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Why the ECB should go Japanese

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Amid its pandemic firefighting, the European Central Bank is ploughing on with a strategic review of its monetary policy framework. One previously neglected idea is coming into the discussion. Pablo Hernández de Cos, Spain’s central bank governor, suggests that the ECB could explore “yield curve control”, or the policy of directly setting long-term interest rates.

It is not a novel policy. Since 2016, the Bank of Japan has committed to keeping the market yield on 10-year Japanese government bonds near zero. The BoJ will buy or sell whatever quantity of bonds is needed to meet this goal.

Targeting long-term rates is an alternative to quantitative easing — mass bond buying — and forward guidance. It achieves directly what QE does indirectly: lower long-term market yields on benchmark securities so as to encourage investors to direct capital elsewhere, ideally to productive investment by businesses wishing to expand. It also directly affects the market cost of borrowing for longer periods, which forward guidance tries to achieve by signalling to markets that central banks will keep short-term rates low for some time into the future.

Why use a tool that gets the same results through other means?

The first answer is that it does so more effectively. Compared with QE, directly targeting 10-year borrowing costs takes the guesswork out of how many government bonds the central bank must buy to achieve what it deems appropriate financial conditions. Compared with forward guidance, direct targeting removes the risk to financial intermediaries that the central bank may not make good on its guidance, and change short rates sooner than it now predicts. This also means the central bank does not hurt its own credibility if it needs to tighten sooner than it thought.

A second answer is that precisely because yield curve control makes little difference to other tools today, now is the least disruptive time to introduce it. At some point policy will need changing, perhaps to tighten in a recovery, or perhaps to offset upward pressure on market rates from US budget stimulus.

In either case, yield curve control would let the ECB move or keep long rates where it sees fit, and avoid politically difficult and technically uncertain deliberation of how many bonds to buy. In fact, Japan’s experience shows that explicitly targeting the 10-year rate reduces the need to buy bonds at all. That should be attractive for the ECB. Its original decisions to engage in large-scale bond purchases were politically excruciating, and thus too slow.

A third argument is that lowering — or lifting — rates is far simpler to communicate to the public than bond purchase programmes in the trillions.

What are the arguments against it? One is that yield curve control falls under the treaty prohibition on credit facilities to governments. But why should targeting long-term market rates be less acceptable than buying huge amounts of government bonds to achieve the same result?

Another objection is that there is no obvious long-term bond yield to target. There are 19 eurozone sovereigns, and the ECB currently buys a portfolio of all their debts. But this objection no longer applies. The EU is ramping up the issuance of common European bonds in order to fund its recovery policies. The yield of the 10-year common European bond would be a perfect benchmark for the ECB to target.

This would not address another motive for the ECB’s bond-buying, which is to keep securities markets functioning smoothly, in particular for high-debt eurozone governments. But every economist is familiar with what is known as the Tinbergen rule: for each policy goal you need a dedicated instrument. Market functioning and optimal long-term market rates are different goals. Using yield curve control to achieve the latter leaves bond purchase programmes free to focus on the former.

But yield curve control could have a side benefit, too — one even more important than its main function as a monetary policy tool. Making the common European bond yield an operational target for monetary policy would encourage markets to adopt it as a benchmark for pricing other securities. In time, this would help nudge European banks away from their bias towards holding their own national government’s bonds, a source of instability the ECB and other EU policymakers want to reduce.

Adopting yield curve control today would not just improve monetary policymaking. It would also give significant support to the EU’s policy objective of a banking union. Beyond its price stability mandate, this is a form of support the ECB is treaty-bound to give.

martin.sandbu@ft.com



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Johnson set to unnerve allies with ‘Global Britain’ defence review

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Boris Johnson’s eagerly awaited new security strategy risks creating tensions with the UK’s closest allies if it spreads its armed forces too thinly and neglects key defence duties in pursuit of a “Global Britain” agenda, experts have warned.

The integrated defence and foreign policy review — which has been repeatedly delayed as Downing Street battles to control the coronavirus pandemic — will be published next week as a statement of the prime minister’s post-Brexit vision for the country.

But the document, grandly titled “Global Britain in a Competitive Age”, is likely to be controversial with foreign defence partners. Core defence capabilities will be retired to pay for digital warfare technology and the UK’s promised focus on the Indo-Pacific risks detracting from its responsibilities in the north Atlantic. It also remains unclear how a post-Brexit UK will co-operate with EU countries on security.

