected in the ubiquity of small family firms. 

An array of restrictive practices is hard-wired into its society. 

Changing all this quickly is not easy.

Still, you have to start somewhere. 

A big problem is the difficulty of making business agreements stick. 

It takes more than twice as long to enforce a contract in Italy than in France or Germany. 

A better functioning judicial system is the foundation on which a broader construct of trust might be built. 

Italy’s tax system is complex and discourages job creation. 

A little judicious reform might go a long way in improving incentives to work. 

And in his efforts to cut red tape, Mr Draghi can already point to progress. 

On March 10th Italy’s three largest union federations signed a pact agreeing to reforms of the government bureaucracy. 

This is a small start. 

But it speaks to a shift in the mood in Italy.

Mr Draghi has the advantage of being able to offer goodies in return for painful changes. 

Italy will be the largest beneficiary of the €750bn ($900bn) eu recovery fund, the disbursements of which are tied to progress on reforms. 

This is not quite Joe Biden’s $1.9trn mega-package but it is not nothing either. 

A lesson from the 1990s, when Italy strove to qualify for the euro, is that reforms can happen if Italians can see a payoff from them. 

This is a hard story for a broker to sell given the latest vaccine mishaps. 

Europe is the opposite of a meme stock. 

But right now, that might actually be a plus.

Border crisis threatens the Biden honeymoon

The US president must risk upsetting his own party to control migration

The editorial board

Over 100,000 people attempted to enter the US via the border with Mexico in February alone © John Moore/Getty


It is too soon to say that Joe Biden’s mostly sure-footed start as US president is over. 

It is all too easy to identify the subject that is likeliest to end it. 

Eerily absent from politics during the pandemic, which grounded would-be migrants everywhere, the Mexico border is back as a place of human anguish and political contention.

Over 100,000 people attempted entry into the US there in February alone, the highest monthly total since spring 2019. 

Some 9,500 were unaccompanied children. 

The numbers are liable to increase as winter conditions turn into a benign spring. 

Such are the demands on finite border facilities, the president has deployed the federal disaster agency to help out.

The recriminations come from right and left. 

This is what happens, say Republicans, when an administration liberalises both policy and rhetoric on immigration. 

Biden has dismantled some of Donald Trump’s harsher policies at the border, while aiming to give undocumented immigrants and their descendants a path to citizenship. 

At the same time, progressives say that the detention of children, in the words of Congresswoman Alexandria Ocasio-Cortez, “never will be OK”.

Biden will have to end up disappointing both sides. It was right to abandon the most draconian policies of his predecessor, including the vainglorious wall against Mexico. 

But nor can the US allow the impression to take hold that it is newly lax. 

It leads to cruelly unrealistic hopes among arrivals, and to disaffection among Americans themselves.

Biden can start by reiterating that the border is, as his adviser Roberta Jacobson said last week, “not open”. 

His line so far has been characterised not by weakness as such, but by a lack of clarity. 

He should also enhance the federal agencies that deal with immigration, which have been weakened by Trump-era neglect and his own slowness to install new, permanent leadership. 

The judicial system for processing asylum claims is hopelessly backlogged, leaving applicants in extended limbo. 

It will take money and organisational skill to clear. 

Skimping in this area is the ultimate false economy.

In the longer term, the US will have to address some of the sources of the migration. 

It cannot by itself fix the hardship and instability in parts of Central and South America. 

That is for governments in the region. 

But it can devote more diplomatic and intelligence resources to the fight against drug cartels, which often cause people to flee, and human traffickers, who facilitate their journey. 

What Trump never took seriously was that border crossings are just the last stage of a long and sad process. 

There is no way to reduce them without taking a strategic view of the region’s many troubles.

A showdown between Biden and his own left seems unavoidable. 

The party’s desire to move past the xenophobia of the prior administration is understandable. 

But there is nothing innately illiberal about strict enforcement of border laws. 

As his vice-president at the time, Biden will know that Barack Obama was a prolific deporter. 

Without confidence in the southern border, voters are likely to sour on the idea of a generous, outward-looking US, including documented migration and the naturalisation of “Dreamers”.

The one consolation of the border crisis is that it marks the return of normal politics. 

Biden’s fiscal relief bill was a momentous achievement, but it commanded near-unanimity in the country. 

Most problems that await him as president do not. 

By draining immigration of political salience, the pandemic spared Democrats from having to think too hard about the subject. 

