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Europe moans as Biden inherits a dominant dollar

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Well, there we have it. The overlord of one of the weirdest experiments in trade policy just got in a helicopter and flew off to the strains of “Y.M.C.A.”. It’s unlikely anyone will try any combination of strategies quite as eccentric as Trump’s ever again. Why? Well, because, erm, they didn’t actually work, particularly against China, as we examine in Tall Tales below.

Today’s main piece is on how the EU complains about the global dominance of the dollar — one area where the US does retain enormous power in the international economy — but balks at doing the necessary to challenge it. Charted Waters looks at the renminbi’s rise in value against the dollar.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com

EU’s halfhearted attempts to globalise the euro

Tremendous timing from the European Commission, real pro-level stuff, to release a paper about boosting the international role of the euro the day before Joe Biden’s inauguration. Did the new president lie awake last night in the White House, reading the report with foreboding? Did he look up to watch the shadows flickering on the wall, seeing in them a portent of the dollar’s global might receding into darkness?

Probably not, to be honest. In the decade since the financial crisis, the euro’s global role as measured by its use in official reserves, trade invoicing, international bonds and bank lending and currency market turnover, first declined and then stagnated. At present, euro-denominated assets account for slightly more than 20 per cent of official sector reserves, compared with slightly more than 60 per cent for the dollar. The European Central Bank, whose governing council meets today, has much less international impact than the Federal Reserve. Even inane fiscal mismanagement by Trump and the Republican Congress hasn’t dented the dollar’s dominance.

This rankles in the EU, and not just because of the traditional concerns about seigniorage — that is, the revenue earned from the production of banknotes — and hedging costs and so on. As my colleagues pointed out in Monday’s Brussels Briefing, there’s great frustration with the US using the dollar payments system to sanction European as well as American businesses and banks dealing with countries such as Iran.

Here comes the irony, though. The eurozone authorities have been talking about rivalling the dollar since the euro’s launch in 1999. There’s a solid case, with some extremely eminent proponents for a multipolar global currency system backing the idea. Last year, the eurozone made the most important shift yet, the rapid expansion of common EU debt as a result of the recovery programme. But without investors being able to access a deep pool of safe assets akin to US Treasuries, the euro will always struggle to rival the dollar.

In fact, you’d struggle from the EU’s communications to deduce any Rubicon action going on. The report does discuss those bonds in the context of deepening the capital markets union, but doesn’t exactly showcase them as a vital tool for internationalising the euro. It devotes a lot of space instead to the usual consultative/facilitative stuff — asking traders in energy markets to price contracts in euros, increasing transparency in euro-denominated bond markets, talking to companies about why they invoice in dollars and so on — all of which is much more marginal. EU officials briefing on the report earlier this week said of the joint borrowing: “It’s a new asset, it’s a safe asset, but it’s not equivalent to a US T[reasury] bond . . . we have constructed our ideas around capital markets union [without] relying on the existence of a safe asset.”

Why so bashful? To simplify and exaggerate: Germany. Berlin doesn’t like talk of joint EU liabilities, seems to regard the Bund as the only safe benchmark asset any reasonable person would ever need and is much less keen on internationalising the euro than, say, France.

That’s a longstanding position. Germany is the anchor of the euro, but German economic policy has traditionally had a mercantilist manufacturing bias orientated towards competitive exchange rates rather than developing financial services and creating a global currency. In the 1970s, after the dollar-centred Bretton Woods exchange rate system collapsed, West Germany got a chance to have the Deutsche Mark supplant some of the dollar’s international role, but actively discouraged it.

Nor is the eurozone undertaking a cunning stealth operation, quietly expanding a pool of interchangeable safe assets but keeping it quiet from the German public. Other aims for the EU’s joint borrowing, namely issuing “green bonds” to fund environmentally progressive investment, are taking priority.

The increase in euro-denominated green bonds, including by non-eurozone residents, has been impressive. But as the fine people at the Brussels think-tank Bruegel point out, green bonds are likely to be segmented from conventional public debt by tricky governance issues needed to ensure they are genuinely financing new environmentally friendly investments. The EU is choosing green borrowing, or the appearance of it, over creating a homogeneous safe asset pool. It’s not necessarily the wrong choice, but it’s a choice nonetheless.

Fundamentally, the EU isn’t enthusiastic enough to make the necessary trade-offs. Member states are (entirely understandably) irritated about being bullied by the US over sanctions, but not enough to overcome concerns about letting jointly guaranteed borrowing rip.

The eurozone’s governments collectively would like to internationalise the euro in the way most people would like to win Olympic gold at gymnastics: cool in principle, but in practice a lot of effort and sacrifice with no guarantee of success. Easier to sit on the sofa moaning that the Americans are hogging the medals again. At this rate we’d be very surprised if the dollar was seriously challenged as the pre-eminent international currency any time this decade. Biden has an inbox full of problems, but a significant threat to the primacy of the greenback isn’t one of them.

