Aurelia Butler

The European Central Bank will this week broach raising interest rates by half a percentage point, outstripping its own guidance, as it seeks to contend with record inflation and big increases in borrowing costs across much of the world. The euro rebounded from 20-year lows against the dollar — during which it briefly fell below the value of the greenback — on reports the ECB is considering lifting its deposit rate from minus 0.5 per cent to zero at its meeting on Thursday. Such a step would exceed most economists’ expectations, since the central bank said after its last decision in early June that it intended to raise rates by 25 basis points. Eurozone government bond prices fell on expectations of a bigger than anticipated jump in the region’s public sector borrowing costs. The ECB is also grappling with fears of an economic downturn and political instability in Italy, one of the region’s most indebted countries, where Prime Minister Mario Draghi has lost the support of a key party, prompting talk of an early election.The debate between the 25 members of the central bank’s governing council, which begins on Wednesday, is expected to reflect mounting concerns that they are behind the curve on inflation, which rose to a record high for the eurozone of 8.6 per cent in the year to June.The increase would be the first by the central bank in more than a decade, and a 50 basis point rise would end an eight-year experiment with negative rates. The last time the ECB raised rates by 50bp was in June 2000. “The case for a 50 basis point rate rise has been there for a while and arguably the ECB should have done it long ago,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “But it is not the decision itself that would be a problem but the timing of it and the way it has been communicated.”The ECB is due to publish its latest survey of professional forecasters a day after its policy decision on Thursday, which is likely to show that long-term inflation expectations have risen further above its 2 per cent target. Ducrozet said that if ECB rate-setters already knew the results, it could persuade some of them to opt for a bigger rate rise.Some ECB council members — including those from Baltic countries where inflation is close to 20 per cent — have broken ranks to publicly call for a 50bp rate rise on Thursday. However, no decision has been taken and the ECB declined to comment on the plan to discuss a bigger than anticipated rate rise, first reported by Reuters.Most central banks around the world have reacted quicker than the ECB to the continued surge in inflation — as energy and food prices have been driven upwards by the fallout from Russia’s invasion of Ukraine — and several have raised rates more than expected recently.The Federal Reserve exceeded its own guidance last month to raise rates by 75bp for the first time since 1994, while the Swiss central bank surprised markets with a 50bp rate rise last month and the Bank of Canada raised rates by 100bp last week.After the ECB council met in Amsterdam last month, its president Christine Lagarde said it “intends” to raise interest rates by 25bp at its July meeting and could then raise them by a bigger amount at its September meeting if inflation stayed high.When asked at the post-meeting press conference why the ECB seemed to rule out a 50bp rate rise in July, Lagarde said: “It is good practice, and it is actually often done by most central banks around the world, to start with an incremental increase that is sizeable, not excessive and that indicates a path.”But at an ECB conference a few weeks later she said there were “clearly conditions in which gradualism would not be appropriate” and which would require it “to withdraw accommodation more promptly to stamp out the risk of a self-fulfilling spiral”. These included a “de-anchoring” of inflation expectations and “a more permanent loss of economic potential” caused by a cut-off of Russian energy supplies to Europe. More

A bill providing a $52bn boost to US semiconductor manufacturing is not just about America’s chipmakers. The crucial procedural vote this week could impose restrictions that affect funds and technology going to countries such as China. The vote could set the tone for global companies that export chipmaking gear and technology to Chinese chipmakers.In turn, US chipmakers will focus on how restrictive any qualifying standards for these subsidies would be. These include whether companies do business with China — which would include most US chipmakers. At the same time, the Biden administration is reviewing export policies for sales of certain semiconductors to China. See this as an effort to tighten restrictions towards China’s tech industry.All this only adds to a growing number of governments distancing their chip-related companies from China. Restrictions are already in place in Taiwan, home to huge chipmakers such as the Taiwan Semiconductor Manufacturing Company. Its government prohibits companies from building advanced foundries in China to protect any local technology. The Netherlands has had discussions with the US over blocking key Dutch semiconductor equipment supplier ASML from exporting its technology and gear to China.Meanwhile, China’s local industry appears to be moving towards chipmaking self-sufficiency. Total sales from Chinese chip groups grew a quarter last year to a record Rmb1tn ($148bn), making it the fastest growing in the world. China’s largest chipmaker Semiconductor Manufacturing International Corporation (SMIC) reported record revenues last year and profits doubled. But that growth is fragile. China’s chipmakers have become proficient in making lower tech chips — used mostly in simple electronics and cars. These manufacturers remain heavily reliant on US and European technology to make those. Also, local industry still needs external funds. Local groups, such as chip conglomerate Tsinghua Unigroup which has struggled to find a local buyer, need fresh capital and advanced technology to keep up operations.While Chinese chip production volumes are growing, China remains a net importer of chips, especially more advanced models. Shares of local makers SMIC, Kingsemi and Advanced Micro-Fabrication Equipment are down a quarter in the past year despite surging earnings, reflecting the political risks that threaten production. Strict new US standards could mark the beginning of another round of financial woes for Chinese chipmakers. More