That privilege is ending, and with a vengeance.

Biden Team Prepares $3 Trillion in New Spending for the Economy

A pair of proposals would invest in infrastructure, education, work force development and fighting climate change, with the aim of making the economy more productive.

By Jim Tankersley

A wind farm in Carbon County, Wyo. Clean energy is among the areas that would see investment under President Biden’s infrastructure plan./ Benjamin Rasmussen for The New York Times


WASHINGTON — President Biden’s economic advisers are pulling together a sweeping $3 trillion package to boost the economy, reduce carbon emissions and narrow economic inequality, beginning with a giant infrastructure plan that may be financed in part through tax increases on corporations and the rich.

After months of internal debate, Mr. Biden’s advisers are expected to present the spending proposal to the president and congressional leaders this week, as well as begin outreach to industry and labor groups. 

On Monday, Mr. Biden’s national climate adviser, Gina McCarthy, discussed his infrastructure plans — and their role in combating climate change — in a meeting with oil and gas industry executives.

Administration officials caution that details remain in flux. But the enormous scope of the proposal highlights the aggressive approach the Biden administration wants to take as it tries to harness the power of the federal government to make the economy more equitable, address climate change, and improve American manufacturing and high-technology industries in an escalating battle with China.

The $1.9 trillion economic aid package that Mr. Biden signed into law this month includes money to help vulnerable people and businesses survive the pandemic downturn. 

But it does little to advance the longer-term economic agenda that Mr. Biden campaigned on, including transitioning to renewable energy and improving America’s ability to compete in emerging industries, like electric vehicles. 

Administration officials essentially see those goals — building out the nation’s infrastructure and shifting to a low-carbon future — as inseparable.

The package under consideration would begin that effort in earnest.

“President Biden’s plan represents a stunning shift in priorities, addressing many of the nation’s most pressing challenges,” said Seth Hanlon, a senior fellow at the liberal Center for American Progress think tank, contrasting the plan with the priorities of Mr. Biden’s predecessor President Donald J. Trump. 

“As reported, the plan is very wide-ranging, reflecting the fact that we’ve underinvested in so many areas.”

Just how to approach the legislative strategy is still under discussion given the size of the proposal and the thin majority that Democrats hold in the House and the Senate.

Mr. Biden’s advisers plan to recommend that the effort be broken into pieces, with Congress tackling infrastructure before turning to a second package that would include more people-focused proposals, like free community college, universal prekindergarten and a national paid leave program.

Some White House officials believe the focus of the first package may be more appealing to Republicans, business leaders and many moderate Senate Democrats, given the longstanding bipartisan push in Washington for an infrastructure bill.

That plan would spend heavily on clean energy deployment and the development of other “high-growth industries of the future” like 5G telecommunications. It includes money for rural broadband, advanced training for millions of workers, and one million affordable and energy-efficient housing units. 

Documents suggest it will include nearly $1 trillion in spending on the construction of roads, bridges, rail lines, ports, electric vehicle charging stations, and improvements to the electric grid and other parts of the power sector.

Whether it can muster Republican support will depend in large part on how the bill is paid for.

Officials have discussed offsetting some or all of the infrastructure spending by raising taxes on corporations, including increasing the 21 percent corporate income tax rate and a variety of measures to force multinational corporations to pay more tax in the United States on income they earn abroad. 

That strategy is unlikely to garner Republican votes.

“I don’t think there’s going to be any enthusiasm on our side for a tax increase,” Senator Mitch McConnell of Kentucky, the Republican leader, told reporters last week. 

He predicted the administration’s infrastructure plan would be a “Trojan horse” for tax increases.

The overall price tag of the package could approach $4 trillion since it includes several tax incentives, like credits to help families afford child care and to encourage energy efficiency in existing buildings. 

It could also extend temporary tax cuts meant to fight poverty, which could increase the size of the proposal by hundreds of billions of dollars, according to estimates prepared by administration officials.

Mr. Biden supports all of the individual spending and tax proposals under consideration, but it is unclear whether he will back splitting his agenda into pieces, or what legislative strategy he and Democratic leaders will pursue to maximize the chances of pushing the effort through Congress.

His advisers have debated the merits of aggressively pursuing compromise with Republicans and business leaders on an infrastructure package, which would most likely require dropping or scaling back plans to raise taxes on corporations. 

