Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Bulgaria says it is back on track to join the Eurozone in 2026, after repeated delays because of political turmoil and failing to meet inflation targets.Sofia’s adoption of the euro was postponed last year when inflation exceeded the threshold required for membership. Now that inflation has slowed to 3.5 per cent in April, Bulgaria expects the European Commission to confirm next week that the country has met the criteria required to join the euro.“We expect a positive convergence report,” said Prime Minister Rosen Zhelyazkov last week. All new EU members who have not yet adopted the single currency have to show that they have converged with other European economies in order to join the Eurozone. They must show that inflation is under control and within 1.5 percentage points of the three Eurozone states that have the lowest inflation and meet other benchmarks, including on the stability of their currencies and economy.The commission said on Tuesday that it was concluding its assessment of Bulgaria’s convergence and it intended to adopt its report in early June. While Bulgaria did contain inflation at low levels for many years, it shot up in 2021 when Russia severed gas links to the country, and then in 2022 when Moscow conducted its full-scale invasion of Ukraine. Sofia managed to bring inflation down close to the EU target of 3 per cent only early last year.Bulgaria’s accession has also been delayed by a series of caretaker and shortlived governments. It has had seven elections in less than four years since the administration of centre-right premier Boyko Borisov was ousted amid protests against endemic graft. Prime Minister Rosen Zhelyazkov: ‘The state will guarantee the security of Bulgarian consumers even after the introduction of the euro’ More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersAt the start of the year, Fed watchers were concerned about three threats to the central bank in 2025: that Donald Trump would impose stagflationary tariffs, execute an inflationary fiscal policy and undermine the independence of the Federal Reserve. He did the lot.But last Thursday, the US Supreme Court all but removed one of the threats hanging over the Fed. In an emergency ruling, a majority on the court decided that Gwynne Wilcox — who was fired without cause by Trump from the National Labor Relations Board in January — will stay out of her former job while the case goes through the lower courts. The Supreme Court also indicated that it was minded to overturn 90 years of precedent by ruling that it was unconstitutional for Congress to create positions on similar boards in which officials are protected from being fired, barring cases of serious misconduct. It was all sounding pretty bad for the Fed’s governors, who have exactly these protections written in law by Congress. Then the Supreme Court’s majority executed a handbrake turn in its reasoning. Even though US central bankers have exactly the same protections, they are employed by “a uniquely structured, quasi-private entity”, so different rules will apply. That is bad news for Wilcox and other public officials fired by Trump, but good news for Jay Powell and other Fed governors. The ruling did not make a lot of logical sense, as the protections are identical. This is what Lev Menand at Columbia Law School told the FT, and was also the position of the three dissenting justices. But what you, me, Menand or the minority in the court might think frankly does not matter — because the majority on the Supreme Court decides. Powell is safe; other US officials are not. Powell then celebrated his new security with a ballsy rendition of the UK’s first world war recruitment poster, “Daddy, what did YOU do in the Great War?” Praising American universities as “a crucial national asset” at a time when the administration is attacking them, he told Princeton graduates to fight for US democracy. “When you look back in 50 years, you will want to know that you have done whatever it takes to preserve and strengthen our democracy, and bring us ever closer to the founders’ timeless ideals,” Powell said.That leaves two out of three risks Fed officials’ jobs might be safe, but their reputations still depend on their response to the tariff and budgetary threats hanging over the US economy. I will come back to the specifics of these as policy becomes clearer in the coming weeks, but it is worth documenting how markets and analysts have changed their views on likely Fed monetary policy over the past month. At the start of May, the stagflationary risks from tariffs dominated. There were fears that very steep tariff increases would slow the US economy to a crawl and force the Fed to ease monetary policy, even if inflation was rising. Despite Friday’s presidential outburst — when Trump threatened higher tariffs on imports of iPhones and goods from the EU — the emerging view is that an expansionary budget and less severe tariffs removed some of the recessionary threat that would have forced interest