BUDAPEST (Reuters) -Hungary’s parliament on Tuesday approved the 2023 budget, which sets out to reduce the budget deficit next year to 3.5% of economic output from a targeted 4.9% this year as the government tries to put finances back on a sustainable track.Nationalist Prime Minister Viktor Orban, who won a fourth consecutive term in office in April, is facing his toughest challenge since taking power in 2010, with inflation at a two-decade high, a weak forint and EU funds still held up amid a dispute over democratic standards.After a spending spree ahead of the elections, which included hefty tax refunds to families and pension hikes, the government is now trying to rein in the budget deficit at a time when the current account deficit also widened largely due to rising energy import costs.These have increased Hungary’s external vulnerability and sent the forint to record lows earlier this month.The government has imposed big windfall taxes on banks and a raft of companies, launched spending cuts and last week scrapped a years-long cap on utility prices for higher-usage households, which – along with tax changes for entrepreneurs – triggered protests against Orban.The tax change and especially the scrapping of price caps are expected to improve the budget balance.”Both steps should lift inflation but cool consumption and improve the fiscal and external balances, addressing Hungary’s main structural issues,” Citigroup (NYSE:C) said in a note.”These measures point towards downside risks to the growth outlook and we see a potential recession in Q4 2022-Q1 2023, at the same time the adjustment may help to prevent further underperformance of the HUF.”The 2023 budget is based on a forecast of 5.2% average inflation, and economic growth of 4.1%, which is above the central bank’s latest projection of 2.0-3.0% GDP growth.While the economy is still growing, boosted by strong domestic demand, analysts project a slowdown from the second half of this year, as surging energy costs, double-digit inflation and sharply rising interest rates bite. More

SEOUL (Reuters) – Boosting women’s participation in the workforce and giving them more leadership opportunities would boost the economic potential of South Korea and the United States, U.S. Treasury Secretary Janet Yellen told a group of women entrepreneurs in Seoul.Women represented a “huge untapped resource” for both the United States and South Korea, Yellen, the first woman to head the U.S. Treasury, told the women in remarks prepared for delivery during a lunch at a vegan restaurant in Seoul.The comments come as the Biden administration is fighting to salvage key parts of its domestic agenda, including a funding boost for child care and universal preschool aimed at increasing the participation of women in the workforce.President Joe Biden had hoped to pass major legislation that would have included such funding along with initiatives to combat climate change and raise taxes on big corporations, but has been stymied by the opposition of Democratic Senator Joe Manchin, whose vote is critical in the evenly split Senate.Yellen told Reuters late on Monday that increasing access to paid leave and child care remained a priority for the Biden administration, adding: “We’re not throwing in the towel on any of it.”In her meetings, Yellen noted that South Korean women are among the most educated in the Organisation of Economic Cooperation and Development countries but hold just 20% of management roles in South Korea. They are also more likely to be irregular workers, and earn 31% less than men on average, the highest gap in the OECD, data from the organisation shows.The International Monetary Fund estimates that closing the gender gap in labour force participation could boost South Korea’s real gross domestic product by 2035 by more than 7%.”Women should be given the ability to stay in the workforce,” Yellen said, adding that many Korean women faced pressure to stay home and raise families. Women everywhere were also held back from rising to senior jobs in public service and the private sector – even in advanced economies such as the United States.A Treasury official said the conversation focused on the challenges of moving ahead in the tech sector while balancing careers and families, a theme echoed during a subsequent meeting Yellen held with women economists from the Bank of Korea.Jenna Lee, founder and chief executive of AIM, South Korea’s first robo adviser, welcomed the chance to meet Yellen.”The challenges women face are much more pronounced in the finance and tech sector,” she told Reuters. “We are fully aware of the fact that we are setting an example for the next generation to come.”In her meeting with Bank of Korea economists, Yellen shared her own experiences in the male-dominated profession of economics, and said she was ultimately able to juggle both a family and career because she married a man who “strongly believed in a fair division of labor in our household”.She said she had worked for years to expand the relatively low number of women who studied economics in the United States and pushed to increase the “disappointingly low” number of women in senior roles at the Federal Reserve when she was there.The economists presented Yellen with a plaque that said her legacy had inspired them to “learn more, do more, and become more”. More