Another route would be to move the sweeping bill through a special parliamentary process that would require only Democratic votes, as Mr. Biden did with the stimulus package.

“President Biden and his team are considering a range of potential options for how to invest in working families and reform our tax code so it rewards work, not wealth,” said Jen Psaki, the White House press secretary. 

“Those conversations are ongoing, so any speculation about future economic proposals is premature and not a reflection of the White House’s thinking.”

Mr. Biden said in January that his relief bill would be followed by a “Build Back Better Recovery Plan,” which would include investments in infrastructure, manufacturing, clean energy, skills training and other areas.

The timing of that proposal — which Mr. Biden had initially said would come in February — slipped as administration officials focused on completing the relief package. In the interim, administration officials have concluded that their best chance to advance Mr. Biden’s larger agenda in Congress will be to split it into pieces.

The infrastructure proposal includes large portions of the plan Mr. Biden offered during the 2020 election, including investments that his campaign predicted would create five million new jobs, on top of restoring all the jobs lost last year during the Covid-19 crisis.

The second plan is focused on what many progressives call the nation’s human infrastructure — students, workers and people left on the sidelines of the job market — according to documents and people familiar with the discussions. It would spend heavily on education and programs meant to increase the participation of women in the labor force by helping them balance work and caregiving.

An electric vehicle charging station in Baker, Calif. Documents suggest a Biden administration plan would include nearly $1 trillion in spending alone on the construction of roads, bridges, rail lines, and electric vehicle charging stations./ Philip Cheung for The New York Times


That plan would also extend or make permanent two temporary provisions of Mr. Biden’s recent relief bill: expanded subsidies for low- and middle-income Americans to buy health insurance and tax credits aimed at cutting poverty, particularly for children.

Officials have weighed financing that plan through initiatives that would reduce federal spending by as much as $700 billion over a decade, like allowing Medicare to negotiate prescription drug costs with pharmaceutical companies. 

The officials have discussed further offsetting the spending increases by raising taxes on high-earning individuals and households, like raising the top marginal income tax rate to 39.6 percent from 37 percent.

One question is how, exactly, to apply Mr. Biden’s campaign promise that no one earning less than $400,000 a year would pay more in federal taxes under his plan. 

Currently, the top marginal income tax rate starts at just above $500,000 for individuals and above $600,000 for couples. Mr. Biden proposed raising that rate during the campaign.

Mr. Biden’s advisers say they are committed to not raising the tax bills of any individual earning less than $400,000. 

But they have debated whether to lower the income threshold for the top marginal rate, to tax all individual income above $400,000 at 39.6 percent, in order to raise more revenue for his spending plans.

Mr. Biden’s broader economic agenda will face a more difficult road in Congress than his relief bill, which was financed entirely by federal borrowing and passed using the special parliamentary tactic. 

Mr. Biden could again try to use that same budget reconciliation process to pass a bill on party lines. But moderate Democrats in the Senate have insisted that the president engage Republicans on the next wave of economic legislation, and that the new spending be offset by tax increases.

Large business groups and some congressional Republicans have expressed support for some of Mr. Biden’s broad goals, most notably efforts to rebuild roads, bridges, water and sewer systems, and other infrastructure. 

The U.S. Chamber of Commerce and the National Association of Manufacturers have both spoken favorably of spending up to $2 trillion on infrastructure this year.

But Republicans are united in opposition to most of the tax increases Mr. Biden has proposed. Business groups have warned that corporate tax increases would scuttle their support for an infrastructure plan. 

“That’s the kind of thing that can just wreck the competitiveness in a country,” Aric Newhouse, the senior vice president for policy and government relations at the National Association of Manufacturers, said last month.

Administration officials are considering offering as part of their plans to extend some 2017 tax breaks that are set to expire, like the ability to immediately deduct new investments, in order to win business support.

Top business groups have also expressed an openness to Mr. Biden breaking up his Build Back Better agenda to pass smaller pieces with bipartisan support.

“If you try to solve every major issue in one bill, I don’t know that’s a recipe for success,” Neil Bradley, the executive vice president and chief policy officer at the U.S. Chamber of Commerce, said in an interview last month. “These don’t have to be done in one package.”


Jim Tankersley is a White House correspondent with a focus on economic policy. He has written for more than a decade in Washington about the decline of opportunity for American workers, and is the author of "The Riches of This Land: The Untold, True Story of America's Middle Class."  

