Aurelia Butler

You might not easily get this impression from Christine Lagarde’s understated delivery, but the European Central Bank she heads just became a lot more pugnacious vis-à-vis not only markets, but also the eurozone’s fiscal policymakers. For quite some time the ECB has been visibly uncomfortable about being “the only game in town”. It was long left to the central bank to push monetary policy close to its limits to sustain aggregate demand, and to find legally watertight mechanisms to prevent speculative attacks on the euro’s integrity and its member government’s solvency.Its decisions on Thursday — to raise interest rates by a higher-than-signalled half a percentage point and to introduce a new “Transmission Protection Instrument” bond-buying programme — turn the tables. The rate decision was punchy and clearly intended to flex some monetary tightening muscle: markets should not expect the ECB to hesitate to curb inflation, the message seemed to be. But the TPI (to use the latest acronym in the bank’s arsenal) is by far the most interesting policy — and political economy — move.The ECB has now taken it upon itself to stop sovereign borrowing costs from diverging too much from one another — if it judges the divergence to be “disorderly and unwarranted” and to interfere with its monetary policy stance. In plain language, that refers to panicky market sell-offs of sovereign debt when ECB monetary tightening leads investors to question what rising rates would do to a euro country’s debt dynamics.The policymakers in Frankfurt have put those investors on notice. Lagarde’s press conference suggested that the spread widening the ECB has in its crosshairs is the self-fulfilling kind, where bond prices deteriorate for no other reason than market participants expect them to do so. One might put it this way: the ECB will not tolerate markets dynamics which, rather than reflecting economic realities, create their own. And it will intervene, without limits if necessary, to prevent this. But it has put the rest of the EU’s governing system on notice too. The ECB’s eligibility criteria for using the new instruments draw heavily on the economic governance mechanisms in the European Commission and the eurogroup of finance ministers. Among other things, to shore up a country’s bonds under TPI, the ECB will look at whether the government in question is abiding by the commission’s and eurogroup’s recommendations. The central bank is telling elected leaders not to outsource essentially political judgments, daring them to own the decisions that determine whether a country should be protected against speculative attacks. Without saying it in as many words, the ECB is belatedly making more use of its neglected secondary mandate. That mandate is often forgotten or outright denied. But subject to stabilising prices, the central bank is legally obliged by the EU treaties to support the bloc’s general economic policies. It is doing so while simultaneously reminding everyone who has the authority to say what those policies actually are.Mario Draghi’s resignation as Italian prime minister on the same day puts the new dispensation of decision-making in stark relief. The ECB’s own criteria justify buying Italian bonds under TPI today, if it sees fit. By the end of the year, however, Draghi has said Italy needs to fulfil 55 policy actions to comply with the commitments in its EU-funded recovery plan — which the ECB has made a condition for TPI eligibility. That will weigh on whoever takes over the reins in Rome in the next few months, and those in Brussels who have to assess their compliance. By promising to do its bit, the ECB has also cleverly passed the [email protected] More