“I’m sure the review will be a powerful essay about Britain’s role in the world,” said Lord Peter Ricketts, the UK’s former national security adviser. But he added: “Will our ambitious plans actually feed through into something which makes sense?”

‘Troop numbers still matter’

The most contentious decision is on the size of the army, which is widely expected to be cut from a notional force of around 82,000 to something closer to 72,000. Even though the Ministry of Defence secured an unexpected £16.5bn spending boost from the Treasury in the autumn, the department is still seeking savings to reduce a £17bn budget black hole and fund better cyber defences and new military capabilities in space. 

US military officials say privately that while they value UK special forces and are impressed by Britain’s growing cyber expertise, troop numbers still matter. Washington has traditionally relied on the UK to field a heavy division, which means an army of roughly 100,000 personnel. Michael Shurkin, a security expert at the Rand Corporation, insisted that the US’s historical default to military co-operation with the British is based on a recognition of its quality, rather than troop strength. “It’s not just that we expect the British to show up when we call — we really want the British to show up when we call, because they’re good,” he said.

However, he made clear that “it becomes a real problem” if suddenly a trusted ally can no longer provide the troop numbers it once could.

The challenge for ministers is how to present cuts to the army without causing alarm in Washington and Nato headquarters. “How well it goes down with our allies depends very much on how honest we are about what we’re doing,” said Jack Watling, a land warfare specialist at the Royal United Services Institute think-tank.

He argued that if the UK offers to provide attack helicopters, long-range precision rocket artillery and reconnaissance troops to assist other nations, this could help compensate for a reduction in overall personnel. “If we set out a credible roadmap that admits it’s going to be rough for the next decade but by 2030 we will deliver something that is clearly defined, then the US will probably respond positively,” Watling said.

Countering China

Another potential flashpoint will be the review’s focus on the Indo-Pacific, as the UK pursues deeper defence ties with Asian allies such as Japan, India and South Korea in an effort to counter China’s growing military assertiveness. China now has the world’s largest navy and is honing its long-range ballistic missile capabilities. Beijing’s $12bn boost to its 2020 defence budget ($193bn) was greater than the combined defence budget increases in all other Asian states combined, according to the International Institute for Strategic Studies.

The Royal Navy’s flagship aircraft carrier will deploy later in the spring on her maiden voyage to East Asia, and is due to carry out joint exercises with Japan, among others. But some experts have questioned whether the UK’s commitments are real or merely symbolic — especially since Britain does not have enough of its own fighter jets to equip the carrier, and is relying on the US Marine Corps supplying F-35B Lightning aircraft.

The UK’s HMS Queen Elizabeth aircraft carrier is to be deployed on its maiden voyage to East Asia this spring © Dan Rosenbaum/MoD

“For Australians, Blighty showing up in the old neighbourhood is very easily seen through the lens of imperial nostalgia or post-Brexit hubris,” said Euan Graham, an Asian defence expert at the IISS, based in Singapore. “The Brits should be judged on their consistency of presence, not a once-in-a-generation deployment of a carrier group, that’s not really of much use.” 

There are suggestions from some analysts that the US — which is refocusing its own military efforts against China — might prefer Britain to strengthen its presence in the north Atlantic, the Gulf and the Mediterranean, allowing American forces to concentrate on Pacific defence themselves. “Maybe strategically speaking, the better way to [counter Beijing],” Shurkin suggested. 

‘A tilt away from Europe’

The UK’s European allies may also be wary of British ambitions in Asia. Ricketts — a former British ambassador to France — described Johnson’s enthusiasm for a return to the seas east of Suez as “a tilt away from Europe as much as a tilt towards the Indo-Pacific”. He said the French will be keen to see the integrated review acknowledge the EU’s contribution to European security. But he noted: “I think they’ll be disappointed.”

One solution to the MoD’s financial shortfalls would be to find savings through collaboration. Nicolas Baverez, a defence expert at the Paris-based Institut Montaigne, argued Britain and France share a challenge in funding new hypersonics, robotics, and space capabilities. “It will be very difficult for each of our countries alone to finance all these fields of research,” he said. “The answer will be to make bets and choices, and maybe to co-operate, to mutualise certain costs.” 