rates down. As the chart shows, market expectations of future US interest rates are now significantly higher along the curve by around 0.5 percentage points. Some content could not load. Check your internet connection or browser settings.The market’s view is that the Fed will be slower in cutting rates, but that the projected level at the end of 2026 will be roughly the same as it was in early April. If I instead chart the market forward rates for the end of 2025 and the end of 2026, it is clear that in May, there was a growing realisation that the Fed will want to wait and see before changing interest rates. The FT’s Monetary Policy Radar has taken the view since April that a sensible central scenario would see no US rate cuts at all in 2025, with an alternative scenario containing a significant loosening of policy. We judge the risks of each to be pretty similar. Some content could not load. Check your internet connection or browser settings.What is going on with UK inflation?Last week, UK inflation figures for April brought difficult headlines for the Bank of England. Annual headline inflation was up from 2.6 per cent in March to 3.5 per cent in April, with far from all the action being in energy prices. Core inflation rose from 3.4 per cent to 3.8 per cent. Everyone knew inflation would rise, because there were significant increases in gas and electricity tariffs already announced in February. There were also specific tax increases, such as vehicle excise duties, and the likelihood of higher airfares because Easter was later in 2025. But the actual figures exceeded the 3.3 per cent increase expected by analysts and the 3.4 per cent expected by the BoE itself. With the benefit of hindsight, it appears that the bigger problem lay in the forecasts rather than in a nasty surprise in the data. More than the rise in overall inflation can be accounted for by gas and electricity prices, vehicle excise duties and a 27 per cent rise in air fares. These are all one-offs, and airfares are likely to fall back in May.The BoE has a supercore services inflation which excludes indexed and volatile components, rents and foreign holidays. I calculate it fell from 4.4 per cent in March to 4.2 per cent in April. This is a good measure to use when you know there are volatile components in the data (which forced even the FT core measure of inflation higher). So, April was not quite as awful as it first seemed. That said, there is no doubt that UK disinflation has slowed, as the chart below shows, when looking at two measures that really try to get at the persistent nature of price movements. There is a balanced debate on the Monetary Policy Committee between those who worry the slowdown in disinflation highlights a deeper problem and those who think it is merely a pause.Some content could not load. Check your internet connection or browser settings.The April data also illustrated the need for a common and official measure of inflation adjusted for seasonal effects such as a late Easter. Everyone — including us at the FT — is producing their own seasonally adjusted series, so inevitably there is no shared truth to guide the debate.The good news is that the Office for National Statistics recognises this is problematic, will consult on the matter over the summer and hopes to be ready to publish next March. At the excellent UK Economic Statistics Centre of Excellence conference last week (disclaimer: I am on its advisory board), Huw Dixon and Monica George Michail presented their analysis of the feasibility of seasonally adjusting UK inflation data. Read their excellent paper if you want the details. But the summary is that seasonal adjustment is clearly possible, although as the chart below shows, seasonal patterns in pricing do change over time. That means the seasonally adjusted data will get revised — and the most problematic monthly inflation numbers, unfortunately, are almost always the most recent.Some content could not load. Check your internet connection or browser settings.What I’ve been reading and watchingA chart that mattersIf you are prone to worrying about persistence in inflation, the chart below provides just the shock you crave. Joseph Gagnon at the Peterson Institute and Steven Kamin of the American Enterprise Institute have discovered a cross-country relationship between historic inflation and recent price rises. Countries that suffered high inflation in the 2000s had higher pandemic-era inflation. This is not just a “proximity to Russia” relationship, and I have improved on the authors’ estimates by including the latest data below. It appears that central banks’ promises to keep inflation under control are less credible in countries that have experienced high inflation, even in the distant past. To the extent this relationship is causal and holds, future policymakers are in for a pretty rough ride. Some content could not load. Check your internet connection or browser settings.Central Banks is edited by Harvey NriapiaRecommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The