In recent decades, investors have operated on the basis that the global balance of power is shaped by the source — or “prize”, as the writer Daniel Yergin puts it — of oil. Now, however, a new tagline is percolating: computer chips are the 21st century strategic version of the fossil fuel. Or that, at least, is the message being promoted by Pat Gelsinger, chief executive officer of Intel, America’s biggest chipmaker. “[The location of] oil has defined geopolitics in the past five decades. But fabs [ie fabrication factories for chips] will shape the next five — this is the new geopolitics,” he recently told a conference in Aspen, lamenting that while America initially created the semiconductor industry, 80 per cent of production currently sits in Asia. Or as Rob Portman, a Republican senator from Ohio echoed at the same event: “Thirty years ago 37 per cent of semiconductors in the world were made in the US . . . today it’s 12 per cent and is going the wrong way.”Is this just special pleading? Certainly in part. Intel has lost ground to its Asian rivals in recent years and has been furiously lobbying Congress to provide $52bn of funding to back a bill passed last year to boost American-made chip production.And this week the lobbying paid off: a key Senate committee finally agreed to fund the $52bn plan. This will be signed by President Joe Biden “before the August recess”, Mark Warner, the Democrat senator who chairs the Senate intelligence committee, tells me.This is still only a “skinny chips” bill, as Warner says; in other words, it omits parts of the original legislation. But skinny or not, dollars will flow. Intel, for example, is about to build two $10bn fabs in Senator Portman’s district of Ohio, and expects to receive a $3bn subsidy for each. Hence why Gelsinger — and Portman — are promoting the chips-are-the-new-oil mantra.But leaving aside the issues of obvious self-interest, the reality is that this new credo is grounded in fact. That is partly because chips are playing an increasingly crucial role in military hardware. One issue that has hobbled Russia’s ability to replenish its battlefield equipment in recent months, say, is that it has been cut off from chip supply chains by western sanctions. Moreover chips — like oil — are increasingly shaping inflation trends: in recent decades, western disinflation was supported by declines in the cost of Asian-produced chips and cheap manufacturing. But now that dynamic has gone into reverse due to supply chain disruptions. Then there is growth. Since almost every modern industrial sector needs a reliable supply of chips, the 2021 supply chain disruptions alone are calculated to have reduced American gross domestic product by $240bn that year, Portman says. And John Cornyn, a Republican senator from Texas, reckons that if America ever lost access to supplies of advanced semiconductor chips in the future “GDP could shrink by 3.2 per cent and we could lose 2.4mn jobs” in a single year. “Over three years, more than $2tn US GDP could be lost, with over 5mn people losing their jobs,” he adds. Hence the growing alarm in Congress — and America’s C-suite — about the fact that almost all advanced chip production is currently located in Taiwan, which is being threatened by a newly assertive China. Or as Warner says: “The vulnerability of Taiwan has been driven home by the invasion of Ukraine.” This also explains Warner’s frustration that Europe is already racing ahead to subsidise chip production, essentially copying the bill that the US adopted (but did not fund) last year. Intel, for example, has already received commitments of €6.8bn in subsidies from Germany. “When Brussels and Germany and France move faster than Americans we know we have got problems,” Warner says. Or as Gelsinger adds: “This complex 27-member socialist union . . . is now ahead of the US by a solid six months.”So will the (belated) funding of the Chips Act become the computing equivalent of America’s shale industry — namely a trigger for more self-sufficiency? Not quickly or easily. It takes at least two years to start a fab. And America lacks the talent base and infrastructure that has enabled Taiwan to dominate. As a result, Morris Chang, founder of Taiwan’s dominant TSMC group, says that production in its US TSMC factories costs 50 per cent more than in Taiwan.Moreover, while $52bn sounds a big number, China is estimated to be giving three times that — or more — in support to its own sector. And the Chips Act caps subsidies at $3bn per plant (which typically cost around $10bn), but other countries provide up to 50 per cent in help, Gelsinger says. This leaves Warner fretting about a looming “race to the bottom on chip subsidies” between Europe and America — or Asia. Yet, even if it will be tough to shift the supply chain pattern, nobody should doubt that the pendulum is swinging. Gelsinger is now promoting a target whereby America produces around 30 per cent of all chips in the future and Europe some 20 per cent (compared, he says, with the current 12 and 8 per cent levels, respectively). Under this vision, which is backed by key senators, Asia would account for just 50 per cent of all chip production. This bold reform may not be achievable; or not anytime soon. But the message for investors is clear: the geopolitical chip wars could soon turn even more interesting. And they should count themselves lucky that western companies do not depend on Russia for [email protected] More

