Aurelia Butler

It wasn’t just US observers who were surprised and intrigued last week when West Virginia senator Joe Manchin remembered his hitherto largely nominal party affiliation and cut a constructive deal with the Democratic Senate leadership on climate and clean energy policy. Viewed from abroad, the agreement is also notable for proposing one of the first apparently genuine examples of “friendshoring” — favouring strategic allies when building supply chains — seen in the wild. It has delighted Canadian automakers by extending a tax credit to electric vehicles assembled in North America, not just the US. It also favours battery minerals processed by economies with which the US already has preferential trade deals. Manchin is not exactly noted as an instinctive internationalist, but discussions about energy security and cross-border oil pipelines with Canadian companies and politicians seem to have convinced him of the wider strategic imperative of building supply chains that exclude China.The appeal of friendshoring (also known as ally-shoring) has risen sharply. It was first elevated by the US’s geopolitical tension with China and then accelerated by the sanctions and trade blockades that have followed Russia’s invasion of Ukraine. But the concept remains fraught with multiple difficulties.First, it’s not always clear who your friends are and how you should choose them — and indeed choose between them. There may be fireworks lighting up the skies above Ontario at the Manchin deal. But the EU, Japan and South Korea might indignantly also stake some claim to being regarded as geopolitical allies, even friends, of the US. Brussels has already complained about the discriminatory nature of an existing proposed EV credit confined to US-made products. It is highly unlikely to be cheered up — or convinced that the tax credits comply with World Trade Organization law — by the charmed circle expanding to include only Canada and Mexico.The deal’s other provision, to favour battery minerals produced or recycled in countries with which the US has a preferential trade deal, is also problematic. The list includes South Korea but not the EU, despite years of painful negotiations over a trade agreement between Brussels and Washington, nor Japan. Second, making a snapshot decision on political reliability more generally is hard enough, but trying to work out which friendships are likely to endure is almost impossible. That also goes for other countries assessing the loyalty of the US. Another presidential term for Donald Trump, or another economic nationalist in the same vein, and supply chains constructed according to Joe Biden’s foreign policy preferences could rapidly be smashed in another tantrum of indiscriminate protectionism.In any case, few countries will want to be an immutable part of a US friendshoring gang if it opens them up to strategic and commercial retribution from Beijing. It’s not just about emerging markets such as Vietnam and Brazil that have good strategic relations with the US but are also heavily woven into supply networks involving China. EU governments have also resisted automatically being dragged into the US’s corner — for example declining to institute a blanket ban on Huawei’s participation in 5G networks.Third, the tools authorities have to refashion supply chains along strategic lines are clumsy and expensive. On the export side, governments can restrict sales of sensitive technology, as the US and EU have done over semiconductors and other products for Russia and China. But with imports, companies will go for cheap inputs and it will take serious fiscal or regulatory effort to make them shift suppliers on a large scale. That has implications for public finances or product prices, or both. Unless the EV tax credit improbably fosters such an incredibly efficient North American supply chain that it will be able to outcompete all-comers even when it is removed, US consumers will end up paying more for their cars. It might be a tough sell to argue that the public has to pay higher taxes or buy more expensive products because of a contentious official assessment of political risk, itself subject to self-interested lobbying from domestic producers.Finally, politically-motivated supply interruption isn’t necessarily the biggest threat to vital imports in any case. True, there are sometimes very obvious impacts from government interference for strategic ends, such as the current food and fertiliser shortages caused by Russia blocking exports from the Black Sea. But even before the war in Ukraine, the world economy had suffered a crunch in many supply chains. Those reflected shocks to manufacturing production and demand and the global shipping industry rather than malign interventions by hostile governments. It will mean another awkward conversation if voters see supply chains laboriously re-engineered by state intervention and then not work anyway.Assuming the Manchin deal survives, the tax credit provisions will be a valuable test of the ability of governments in general and the US in particular to mould supply chains according to strategic considerations. The questions about the proposals are clear. Are they legal? Are they affordable? Will they work? It’s incumbent on proponents of friendshoring to show that the answers are [email protected] More