However, the integrated review is more likely to seek alliances further afield. In a speech to the Munich Security Conference last month, Johnson boasted that in leaving the EU, the UK had “restored sovereign control over vital levers of foreign policy”. Johnson added optimistically that European leaders were increasingly looking to American allies “to rediscover that far-sighted leadership and the spirit of adventure and transatlantic unity that made our two continents great in the first place”.

Lord David Richards, former chief of the defence staff, suggested Britain should not forget threats such as Russia in its own backyard.

“We could have a very useful role closer to home which is logistically possible, militarily feasible, and we could have real clout within Nato,” he said. “But the risk is that we fritter it all away by going all around the globe and don’t achieve any real strategic influence anywhere.”



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Germany’s CDU rocked by pandemic procurement scandal

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German chancellor Angela Merkel’s centre-right bloc has been rocked by scandal after two of its MPs announced they were resigning following disclosures that they had personally profited from government deals to procure coronavirus face masks.

The announcements risk damaging the party ahead of two important regional elections next Sunday in the western states of Baden-Württemberg and Rhineland-Palatinate.

The polls are seen as a critical test for Armin Laschet, the new leader of Merkel’s party, the Christian Democratic Union, who was only elected in January and is still seeking to stamp his authority on the party.

Nikolas Löbel, a CDU MP, announced on Sunday that he was retiring from politics after it emerged that a company he owned had earned a €250,000 commission by acting as a middleman between a mask supplier in Baden-Württemberg and two private companies in the state.

The MP, who is also managing director of a company in the south German town of Mannheim called Löbel Projektmanagement, said he was resigning his membership of the CDU/CSU parliamentary group with immediate effect. He also said he would step down from the Bundestag at the end of August, and not run again for parliament in elections in September.

“To be a member of the German Bundestag and be able to represent my home town Mannheim is a great honour and an especially moral obligation,” he wrote in a statement. “With my actions I have failed to live up to these standards. For that I would like to apologise to everyone in this country.”

But that didn’t go far enough for party leader Laschet, who said Löbel should quit parliament immediately.

“All of us — politicians on the federal, regional and municipal level — are doing all we can at the moment to bring this country through the crisis and protect people,” he said in a statement.

“And whoever does business with this protection, and who personally enriches himself from that, is no representative of the people. And he must leave parliament at once.”

A similar call came from Markus Söder, the powerful prime minister of Bavaria and leader of the CDU’s sister party, the CSU. “All those involved should wipe the slate clean and draw the fundamental consequences,” he tweeted. “Anything else harms people’s trust in politics.”

Löbel’s resignation came just two days after the CSU MP Georg Nüßlein was forced to resign as deputy leader of the CDU/CSU parliamentary group in a similar scandal. Nüßlein, who is now being investigated for corruption, also said he was retiring from politics, though like Löbel, he intends to remain an MP until September’s election.

Nüßlein earned a large commission after his consulting firm helped to negotiate a big delivery of face-masks from a Chinese supplier during the first wave of the coronavirus pandemic.

Police investigators searched premises in Germany and Liechtenstein last week, including Nüßlein’s office in the Bundestag and his constituency office in the southern state of Bavaria, in connection with the case. Nüßlein himself has denied the allegation of corruption.

Opposition politicians reacted with fury to the mask scandals. “It makes no sense to people when MPs from government parties use their contacts to gain a financial advantage from an emergency,” said Volker Wissing, general secretary of the liberal Free Democrats.



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Mario Draghi makes his mark with vaccine embargo

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It did not take Mario Draghi long to make a mark in Europe as Italian prime minister.

At his first EU summit as premier at the end of last month, the former head of the European Central Bank made a forceful intervention about the slow pace of Europe’s vaccination drive and the need to get tough with pharmaceutical companies over their failure to deliver promised vaccine supplies.

Seven days later, the Italian government confirmed that, with Brussels’ approval, it had blocked a consignment of doses of the Oxford/AstraZeneca vaccine destined for Australia under an EU-wide export authorisation scheme that has been criticised by other countries. The company has fallen far short of its promised deliveries to the EU in the first three months of 2021.

Draghi, a man who earned impeccable internationalist credentials as ECB president, became the first leader to trigger an EU mechanism that critics see as vaccine nationalism that risks undermining the global fight against the pandemic.