The writer is head of the centre for financial crime and security studies at the Royal United Services Institute think-tankWhen Russian troops massed on Ukraine’s border late last year, western leaders warned that an invasion would bring massive economic consequences for the Kremlin. When these attempts at deterrence failed and the tanks rolled in, the US, UK and EU implemented a campaign of co-ordinated sanctions. While many have questioned the execution and effectiveness of this response, it provides a valuable test case for the power of finance as a tool of statecraft.One of the most obvious examples of how countries use finance in geopolitics is economic colonisation (buying up industries overseas) as deployed by expansionist states for centuries. The British empire was built on financiers and banks backed by the Royal Navy. More recently, China has used its Belt and Road Initiative to provide loans, investment and infrastructure in strategically important countries — such as the Gwadar port in Pakistan. In return, Beijing is building debt dependency and securing commercial advantages such as mining rights.More insidious than the use of financial sanctions and economic colonisation is the increasing use of active financial measures by hostile states. The term “active measures” was coined during the cold war to describe covert and deniable political influence and subversion operations, ranging from disinformation campaigns to staged protests. More recently, finance has been increasingly weaponised to achieve this sort of malign ambition.Over a quarter of a century, Moscow and its proxies have been securing influence in open societies through finance. From simply enjoying the safety offered by western asset markets and property ownership, to funding galleries, universities and football clubs, Russia has bought acceptance, influence and proximity to power. Many of these investments are covert, but some are more blatant, such as donations or loans to political parties. The Kremlin has also funded civil disruption in former Soviet Republics and engaged in anti-democratic activity such as disinformation campaigns. Most recently, these have sought to undermine the effectiveness of US and UK-made Covid vaccines.Western countries are, on the whole, alive to hard security threats such as terrorism, and are waking up to the threats posed by state-backed information warfare campaigns. But their awareness of the role played by finance is much less developed, making them vulnerable to active financial measures.In recent months, the UK has finally started to plug the manifold loopholes that have allowed “dirty” money to circulate in the British economy. The government has committed to bring forward new legislation that will further strengthen powers to tackle illicit finance and reduce economic crime.While addressing criminal activity is clearly welcome, blocking the proceeds of crime is only part of the problem: much harder is identifying the seemingly “clean” money being used for influence purposes. Such investments and donations typically lie beyond the realm of law enforcement and are not on the radar of a financial sector focused on combating money laundering.Whitehall is apparently aware of the threat: last year’s defence and security review emphasised the danger of hostile states “test[ing] the line between peace and war” via economic statecraft, cyber attacks, disinformation and proxies. Most of these activities typically involve a financial dimension: identifying and challenging these transactions should be a core function of MI5’s team to combat state threats. However, some key opportunities are being missed. Western democracies represent a significant portion of global finance: London and New York are global financial centres, and the western alliance comprises nine of the 10 largest global economies. But whereas countries such as China harness their economic power to expand their influence, the UK — despite its vaunted post-Brexit trade ambition — has been in retreat. Its financial influence around the world has shrunk as British banks have reduced their global business, while the government has failed to articulate a geoeconomic strategy. This goes against ministers’ ambitions of “planting the British flag on the world stage once again”.As Russia’s war in Ukraine grinds towards its sixth month, western nations are still relying on financial measures as a show of force against the Kremlin. This resolve must now be applied more universally by the UK and its allies for deterrence purposes — just as their adversaries are doing. More

Everyone in the UK, it seems, is angry about their pay. Rail strikes are set to escalate over the summer. Bus drivers, refuse collectors and baggage handlers have staged walkouts across the country; more than 100,000 postal workers at the Royal Mail Group have voted to follow suit. In the public sector, unions representing teachers and doctors, nurses and civil servants are preparing to ballot their members on industrial action after ministers announced pay deals that equate to real terms wage cuts.The outrage has created some incongruous alliances: rail workers demonstrated in June outside the Old Bailey in solidarity with criminal barristers who were rallying in wigs and gowns to protest against miserly legal aid fees.And with polls showing significant support for striking workers, unions are gaining ground in workplaces where they had previously struggled to gain a foothold, from the Financial Conduct Authority to the first vote for national strike action by home-based call centre workers.With inflation at a 40-year high, the surge in strike threats raises the question: who really deserves a pay rise?Among different jobs, some of the biggest losers in recent years include NHS consultants, midwives and teachers. The public sector has fared worse than private business. But perhaps the biggest reason for the wave of unrest is that wages across the entire economy have struggled. The current cost of living crisis follows the worst peacetime decade for pay since the second world war. A decade of lost pay growthOn the eve of the pandemic, average weekly earnings were still below the peak they reached before the 2008 financial crisis in real terms.This stagnation is exceptional by historical standards: until 2007, wages had grown fairly steadily throughout the postwar period. If that trajectory had continued, they would now be 47 per cent higher in real terms.