European Central Bank should pause further interest rate cuts until at least September, one of its most hawkish policymakers has said, warning that “we should keep our powder dry” given the simmering EU-US trade war.Austrian central bank governor Robert Holzmann told the Financial Times he saw “no reason” for the ECB to lower rates at its June and July meetings. “Moving [interest rates] further south would be more risky than staying where we are and waiting until September,” Holzmann said, arguing that a further rate cut at this stage was likely to have “no effect” on economic activity in the Eurozone. Holzmann’s hawkish comments point to disagreement among ECB rate setters, as they weigh how to approach Donald Trump’s trade war ahead of their next meeting on June 5. The US president last week threatened to impose 50 per cent tariffs on imports from the EU from June 1 but has since agreed to delay until July 9 to allow time for talks with the bloc. Fellow ECB hawk Isabel Schnabel warned earlier this month that the trade conflict could fuel inflation and limit the central bank’s room for manoeuvre. In contrast, Belgium’s central bank governor Pierre Wunsch — previously also known for his hawkish views — earlier this month called for the ECB to be ready to cut rates to “slightly below” 2 per cent this year. Both Wunsch and Schnabel spoke before Trump issued his 50 per cent tariff threat on Friday, which marked a significant escalation in the trade feud.Policymakers in Frankfurt have lowered their key deposit facility rate seven times since last June, bringing it down from 4 per cent to 2.25 per cent at their previous meeting in April. Given that Eurozone inflation is hovering close to the ECB’s medium-term target of 2 per cent while growth forecasts are bleak, investors and analysts expect another quarter-point cut at the central bank’s June meeting. Markets have also priced in at least one further cut later this year. Holzmann argued that economic activity in the currency area was being held back by “extreme uncertainty” rather than restrictive monetary policy. “Key economic decisions by market participants are delayed and not taken. [ . . . ] People want to wait.” In such a context, a reduction in interest rates would not do much — if anything, he argued.The Austrian central bank governor, whose term will expire later this year, also said that borrowing costs in the euro area have come down so much over the past year that they were no longer slowing down economic activity and were potentially even stimulating growth. He views the “neutral” rate of interest — where borrowing costs are doing neither — at somewhere between 2.5 per cent and 3 per cent. “Most if not all of the recent estimates on [the neutral rate of interest] for Europe point to quite a strong increase since the beginning of the year 2022. We are already at least at the neutral level.”Germany’s planned €1tn debt-funded spending plans were another reason for the ECB to maintain “a steady hand”, Holzmann said. If implemented by Germany’s new chancellor, Friedrich Merz, they should boost economic growth in the currency area. Holzmann described Merz’s plan as “a fiscal shock to Europe, which will help us to turn the current development around”.While Holzmann acknowledged that “many” of the 25 other members of the ECB governing council were “a bit” more dovish than him, he stressed that he did not feel “isolated at all”, arguing that “a number of people” on the decision making body were also “sceptical” about additional interest rate cuts.   More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome to FirstFT. Here’s what is on today’s agenda:Greenland says it will turn to China if the US and EU shun its mining sectorEuropean companies hail Japan’s embrace of non-US defence dealsToyota mounts software challenge to Tesla and Chinese rivalsThe rise of robot dogs We begin with an exclusive story on EU regulators planning their first stress test to look for vulnerabilities in the financial system outside banks. The move reflects fears about the rapid growth of less regulated groups such as hedge funds and private equity.What are regulators proposing? European authorities plan to examine the impact on the wider financial system of a potential market crisis, including pension funds and insurers. Officials at the EU’s main financial watchdogs are still discussing the details of such a system-wide stress test of non-bank institutions, but they are optimistic that it could be launched next year, according to two people involved in the talks. The plans follow a similar exercise by the Bank of England last year.Why does it matter? Since the 2008 financial crisis, the provision of loans has shifted from banks’ balance sheets towards other firms that behave like traditional lenders but are more lightly regulated. Supervisors are growing increasingly concerned about the opacity and potential risks these firms could present. The plans for a stress test would probably raise serious concerns among hedge funds, private credit