Charted waters

On the topic of currencies that play an important role in world trade, Hudson Lockett, the FT’s Asia capital markets correspondent, has put together the chart below, which shows analysts have very mixed views on what will happen to the value of China’s currency this year.

Line chart of renminbi per dollar showing China’s currency faces uncertain trajectory in 2021

So far this year, the renminbi has surged against a notably weak dollar. But there is a lot of uncertainty about what comes next, with some forecasting the currency could surge to almost Rmb6 against the greenback, and others expecting it to fall as low as Rmb7.

The renminbi, which is closely managed by China’s central bank, is now at a two-year high.

Tall Tales of Trade

Donald and Melania Trump board Air Force One for the last time, on their way to Florida © Pete Marovich/Getty Images

Trump’s departure will deprive Trade Secrets of the most reliable Tall Tales generator we have ever known, better even than Brexit. It’s a bittersweet moment.

So let’s do a final one in the form of departing US Trade Representative Robert Lighthizer’s claim in his Financial Times interview to have “changed the dialogue” on China. Well, hmmm. Going after Chinese distortions on trade wasn’t exactly a novel idea: it was the number-one goal of US international economic policy from the early 2000s, initially focused on currencies. Trump’s innovation was the use of unilateralist sanctions on a vast scale to force a move to managed trade with its Phase 1 deal.

The only problem was: it didn’t work. The US deficit with China hasn’t been fixed. China is way behind its Phase 1 import purchase commitments, and Covid-19 isn’t a proper excuse. Beijing hasn’t shifted from its drive towards economic nationalism, and no one really thinks its supposed concessions on intellectual property and so on are going to stick.

Far from staking out a fiercely uncompromising position, Lighthizer basically got rolled, and left Trump vulnerable to Democratic attacks for being soft on Beijing. As the Cato Institute’s Simon Lester sagely points out here, the Trump/Lighthizer legacy on trade is basically a long list of cautionary tales. I guess you could say Lighthizer did change the dialogue on China, but it’s unlikely anyone’s going to be reusing his lines in future.

Don’t miss

  • Beijing has imposed sanctions on several former Trump administration officials, including ex-US secretary of state Mike Pompeo, accusing them of having “seriously violated” China’s sovereignty. China announced the decision a day after Trump’s administration declared that the repression and detention of more than 1m Muslim Uighurs in the north-western Xinjiang region amounted to genocide.
    Read more

  • UK culture secretary Oliver Dowden is examining post-Brexit financial support for the music industry, which is facing higher costs and new red tape when organising tours in the EU. More than 100 leading British musicians said the UK government had “shamefully failed” their industry during negotiations on the new UK-EU trade deal. It has no provisions for the free movement of artists.
    Read more

  • To counter Beijing’s strategy of divide and rule, the US and its allies need consistent policies, writes Philip Stephens.
    Read more

Tokyo talk

The best trade stories from Nikkei Asia

  • On Biden’s first day as president, China’s three largest telecoms operators asked the New York Stock Exchange to reverse its recent decision to have them delisted.
    Read more

  • Intel has been in talks with Taiwan Semiconductor Manufacturing to outsource production of processors for laptops, servers and edge-computing devices.
    Read more



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Europe

EU plans digital vaccine passports to boost travel

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Brussels is to propose a personal electronic coronavirus vaccination certificate in an effort to boost travel around the EU once the bloc’s sluggish immunisation drive gathers pace.

Ursula von der Leyen, European Commission president, said on Monday the planned “Digital Green Pass” would provide proof of inoculation, test results of those not yet jabbed, and information on the holder’s recovery if they had previously had the disease.

“The Digital Green Pass should facilitate Europeans‘ lives,” von der Leyen wrote in a tweet on Monday. “The aim is to gradually enable them to move safely in the European Union or abroad — for work or tourism.”

The plan, expected to be outlined this month, is a response to a push by Greece and some other EU member states to introduce EU “vaccination passports” to help revive the region’s devastated travel industry and wider economy. 

But the commission’s proposed measures will be closely scrutinised over concerns including privacy, the chance that even inoculated people can spread Covid-19, and possible discrimination against those who have not had the opportunity to be immunised.

In an immediate sign of potential opposition, Sophie Wilmès, Belgium’s foreign minister, raised concerns about the plan. She said that while the idea of a standardised European digital document to gather the details outlined by von der Leyen was a good one, the decision to style it a “pass” was “confusing”. 

“For Belgium, there is no question of linking vaccination to the freedom of movement around Europe,” Wilmès wrote in a tweet. “Respect for the principle of non-discrimination is more fundamental than ever since vaccination is not compulsory and access to the vaccine is not yet generalised.”