“Imagine what would have happened if [former PM Giuseppe] Conte or [Matteo] Salvini had taken such a stance,” said an official with the Democratic party, part of the governing coalition.

Salvini, leader of the nationalist League which is also in the coalition, said on Twitter that he was “proud Italy was the first European country to block exports outside the EU”.

Draghi was installed as prime minister last month to break Italy’s political paralysis and revamp plans to spend up to €200bn in EU funds to support an economic recovery and faster long-term growth. But an alarming resurgence of infections in recent weeks means fighting the pandemic is his overriding priority.

Vials of the AstraZeneca Covid vaccine © Remo Casilli/Reuters

His robust stance on export controls was an expression of “strong restlessness” about the EU’s handling of the vaccination campaign, said Giovanni Orsina, director of the LUISS school of government in Rome. 

“The current situation shows a strong fragility in Brussels’ negotiating position towards the big pharmaceutical companies,” Orsina added. “Draghi is using his political clout to redress the balance in this regard, clearly also in Italy’s favour. Absurdly, having a person of extraordinary international prestige allows for a much stronger approach to national protection than a pure sovereigntist as prime minister.”

At the EU summit Draghi asked why the bloc had not imposed stricter vaccine export controls for companies that failed to meet their contractual commitments. Speaking to Ursula von der Leyen, European Commission president, by phone this week, he stressed “the priority goal of a more rapid European health response to Covid-19, especially on vaccines”, according to his office.

Meanwhile he has set out to reboot Italy’s vaccination programme which is run, with varying degrees of success, by regional governments. As of March 5, Italy had administered only 5.2m doses, or 8.6 per 100 people, below the EU average. More ambitious vaccination targets are expected within days.

Draghi has also replaced the coronavirus commissioner with an army logistics general who has experience in Afghanistan and Kosovo and who will work alongside a new head of the civil protection agency. The aim is to speed up vaccination across the country. The government is also weighing up whether to extend the interval between doses in order to increase coverage, as in the UK. 

Drive-through testing centres and other sites are being converted into vaccination facilities, and a €500m investment in a new manufacturing plant is planned.

“The Italian pharmaceutical industry is a sector to be proud of, and it is capable of ensuring the production of vaccines at all stages,” Giancarlo Giorgetti, economic development minister and League politician, said earlier this week.

The Democratic party official said replacing the Covid commissioner with a general was “concerning”, but Draghi’s efforts have otherwise drawn broad support.

Raffaele Trano, a former Five Star MP now in opposition, said “the muscular approach and the logistical revolution seem to be paying off, even against the big pharmaceutical companies who are not being reliable at all and whose priority is clearly to put profit before the health of citizens”.

“There is a need to act promptly, and Draghi is doing what he was called to do: speeding up the process as much as possible,” said Paola Boldrini, a centre-left member of the senate who sits on its health committee.

“Europe has acted as best it could, but Italy is in an emergency situation, which is the reason why the current government was formed,” Boldrini added. “Unfortunately, despite the great co-ordination in disbursing recovery funds, with vaccines the EU was not as efficient, the contracts that were signed [with pharmaceutical companies] underestimated the real production capacity of vaccines and Brussels found itself unprepared.”

Italian officials stress that the decision to block the vaccine consignment from Catalent, a Lazio-based fill-and-finish contractor, was taken jointly with the commission in accordance with the export transparency mechanism introduced in January.

“I would not interpret Draghi’s move, co-ordinated with the commission, through the lens of vaccine nationalism but rather of the EU’s willingness and ability to stand up to big pharma to protect its citizens,” said Nathalie Tocci, director of the Institute for International Affairs in Rome. The doses were intended for Australia, a country with few new infections and where the vaccination programme is still in its early stages.

“I don’t think that Italy would have taken this initiative if the country in question was either a developing country or one living through an emergency to the same extent EU member states are.”

“Recently the intra-EU controversy has been between institutions and big pharma, where the accusation is that the EU has not been able to stand up to companies, thus gambling on the lives of citizens,” Tocci added. “Seen through this lens, Draghi’s move, far from being an act of nationalism, could be read as the necessary step to prevent reigniting dangerous Euroscepticism.”

Additional reporting by Silvia Sciorilli Borrelli in Milan



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