groups and money market funds that they could be subjected to greater scrutiny and restrictions by European regulators in the future. Read the full story.Here’s what else we’re keeping tabs on today:EU: The General Affairs Council meets in Brussels. The agenda includes Spain’s request to recognise Catalan, Basque and Galician as official languages of the bloc.Canada: King Charles addresses the state opening of parliament in Ottawa, the first time a reigning monarch has conducted this duty in person in 50 years.Economic data: The Conference Board releases its US consumer confidence index.Results: US car parts retailer AutoZone reports results.Join Financial Times experts tomorrow to get clear-sighted analysis of the most consequential geopolitical rivalry of our time: the US-China showdown. Register for the webinar now and put questions to our panel.Five more top stories1. US and European mining companies need to hurry up and invest in Greenland, otherwise it will have to look elsewhere for help exploiting its minerals, including from China, the Arctic territory’s business minister has warned. Nuuk would prefer to work with “allies and like-minded partners”, but Greenland was “having a difficult time finding our footing” in the changing nature of the western alliance, the minister added.2. European defence companies say Japan has accelerated its opening to non-American suppliers of military equipment since the election of US President Donald Trump. Tokyo’s increasing willingness to look beyond its traditional defence partner for procurement comes after Trump rattled US allies by raising questions about Washington’s commitment to joint defence.3. Toyota has promised to install a homegrown operating system within its best-selling RAV4 sport utility vehicle by next March, in a bid by the world’s largest carmaker to catch up with Tesla and Chinese rivals’ software lead.4. Several EU governments have signalled they want a quick deal with the US to head off Donald Trump’s threat of 50 per cent tariffs on the bloc, urging the European Commission to keep talking to Washington rather than taking the path of confrontation.5. Police said a 53-year-old man has been arrested after a car collided with crowds at Liverpool Football Club’s Premier League victory parade. British Prime Minister Sir Keir Starmer described the scenes emerging from the incident as “appalling”. Here are more details.News in-depth© FT montage/Getty ImagesGermany’s efforts to swell the ranks of its armed forces have hit a snag as the country has lost contact with almost 1mn potential reservists due to strict data protection laws, its reservists’ association has said. The setback comes as Berlin seeks a stronger role in European defence and security. We’re also reading . . . ‘Task discretion’ decline: Digital productivity tools may sap employees’ sense of control of their work and reduce scope for trying new ways of doing things, writes Sarah O’Connor.US-South Korea: Trade tensions are building, the military alliance is under pressure and Korean domestic politics are fraught. Can Seoul negotiate a way out?Eurozone bonds? The EU now has a unique chance to capitalise on investor doubts about the US and promote the euro as a reserve currency, writes Marieke Blom, chief economist at ING.Nick Candy, the treasurer of Nigel Farage’s Reform UK, has racked up more than £100mn of financial losses after the property developer’s Luxembourg-based investment portfolio backed a number of failed ventures, including an augmented reality start-up and a high fashion house, an FT analysis found.Chart of the dayFour of Europe’s oldest industrial groups, Schneider Electric, Siemens AG, ABB and Legrand, have added more than €150bn to their market caps on the back of soaring demand for data centres driven by the boom in artificial intelligence since the launch of ChatGPT in November 2022.Take a break from the newsRobot dogs are multiplying fast around the world, metamorphosing from amusing playthings to trusted companions deployed in a wide range of terrains from production plants to battlefields. Michael Peel takes a look at the growing use of caninoids as part of the FT’s special report on robotics.© Pau Barrena/AFP via Getty ImagesAdditional contributions from Irwin Cruz and Benjamin Wilhelm More