The travel sector tentatively welcomed the news of Europe-wide vaccine certification as a way to rebuild confidence ahead of the crucial summer season, but warned that regular and rapid testing was a more efficient and immediate way to allow the industry to restart.

Fritz Joussen, chief executive of Tui, Europe’s largest tour operator, said “with a uniform EU certificate, politicians can now create an important basis for summer travel”. But he added that testing remained “the second important building block for safe holidays” while large numbers of Europeans awaited a jab.

Marco Corradino, chief executive of online travel agent Lastminute.com, said he feared the infrastructure needed would not be ready in time for the summer season: “It will not work . . . at EU level because it is too complicated and would not be in place by June.”

He suggested that bilateral deals, such as the one agreed between Greece and Israel in February to allow vaccinated citizens to travel without the need to show a negative test result, had more potential.

Vaccine passport sceptics argue it would be unfair to restrict people’s travel rights simply because they are still waiting for their turn to be jabbed. 

Gloria Guevara, CEO of the World Travel and Tourism Council, said it was important not to discriminate against less advanced countries and younger travellers, or those who simply cannot or choose not to be vaccinated. “Future travel is about a combination of measures such as comprehensive testing, mask-wearing, enhanced health and hygiene protocols as well as digital passes for specific journeys,” she added.

A European Commission target to vaccinate 70 per cent of the bloc’s 446m residents by September means many people are likely to go through summer unimmunised.

While some countries around the world have long required visitors to be vaccinated against infectious diseases such as yellow fever, a crucial difference with coronavirus is that those inoculations are available to travellers on demand. 

Questions also remain about the risk of people who have already been vaccinated passing on coronavirus if they contract the disease.

 





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EU must prepare for ‘era of pandemics’, von der Leyen says

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Europe must prepare its medical sector to cope with an “era of pandemics”, the European Commission president said, as she warned the bloc was still in its most difficult period for Covid-19 vaccine deliveries. 

Ursula von der Leyen told the Financial Times that the EU could not afford to sit still even once Covid-19 has been overcome, as she described her plans for a Europewide fast-reaction system designed to respond more quickly to emerging medical threats. 

“Europe is determined to enlarge its strength in vaccine production,” she said in a telephone interview. “It’s an era of pandemics we are entering. If you look at what has been happening over the past few years, I mean from HIV to Ebola to MERS to SARS, these were all epidemics which could be contained, but we should not think it is all over when we’ve overcome Covid-19. The risk is still there.” 

Von der Leyen last month unveiled plans for a biodefence preparedness plan called the HERA Incubator, which will combine researchers, biotech companies, manufacturers and public authorities to monitor emerging threats and work on adapting vaccines. This will become part of a Health Emergency Preparedness and Response Authority (HERA). 

The concept is an attempt to mirror some of the benefits conferred by America’s Biomedical Advanced Research and Development Authority, which is charged with the job of responding rapidly to new health threats.

“The US has a strong advantage by having BARDA . . . this is an infrastructure Europe did not have,” von der Leyen said. “But Europe has to build up to be prepared for whatever comes, and also for the next possible pandemics. This is the HERA incubator.” 

The EU remains within its “most difficult quarter without any question” for vaccine deliveries, she said, cautioning “many, many problems” could always occur within the production process.

Looking towards the second quarter, she pointed out that a second EU contract with BioNTech/Pfizer for their vaccine would kick in, alongside the new jab from Johnson & Johnson, which is expected to be authorised in March.

In an EU summit on Thursday, von der Leyen addressed vaccine production and the threat of virus mutations after a rocky start to the year, when she was hit by complaints from politicians in member states, including Germany, about supply shortfalls. 

Von der Leyen acknowledged to the European Parliament in early February that mistakes had been made in the EU’s vaccination effort, and the campaign remains behind those of the US and UK. Among the difficulties are continued production problems at AstraZeneca’s European facilities. 

Von der Leyen said she was sticking with the EU’s target for the delivery of 300m doses in the second quarter, saying the challenge will shift from vaccine production to national rollouts. As for AstraZeneca’s shipments, she said: “I need to see the proof of the pudding . . . It’s very good that they also delivered from the rest of the world, but they have to honour their contract and we want our fair share.”

Ursula Von der Leyen says she is sticking with the EU’s target for the delivery of 300m doses of the AstraZeneca vaccine in the second quarter © Remo Casilli/Reuters

The good news for the EU is its access to mRNA technology, which is used in the BioNTech/Pfizer vaccine and which scientists believe can be used to rapidly adapt to mutations, said von der Leyen. 

But she also supported French president Emmanuel Macron’s proposal to share up to 5 per cent of supplies to permit the vaccination of healthcare workers in developing countries.