China’s Warning to Biden

A lecture in Alaska shows that adversaries sense U.S. weakness.

By The Editorial Board

Secretary of State Antony Blinken speaks to the media following talks between the U.S. and China in Anchorage, Alaska, March 19./ PHOTO: POOL/REUTERS


That was some tongue lashing a senior Chinese official delivered last week in Anchorage to top Biden Administration officials in their first meeting. 

This is the new reality in U.S.-China relations, as adversaries look to see if they can exploit President Biden as they did Barack Obama.

The two sides had agreed to two minutes of opening remarks each. 

Secretary of State Antony Blinken kept his short and hospitable, though he did say the U.S. has “deep concerns with actions by China, including in Xinjiang, Hong Kong, Taiwan, cyber attacks on the United States, and economic coercion toward our allies. 

Each of these actions threaten the rules-based order that maintains global stability.”

China’s director of the Central Commission for Foreign Affairs, Yang Jiechi, then went on a 20-minute tear (including translation) about the superiority of “Chinese-style democracy” and America’s sins. 

The latter included a reference to Black Lives Matter, human-rights problems, and that the U.S. “has exercised long-arm jurisdiction and suppression and overstretched the national security through the use of force or financial hegemony.”

Mr. Yang added: “So we believe that it is important for the United States to change its own image and to stop advancing its own democracy in the rest of the world. 

Many people within the United States actually have little confidence in the democracy of the United States.” 

As we’ve noted, the Chinese like to echo the woke U.S. media critique of America.

Mr. Blinken responded that the U.S. “acknowledges our imperfections, acknowledges that we’re not perfect, we make mistakes, we have reversals, we take steps back” but then make progress again. 

This is true enough, but needlessly defensive after a foreigner’s public assault on U.S. interests and values.

***

This is only one meeting, but it was a tone setter for the world’s most important bilateral relationship. 

Word is leaking that the private exchanges from the Chinese side were as tough as the public remarks. 

The Chinese are making clear that, after the Trump years, Beijing wants a return to the policy of Obama accommodation to China’s global advances.

This means feeble objections to China’s cyber and intellectual property theft. 

It means ending the U.S. policy of building an alliance of democracies in Asia that counters Chinese aggression. 

And above all, it means ending criticism or sanctions against China for violating its treaty with Britain over Hong Kong, threatening an invasion of Taiwan, or imprisoning Uighers in Xinjiang reeducation camps.

In its first two months the Biden Administration has been strong in its rhetoric on all of this. 

Mr. Blinken and national security adviser Jake Sullivan orchestrated a series of well-done meetings with Indo-Pacific allies in advance of the Anchorage meeting. 

They also struck a deal on financing U.S. troop deployments in South Korea.

But the real challenge will be how well it responds to the aggressive designs of adversaries in Beijing, Moscow and Tehran. 

The hard men in these capitals recall how they were able to advance when Mr. Biden’s liberal internationalists were last in power under Mr. Obama. 

Russia grabbed Crimea, invaded eastern Ukraine and moved into Syria. 

China snatched islands for military bases in the South China Sea and stole U.S. secrets with impunity. 

Iran spread terrorism via proxy throughout the Middle East and fleeced John Kerry on the nuclear deal.

These regional powers are looking to see if this new U.S. Administration is Obama II. 

The renewed courtship of Tehran to return to the flawed 2015 nuclear deal is a sign of weakness. 

Vladimir Putin will surely take some action against U.S. interests in response to Mr. Biden’s affirmative response last week to a question of whether the Russian is a “killer.”

The biggest test will be China, which is growing in confidence that it has the strategic advantage over a declining America. 

If you don’t believe that, read Mr. Yang’s comments in Anchorage. 

The thinking of the powers in Beijing today is not unlike that of the Soviet Union in the 1970s when American decline was in vogue and the Communists sought to advance around the world. Except China today has far more economic strength.

The future of Taiwan may be the most fraught challenge. 

As a locus of global semiconductor production, the island is crucial to U.S. economic interests as well as being a democratic ally. 

Chinese President Xi Jinping has made clear that retaking Taiwan is a priority, and China’s military is building a force capable of a quick-strike invasion. 

Mr. Xi will be eager to trade promises about climate change for U.S. acquiescence over Taiwan.

This is a dangerous moment as the world’s rogue powers look to test the Biden Administration’s resolve. 

The Anchorage lecture is a warning to take seriously.