Inflation expectations are controversial for obvious reasons.You go to the public, ask them how they think prices will change over a selection of different time periods, and then draw conclusions about what might actually happen.Capturing this data is a core function of the Bank of England’s Inflation Attitudes Survey, carried out quarterly by pollster Ipsos via its “proprietary panel” and “trusted partners”. The survey’s methodology says a “rigorous set of quality procedures” ensure that these panellists are “real, unique, fresh (not over surveyed on the topic), and engaged”. It does not particularly care whether they know the slightest thing about inflation.We recently wrote about the oddness of questions 11 to 14 of the Bank of England’s IAS, which appear designed to confuse, embarrass and frustrate participants. What we didn’t clock at the time is that Ipsos releases individual responses to those questions, allowing us to create the macroeconomic survey version of Takeshi’s Castle — look at the cohort as a collection of individual humans, and watch them struggle through this cruel and unusual questionnaire. So, obviously, we did that.Ipsos’ press release says about 2,000 people take the IAS, but in reality it seems to be roughly double that. February’s outing had 4,270 respondents, with unique IDs from #235864 to #240133. Let’s get to know them:Some content could not load. Check your internet connection or browser settings.Round 1: Slippery Wall Rate-setter RelayWe start, of course, with Question 11: Q11: Each month a group of people meets to set Britain’s basic interest rate level. Do you know what this group is?Here are the options:Monetary Policy CommitteeBank of EnglandThe GovernmentThe TreasuryParliamentOtherDon’t knowFrom that selection, we’d argue that Monetary Policy Committee is the only truly correct answer. How many respondents got that? Some content could not load. Check your internet connection or browser settings.It’s a brutal first round, taking our plucky 4,270 down to 648. Hit the cog icon on the right to filter the results and confirm/refute your own biases.So, just under one in seven respondents are left. On to round two.Round 2: Square Maze Inflationary TrapQ12: Which of these groups do you think sets the interest rates? Government ministersCivil servantsBank of EnglandHigh street banksEuropean Central BankDon’t knowQuestion 12 is a tough one. As we discussed in our previous piece, in the context of Question 11 there’s no clearly-correct answer here. Also note the vagueness — where Q11 refers to “Britain’s basic interest rate”, this is a far more nebulous “the interest rates”. Government ministers and civil servants surely aren’t correct answers, but — depending on the interpretation of the question — Bank of England, high street banks and European Central Banks are all close. But if Monetary Policy Committee was the answer before, surely we should demand the same specificity here?Therefore, the only correct answer is don’t know. As Marla Daniels says in The Wire: The game is rigged, but you cannot lose if you do not play[embedded content]How many people stuck with their convictions and avoided the trap?Some content could not load. Check your internet connection or browser settings.Yikes, just ten people left. On to round three.Round 3: Uphill Garden Bad AttitudesQ13: In fact the decisions are taken by the Monetary Policy Committee of the Bank of England. Which of these do you think best describes the Monetary Policy Committee?Part of the GovernmentA quango, wholly appointed by the governmentAn independent body, partly appointed by the governmentA completely independent bodyDon’t knowHaving acknowledged cruelly trapping their respondents, Ipsos throws another curveball here.As we see it, part of the government is arguably correct, as is an independent body, partly appointed by the government. The MPC certainly isn’t itself a quango, and if we’re going to be brutal it also can’t fairly be described as a completely independent body. We think don’t know is once again an acceptable answer.Let’s see how our respondents did:Some content could not load. Check your internet connection or browser settings.So… seven survivors — three men, and four women — who correctly made it through the BoE/Ipsos survey trap and survived to tell the tale. Finally, Britain has its magnificent seven:Some content could not load. Check your internet connection or browser settings.What can we learn about these heroes? Well, all except #239763 describe themselves as neither satisfied nor dissatisfied with the job the Bank of England is doing on inflation (even though, really, they know it’s the MPC’s job). As for #239763, she’s chuffed, giving a “very satisfied” response.Round 4: Wipe Out The Final FiltrationCan we further whittle down this group? One of the few other questions where there’s a correct answer is 1:Q1: Which of these options best describes how prices have changed over the last 12 months? Taking the position that respondents would, without any other information, treat this as a UK-specific question, the answer in February was 2.8 per cent (assuming you believe the ONS).Of our seven, only one got this correct: #240130, who answered “Up by 2% but less than 3%”. All the others picked at least 4 per cent, or said they didn’t know.So . . . we have a winner! #240130 is the one IAS respondent with what FT Alphaville would sufficient savvy to bother listening to.Some content could not load. Check your internet connection or browser settings.#240130, who we’re going to call Hannah, is a Scottish woman aged 16–24. She’s a student, but earns £20,000 to £34,999 a year. She has A-level equivalent qualifications but no degree (yet!), and probably privately rents or lives with her parents. Hannah, we salute you.Triumph, illustrated More