Eurozone mortgage rates are rising sharply, raising the prospect of a slowdown in the housing market after government support provided during the coronavirus pandemic and a desire for more space triggered a surge in house prices. The cost of new loans to households for house purchases increased by 16 basis points between May and June to 1.94 per cent, according to European Central Bank data published on Tuesday. Average rates are now 64 basis points above the low of 1.3 per cent registered last September — the largest increase in borrowing costs over a nine-month period since 2006.Mortgage rates are rising across advanced economies as central banks supersize rate rises in a bid to control inflation, raising the risk of prices crashing. In the UK, the average rate on newly drawn mortgages has risen by 65 basis points to 2.15 per cent since the autumn of last year. In the US, the 30-year benchmark Freddie Mac mortgage rate is above 5 per cent, up from less than 3 per cent in the summer of last year. Andrew Kenningham, chief Europe economist at Capital Economics, described the increase in the eurozone as “striking”. He added that higher borrowing costs would be an additional headwind for households, which have seen their disposable income crushed by surges in the cost of energy and food over the past year. “It is one of the factors which we think is likely to push the eurozone into recession in the coming six to nine months.” The ECB data showed mortgage rates rose more rapidly in Germany and Italy, with smaller rises recorded for France and Spain. In Germany, the average mortgage rate rose by more than a full percentage point from the recent low of 1.16 per cent to 2.25 per cent in June. In Italy, there was a 72 basis point increase to 1.97 per cent from the recent low of 1.25 per cent. Rates have increased across most types of products. The largest monthly rise was for mortgage rates with a maturity of between five and 10 years, which increased by 21 basis points between May and June to 2.23 per cent.Mortgages look set to become more expensive over the coming months following the ECB’s decision to raise its benchmark deposit rate by 50 basis points to zero at the end of July — a bigger move than expected. Another 50 basis point rise is forecast for September after inflation hit a fresh high of 8.9 per cent in the year to July — a fresh all-time high for the currency area and more than four times the central bank’s 2 per cent target. Markets expect more monetary policy tightening in the UK and US too. They have priced in an 88 per cent probability of a 50 basis point rate increase when the Bank of England meets on Thursday, with additional increases expected at the next meetings of the US Federal Reserve. Rising rates are expected to cool down the boom in the housing market — the result of record-low interest rates, fiscal measures to boost activity and strong demand for bigger properties with outside space because of more people working from home.

“We expect the housing market to slow meaningfully in response to the sharp rise in mortgage rates,” said Oliver Rakau, economist at Oxford Economics. “Looking ahead, higher rates and tighter bank lending conditions signal that loan flows are set to slow sharply.” Eurozone house price annual growth reached an all-time high of 9.8 per cent in the first quarter of 2022. While price growth is expected to slow in the coming quarters, economists view a crash as unlikely. More

LONDON (Reuters) -Britain’s foreign minister Liz Truss, the frontrunner to replace Boris Johnson as prime minister, was forced to backtrack on one of her most striking pledges a day after announcing it following a backlash from fellow Conservatives and opposition parties. In the first big misstep of her campaign, Truss set out plans to save billions of pounds a year in government spending in a pledge opponents said would require cutting the pay of public sector workers, including nurses and teachers, outside of the wealthy southeast of England. Truss had said late on Monday she would introduce regional pay boards rather than having a national pay agreement, tailoring pay to the cost of living where people actually work.But after criticism on Tuesday, a spokesperson for Truss said: “Our hard-working frontline staff are the bedrock of society and there will be no proposal taken forward on regional pay boards for civil servants or public sector workers.”The U-turn came as a poll showed Truss with a smaller lead over her rival Rishi Sunak than previously thought. A survey of 807 Conservative Party members by Italian data company Techne carried out July 19-27 found Truss was backed by 48%, compared with 43% for former finance minister Sunak.The result suggests a much tighter race than a previous poll of Conservative members carried out by YouGov on July 20-21, which gave Truss a 24-point lead over Sunak.’SPEECHLESS’Truss’s public sector pay plan had faced criticism from the main opposition Labour Party and some Conservative lawmakers.The Conservatives won the biggest majority in three decades at the 2019 national election by upending conventional British politics and winning in more industrial areas in central and northern England with a pledge to reduce regional inequalities.One Truss-supporting Conservative lawmaker said the miscalculation would damage the rest of the campaign.”This was a completely avoidable error, but I don’t think in the end it will stop her being prime minister,” he said.Sunak supporter Ben Houchen, the Conservative mayor of Tees Valley, said he was “speechless” at the proposal.”There is simply no way you can do this without a massive pay cut for 5.5m people, including nurses, police officers and our armed forces outside London,” he said.Rachel Reeves, Labour’s finance spokesperson, said Truss’s plan would have sucked money out of local communities. “This latest mess has exposed exactly what Liz Truss thinks of public sector workers across Britain,” she said. Sunak and Truss are competing for the votes of about 200,000 Conservative members who will select the next prime minister, with the winner announced Sept. 5.Taxes have dominated the campaign race so far. Sunak has accused Truss of being “dishonest” with voters over her promises of immediate tax cuts, saying he would wait until inflation is under control before cutting taxes. Truss says that would push the country into recession. Over 60% of Conservatives in the Techne poll said Truss had better ideas on tax and inflation than Sunak. They also favoured her immigration plans. However, respondents said Sunak had better policies on Brexit and energy.John Curtice, a professor of politics at the University of Strathclyde and one of Britain’s leading polling experts, said with so little polling it was hard to be certain the race was yet over for Sunak. “We perhaps don’t know quite as much as everybody is confidently asserting,” he told GB News on Monday.”In a race which certainly had seen some fairly radical and bold proposals made by both candidates … we certainly don’t know what impact if any it (has) had on the Tory membership as a whole.” More