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Labour unrest is building in a number of countries as a result of high inflation. But the squeeze on UK salaries in recent years is also exceptional by international standards, at least among wealthier countries. Despite the UK’s relatively strong record on employment in the years following the global financial crash, wage growth has been weaker only in Japan, Mexico and the eurozone countries that bore the brunt of its debt crisis.

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This underperformance was partly due to sterling’s depreciation after the 2008 crisis, which drove inflation higher than elsewhere in Europe; but it also reflects the UK’s dismal record on productivity. The well-off are pulling ahead againThe political mood is also being driven by a feeling that economic gains have not been shared equally. Wages have actually risen fastest for the lowest paid in recent years — thanks to the rapid increase since 2016 in the minimum wage. But this has not helped those workers slightly higher up the pay scale to catch up with those at the top. Moreover, cuts to benefits meant that many of the poorest households were no better off, even if their wages increased.People in some jobs that used to pay comfortably above the minimum wage — such as senior care workers — feel they could now earn almost as much in a junior role with less responsibility and stress, or in a supermarket or warehouse job with lower skill requirements.

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While pay has stagnated for many people on modest incomes, the highest earners have recently begun to pull ahead again on the back of a bumper bonus season.Research by the High Pay Centre think-tank shows executive pay is rebounding after a period of relative restraint, with the gap between chief executives’ pay and that of average employees set to widen. Payroll data from HM Revenue & Customs, which includes bonuses, shows pay for the top 1 per cent of employees rose 5.3 per cent in real terms in the two years to April 2022 — almost five times the rate of growth for the lowest paid 10 per cent.Public sector squeeze Public sector workers are especially angry because they have already suffered a prolonged squeeze on their real wages. While average earnings across the economy have stagnated, many public sector workers are significantly worse off than they were in 2010, at the onset of the period of austerity, the tight fiscal policies adopted by the UK in the aftermath of the financial crisis.

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Public sector workers used to earn significantly more than private sector counterparts. But that pay premium has now all but disappeared, according to estimates by the Institute for Fiscal Studies, although the government argues that many public sector workers benefit from relatively generous pensions. Ben Zaranko, an IFS researcher, notes that the biggest cuts have fallen on the most senior and highly paid staff. Across the NHS, pay has fallen by about 5 per cent in real terms since 2010 but support staff have fared relatively well — salaries for ambulance support staff have actually increased in real terms. Pay for nurses has fallen more than 7 per cent, that of midwives by 10 per cent and that of a hospital consultant by 12 per cent.In schools too, experienced teachers’ pay has fallen twice as much as that of new entrants to the profession over the period from 2007 to 2021.

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The situation in the private sector is more varied. Few workers are likely to see their wages match inflation in the coming months. The Bank of England says pay deals are averaging about 5 per cent, while prices are set to rise in double digits. But in a tight labour market, many private sector workers are winning bigger bonuses, with some securing mid-year salary top-ups, rather than one-off payments.Unite, one of the biggest trade unions in the UK, has secured so-called cost of living pay deals for low paid staff at the banks NatWest and Barclays, as well as a bonus for staff at Lloyds Banking Group. It has also called off strike action at British Airways and at the pharmaceutical group GSK after winning improved pay offers.Real time data from Indeed, the job search site, shows advertised pay rates in almost all sectors of the economy have continued climbing in recent months, even as the economic outlook worsened.