This article is an on-site version of our Europe Express newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday and fortnightly on Saturday morning. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. A scoop to start: EU regulators are planning their first stress test of non-bank financial institutions, people involved in the talks told the Financial Times, in a move likely to spark concern among hedge funds, private credit groups and money market funds that could be subjected to greater scrutiny and restrictions.Today, our trade supremo assesses the EU’s waning appetite for a full-fat trade fallout with the US, and our finance correspondent reports on the efforts by Brussels to lower the price cap on Russian crude exports.Now we’re talkingAfter a whirlwind 72 hours in EU-US trade talks the message from member states last night was to keep calm and carry on, writes Andy Bounds.Context: Irritated by what he saw as stalled negotiations with Brussels, US President Donald Trump on Friday threatened to impose 50 per cent tariff on EU imports. On Sunday, he delayed that threat until July 9 following a call with European Commission president Ursula von der Leyen in which she pledged to use that time to reach a “good deal”.Urged on by key member states, there was little time wasted in turning that promise into action. Yesterday, EU trade commissioner Maroš Šefčovič spoke to US commerce secretary Howard Lutnick and trade representative Jamieson Greer, the second such call in four days. Šefčovič posted on social media afterwards that the commission “remains fully committed to constructive and focused efforts at pace towards an EU/US deal”.Gone was his bravado of Friday, when he urged the US not to issue threats and stressed the EU would “defend our interests” — a change of tone also noted in von der Leyen’s brief statement on Sunday night.The markets certainly prefer jaw-jaw to trade war-war. Germany’s Dax index gained 1.7 per cent yesterday, France’s Cac 40 rose 1.2 per cent, and the FTSE MIB in Milan closed 1.3 per cent higher.Still, the EU is refusing to give way on key US demands, such as scrapping digital taxes and reducing food standards to accept more American products.There was no change in Brussels’ position, according to one diplomat briefed on a meeting of EU ambassadors last night. “Our united stance remains the same,” the diplomat said. “We are standing firm and united, with full trust in the Commission,” said another.Some diplomats and officials think Trump’s threat is a bluff, given the damage tariffs would cause to his own economy. But others believe tariff retaliation, such as the €95bn list of goods proposed this month, might be necessary to force a deal.But almost all agree that whatever deal they get, it will probably leave tariffs higher than they were before he came into office.Chart du jour: Nuts and boltsFour of Europe’s oldest industrial groups have added more than €150bn to their market caps on the back of soaring demand for data centres that power artificial intelligence.Tighten upThe European Commission and the EU’s most powerful member states are pushing to lower the price cap on Russian oil as part of a broader tightening of sanctions against Moscow, but it’s unclear if they have enough support at home and abroad, writes Paola Tamma.Context: Brussels is seeking to hit Moscow with more substantial measures, including lowering a $60 per barrel price cap on crude oil exports to $45 per barrel, according to people briefed on initial discussions on the EU’s 18th sanctions package in response to Russia’s full-scale invasion of Ukraine.But the idea has yet to convince all the EU’s 27 member states and its G7 partners. At a gathering of G7 finance ministers last week in Banff, rotating chair Canada suggested including explicit language on tightening the oil price cap in the joint statement. The motion was supported by the EU and its G7 members France, Germany and Italy as well as the UK, but was not included at the request of US treasury secretary Scott Bessent, according to three officials briefed on the meeting.The US Treasury declined to comment. The final communiqué settled for language that committed G7 nations to “continue to explore all possible options, including options to maximize pressure such as further ramping up sanctions” in case no ceasefire is agreed. Separately, EU countries which were previously reluctant to embrace the oil price cap idea, such as Hungary and Greece, are still evaluating the proposal, officials said.“We are ready to apply more pressure from Russia on the European side and we’re hoping other partners will be ready to follow,” commission spokesperson Anitta Hipper said yesterday.What to watch today Meeting of EU general affairs ministers in Brussels.Polish President Andrzej Duda meets German President Frank-Walter Steinmeier in Berlin.Now read theseRecommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe State of Britain — Peter Foster’s guide to the UK’s economy, trade and investment in a changing world. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is chief economist at ING The dollar is losing its status as an all-purpose haven, highlighted by Moody’s recent downgrade of its last remaining triple A credit rating from one of the big three agencies. The EU now has a unique chance to capitalise on investor doubts and promote the euro as a reserve currency, a move that would yield significant economic benefits. It is time to break the taboo around issuing common debt by the EU backed by member states.The dollar’s decline is partly due to President Donald Trump’s trade and budget policies, but there is a structural shift too: foreign holdings of US debt dropped from 50 per cent of the outstanding debt pile in 2014 to only a third by 2024. Meanwhile, foreign interest in European bonds, especially German Bunds, is rising: over the years 2023 and 2024, foreign holders increased their holdings by about €160bn, the equivalent of 8 per cent of currently outstanding Bunds.  The EU should accelerate this trend for two reasons. First, greater demand for euros means cheaper borrowing costs for the bloc’s governments, corporations and homeowners. The Bank for International Settlements found that $100bn in foreign purchases of US Treasuries lowered interest rates by 0.20 percentage points using conservative estimates, illustrating the substantial beneficial impact of having increased foreign holdings.Second, positioning the euro as an alternative haven brings stability during downturns. In times of economic stress, a flight to euro assets would lower financing costs for European governments, giving them more fiscal ammunition to stabilise their economies. At moments such as that, European banks would also receive a boost in the value of their government debt assets, breaking the bank-sovereign “doom loop” that spooked markets during the Eurozone crisis of the early 2010s when sell-offs in national debt weakened bank securities and vice versa. More resilience in a crisis would allow lenders to continue to support the real economy, rather than break it at the worst possible moments.To capitalise on this singular historical moment, Europe needs to act fast. Playing a stronger role as a haven requires increased availability of safe assets. This includes both highly rated national government bonds but also Eurozone bonds backed by member states and issued at a predictable rate.For some governments, particularly those with lower debt-GDP ratios, Eurozone bonds are rife with moral hazard: they fear that backing common debt would merely encourage more profligate peers to freeload and keep spending. That is a fair criticism — but opposing Eurozone bonds outright would mean missing out on a much bigger opportunity that would benefit frugal countries.One way to mitigate improvidence is to make Eurozone bonds conditional. For example, they could replace national debt, rather than add to the overall stock. As Hélène Rey, professor of economics at London Business School, has argued: there is no need to run very high government deficits to be the world’s reserve currency. It is about a sufficiently large stock of debt being available. As it happens, here in Europe there is a bountiful stock at our hands that common bonds could replace. A stronger restriction on breaking the EU rule that government deficits should not exceed 3 per cent deficit to GDP as part of the plan would lower the moral hazard risks.Even with conditionalities, there may be concerns among stakeholders in Finland, the Netherlands and Germany that issuing debt together with, say, Italy and Greece, would increase their individual government borrowing costs. However, this perspective is unduly pessimistic. European institutions already issue debt with a triple A rating, which is superior to the median government rating of low double A. Furthermore, if European governments jointly finance a small portion of their debt — for example, the first 10 per cent — this implies risk pooling. Consequently, this would reduce the overall risk associated with European sovereign debt, and potentially lead to improved ratings for all national governments. In addition, increased liquidity and regular issuance of Eurozone bonds can result in their inclusion in sovereign indices and help grow a futures market. This brings us back to the overall impact on financing costs. For context, the EU at present pays a premium of 0.15 to 0.20 percentage points to finance itself for seven to 10 years versus the Dutch government. The increased popularity at home and abroad could easily bring future common financing costs below the current price paid by a relatively frugal country such as the Netherlands. Needless to say that the southern EU countries may benefit more — an impact that would indirectly also benefit the rest as the internal market would grow faster.The economic case is clear for the EU to begin to design acceptable frameworks for issuing Eurozone bonds if it wishes to capitalise on US weakness. More

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