The writer is a former deputy governor of the National Bank of Ukraine Vladimir Putin infamously predicted that Ukraine would be conquered in a matter of days. The west was equally sceptical about Ukraine’s chances of surviving a Russian onslaught. However, it has been more than 150 days since the start of the full-scale Russian invasion of Ukraine, and Putin is far short of achieving his original goal of Ukraine’s destruction as an independent state. Earlier forecasts of a short war have been thoroughly discredited, and commentators on all sides no longer rule out that it may continue for many more months, if not years.A longer duration of the conflict alters not only the military strategy but the macroeconomic calculus. In the war’s early days, Ukraine’s macroeconomic policies aimed to control expectations and avoid panics. These policies were based on controlling prices — for example, the hryvnia-dollar exchange rate was fixed at the prewar level — and providing stop-gap measures to support businesses and households, such as suspending import duties. These responses were appropriate to address the initial shock. But as the war grinds on, they need to be adjusted or Ukraine will run into an economic catastrophe.The National Bank of Ukraine, the country’s central bank, has a seemingly impossible job. First, the fixed exchange rate provides an important nominal anchor. Second, the NBU is in charge of the financial system’s health to ensure that the economy has access to liquidity and that the payment system functions smoothly. The central bank has some power over capital flows, but Ukrainian refugees in the EU and other countries must be allowed to use precious hard currency to support themselves. Third, the NBU has to cover the government’s vast fiscal needs to pay for the war effort. In the short run, this policy mix can work. For instance, the central bank can burn foreign exchange reserves. But it is not compatible with the longer horizons of the war. If policies are not modified, the NBU faces the prospect of high inflation, dangerous depletion of foreign exchange reserves and the risk of a currency crisis, or a banking panic. The government’s limited resources leave few pleasant options. Recently, the central bank had to devalue the hryvnia by 25 per cent. But this will probably provide only temporary relief as another devaluation may be necessary. Alternatively, the hryvnia could be allowed to float more freely, helping to address accumulating imbalances in the economy. But this risks coming at the cost of losing a nominal anchor. Prewar inflation targeting is less useful, given the uncertain monetary transmission mechanism of wartime. The fiscal authorities could also try to raise more revenue and control spending. These options are difficult. It is hard to raise taxes when the economy is weak. But one possibility is to tax the shadow economy via non-direct taxes such as excise duty or increased import duties. The finance ministry must finally accept reality and start borrowing on the local debt market at much higher rates, rather than relying constantly on monetary financing from the NBU to cover budget shortfalls. So far, attempts to borrow at deeply negative real interest rates have been rather unsuccessful. In any case, Ukraine’s task is clear: the fiscal stance has to be significantly improved to sustain the war effort over an extended period.But Ukraine’s allies face macroeconomic tasks of their own. My country is defending security in Europe. Indeed, the global order is being decided in Ukraine. If Putin’s Russia wins, the law of the jungle will be the new regime in international relations.But for Ukraine to keep fighting and win, it needs not only much more weaponry but also larger-scale economic support. Since the beginning of the war, Ukraine has received external support to the tune of $2.5bn-$3bn a month. The expected external funding for the second half of 2022 is $18bn — a significant sum, but well below the nation’s needs. To avert economic calamity in Ukraine and sustain its ability to fight, the allies must disburse much larger amounts of about $4bn-$5bn a month in the nearest future.Every day of the war means more lives lost, children traumatised and homes destroyed. The economic cost of the war is no less staggering and it touches everybody — from ruined infrastructure in Ukraine to the spectre of hunger in Africa and elsewhere. Ukraine must win this war and win it quickly. But a long war increasingly looks like the baseline scenario. This requires recalibrating macroeconomic policies in Ukraine and allied countries to make sure that Ukraine’s economy can sustain the war effort as long as necessary. More