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In the hospitality sector, where labour shortages have been most acute, advertised wages were almost 10 per cent higher than a year ago in May, while pay for warehouse and construction workers had risen by about 7.5 per cent. Even in areas such as law and management, where pay was falling outright at the start of the year, it had picked up, albeit more slowly.Public sector workers are therefore falling further behind.Official data shows the gap between private and public sector pay growth, including bonuses, has rarely been wider, with the average pay of public sector workers up just 1.5 per cent in the year to May, against total pay growth of 7.2 per cent for the private sector.That is why the government has found it untenable to hold down public sector pay deals — for nurses and teachers in particular — in the 2 to 3 per cent range they had been targeting.But the pay awards announced this week — which average about 4 to 5 per cent, skewed in favour of staff in lower pay bands — have not gone far enough to appease anger, with unions still planning to consult members on potential strike action. In many parts of the public sector, there are worrying signs of longstanding problems with recruitment and retention — which improved during the pandemic as job options elsewhere dried up — starting to re-emerge. A prolonged pay squeeze could only make these worse. More

The ECB raised its benchmark deposit rate to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs and ending an eight-year experiment with negative interest rates.The euro climbed to $1.0268, about 0.7% higher than the $1.0198 it was trading at ahead of the ECB’s statement. By 1312 GMT it had given up most of those gains.Benchmark 10-year euro area government bond yields were broadly higher, with Germany’s 10-year Bund yield up 10 basis points on the day at 1.36%. Two-year German yields, more sensitive to short-term interest rate moves, rose 14 bps to 0.76%.”The market was not by any means fully priced for this development and you can see that reflected in the very sharp rise in short-dated German yields on the back of today’s move,” said Richard McGuire, head of rates strategy at Rabobank.The ECB had previously flagged a 25 basis point move at its July meeting, but sources told Reuters earlier this week that its Governing Council was consider the bigger 50 bps hike. The pan-European STOXX 600 index struggled for direction, briefly falling after the ECB decision before flattening. Euro zone banks jumped 1% with the ECB’s end of negative-rates seen lifting bank profits.Money markets moved to fully price in another 50 bps rate hike in September.NEW TOOLTo cushion the impact of the rise in borrowing costs, the ECB also unveiled a new tool, the Transmission Protection Instrument. Italian bond yields extended their rise, as investors digested the ECB’s new tool to contain strain in bonds markets. Italian yields had risen earlier in the day following the collapse of Prime Minister Mario Draghi’s government, which raises the prospects of early elections. Italian 10-year bond yields were last up 20 bps on the day to 3.70%, having touched the highest since June 28. The closely watched spread over German bond yields was at 235 bps, having widened in early trade to almost 245 bps, its biggest in around five weeks.”We also have the Transmission Protection Instrument (TPI) and that’s going to be as important in terms of market reaction,” said Marchel Alexandrovich, European economist at Saltmarsh Economics in London.”It is quite vague and not what markets want to hear, it would be good to have more transparency.” More

Samsung (KS:005930)’s applications, filed with school districts in Texas where Samsung has an existing chip plant or is in the process of building a new plant, are part of the state’s Chapter 313 incentives programme. Chapter 313, which provides property tax breaks, are currently set to expire by end-2022, the Texas Comptroller website showed – meaning companies that want to lock in tax breaks under the programme will need to apply before the year’s end, no matter how initial its plans. “We currently do not have specific plans to build at this time. However, the Chapter 313 applications to the State of Texas are part of a long-term planning process of Samsung to evaluate the viability of potentially building additional fabrication plants in the United States,” Samsung said in a statement. Samsung last year picked Taylor, Texas as the location for a new $17 billion plant to make advanced chips, expected to create 2,000 high-tech jobs and production seen starting in the second half of 2024. More