“We all suffer from the fact that the scaling up was not and is not as rapid as we thought at the beginning. This has a general effect all over the world,” she said. “With production picking up I think we should never forget that only if everybody has access to vaccines will we overcome this virus.”

Von der Leyen added that the EU needed to be particularly concerned about developments in its immediate area. 

“The mutant story is worrying me the most,” she said. “When the virus is still raging in the neighbourhood, the probability that mutants will occur, that will come back, for example, to Europe, is only rising.”



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Did US hiring accelerate in February?

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Did US hiring accelerate in February?

US hiring picked up markedly in February from the previous month, economists have forecast ahead of the monthly employment report that is due to be released on Friday.

After the country lost 227,000 jobs in December, hiring rebounded in January — albeit with a modest gain of 49,000 jobs — as the rise in coronavirus infections abated and vaccinations accelerated.

Economists polled by Bloomberg anticipate that the US will add 145,000 jobs in February, pushing the unemployment rate 1 percentage point to 5.3 per cent. If that forecast holds, it would mark the strongest pace of hiring since November.

The prospect of a resurgence was bolstered by data released last Thursday showing that filings for first-time jobless benefits fell to a three-month low in the week ending February 20.

The labour market stumbled in the final stretch of 2020 under the weight of the pandemic’s upswing in the autumn, which prompted tighter restrictions on businesses and social activity across the US.

The leisure and hospitality sector alone shed 597,000 jobs in December and January, according to labour department figures, whereas the January payroll gains were concentrated in government employment and professional and business services.

However, the outlook is brighter for the coming months, particularly with the expected passing of the Biden administration’s $1.9tn stimulus plan, which last week won the support of a large group of senior Wall Street executives, and further vaccination progress.

“US households appeared quite febrile at the end of 2020 as the cocktail of a worsening health situation, weakening employment and expiring fiscal aid weighed on private sector confidence and restrained mobility,” analysts at Oxford Economics said. “Fortunately, we see hope on all three fronts.” Matthew Rocco

Will eurozone inflation continue to rise?

Eurozone inflation hit its highest level since the start of the coronavirus pandemic in January, after five months of falling prices. On Tuesday the bloc’s statistics body will publish a preliminary estimate of February’s level, which is expected to continue the upward trend.

Many economists are predicting a steady rise over the spring on the back of higher energy costs, continuing supply chain disruptions that have raised costs for retailers and manufacturers, and the reversal of a VAT tax cut in Germany.

“For eurozone inflation, the only way is up,” said Carsten Brzeski, economist at ING, who forecast that headline consumer price inflation in the bloc would reach 1.3 per cent in February, from an 11-month high of 0.9 per cent in January.

Claus Vistesen, chief economist at Pantheon Macroeconomics, said a further increase in the price of oil — international benchmark Brent crude is up more than 30 per cent this year — could be the biggest driver of inflation in coming months.

A change in the inflation basket of goods and services is also at play. The 2021 basket reflects that people are consuming more food, where prices are rising, and less recreation activity, where prices are generally falling.

The European Central Bank has forecast that price growth will rise to 1.5 per cent in the fourth quarter this year before dipping to 1.2 per cent a year later — still under its target of below but close to 2 per cent.

“The ECB will not contemplate raising its policy rates until eurozone inflation expectations and wage inflation have increased substantially and persistently,” said Andrew Kenningham, economist at Capital Economics. “That is probably several years away.” Valentina Romei

Line chart of By date of forecast, % showing Economists revise up their eurozone inflation forecast for 2021

Can the copper bull run continue?

If, as the commodity market adage goes, the cure for high prices is high prices, where does that leave copper?

The world’s most important industrial metal, used in everything from electric vehicles to power cables, has risen more than 100 per cent from its pandemic lows in March last year.

Last week it hit a 10-year high above $9,500 a tonne before falling back as speculators piled in and a Chinese brokerage amassed a $1bn long position on the Shanghai Futures Exchange. 

A growing number of banks and brokers believe the bull run will continue and copper will go on to surpass its all-time high of $10,190 reached in February 2011. 

Citi and Goldman Sachs are both predicting big supply deficits for 2021 that would further drain already-low stockpiles of the metal, citing strong demand from China but also the rest of the world as the economic strain from the coronavirus pandemic eases. 

Unlike previous cycles, a dearth of “shovel-ready” copper projects means a flood of supply is not going to hit the market and send prices tumbling. If anything, even higher prices might be needed to spur production of low-grade ores in far-flung parts of the world where it is difficult to build a mine.

“It takes 15 years from discovery to navigating approvals to ultimately getting a development up and running in our industry,” Anglo American chief executive Mark Cutifani said. “So you can’t just wiggle your nose. It does need high prices, but it also needs time.” Neil Hume



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