UK private sector pay grew almost five times as fast as public sector workers’ remuneration in the year to May, according to official data released as ministers prepare to sign off on real-terms wage cuts for teachers, doctors and NHS staff.The figures, showing total pay growth of 7.2 per cent in the private sector compared with 1.5 per cent in the public sector, are likely to galvanise union leaders. Many are threatening strikes if the government holds pay rises below 5 per cent for the current financial year, while inflation soars above 9 per cent.Prime Minister Boris Johnson’s cabinet is on Tuesday due to sign off on wage settlements covering 2.5mn public sector workers, in one of the most significant decisions left to be taken by his caretaker government.Unions representing teachers, health workers and civil servants have warned of widespread disruption if ministers approve further real-terms pay cuts for the coming year. Tuesday’s data, released by the Office for National Statistics, further indicated the stark divide in the economy, because of the almost fivefold disparity between private and public sector pay growth.Patrick Roach, general secretary of the NASUWT teachers’ union, accused ministers of “contempt” for public sector workers. “If the government hopes that teachers’ anger will dissipate over the course of the summer break, they are wrong,” he said. “Teachers have been badly let down by this government for more than a decade.”One government official said the 7.2 per cent pay growth in the private sector in the year to May included one-off bonuses on top of an underlying figure of 5 per cent for wages. The public sector figure did not yet include the settlements that would be announced on Tuesday afternoon and backdated to April, he pointed out. The ONS data also showed hiring remained strong despite the growing pressures of high energy prices and rising living costs, with the employment rate 0.4 percentage points higher in the three months to May than in the previous quarter, at 75.9 per cent.The unemployment rate held steady at the 3.8 per cent recorded a month earlier — below its pre-coronavirus pandemic level — even though more people were joining the workforce, with economic inactivity down 0.4 percentage points on the quarter. The number of unfilled jobs edged up to a record of 1.294mn, although the ONS said the rate of growth in vacancies had slowed. Redundancies remained at a record low.Kitty Ussher, chief economist at the Institute of Directors, said companies struggling to fill vacancies would be encouraged by “early signs” of people who had dropped out of the workforce starting to return. But she added there was nothing in the data to prevent the Bank of England from continuing to raise interest rates at its meeting in early August.

The ONS said growth in average weekly earnings, including bonuses, was 6.2 per cent in the three months to May, equivalent to a real-terms pay cut of 0.9 per cent. Growth in regular weekly earnings of 4.3 per cent equated to a real-terms pay cut of 2.8 per cent — a record drop. The ONS noted that these figures were slightly distorted by the comparison with a period in which many people had been on furlough but said this was not as great as it had been earlier in the coronavirus pandemic.Nadhim Zahawi, UK chancellor, said the figures gave “encouragement in uncertain times”, adding that the government was helping households with rising living costs through grants and tax cuts while working alongside the BoE to bear down on inflation.The tight labour market has given some workers more bargaining power, allowing them to secure bigger wage rises that go at least some way to offset the squeeze on household incomes caused by surging inflation.“It is markets, not militancy, pushing pay higher,” said Tony Wilson, director of the Institute for Employment Studies, adding that labour costs were a decisive driver of rising prices.However, Samuel Tombs at the consultancy Pantheon Macroeconomics said the figures would ease pressure on the BoE to step up the pace of monetary tightening. He argued this was because the data showed growth in total pay slowing, labour supply recovering and demand for workers starting to stabilise, with unemployment in the second quarter likely to overshoot the central bank’s forecast. More

Good morning. A strong morning followed by a bad afternoon for stocks yesterday. A report of slower hiring and investing at Apple was blamed for the change of mood, but we’re not buying it. An ugly market is gonna ugly. Today, we take a trip into the monetary policy weeds. It may not be for all readers, but geeks are gonna geek. Email us: [email protected] and [email protected]. QE, bank lending and inflationDid quantitative easing contribute to inflation, and how much? Will quantitative tightening have the opposite effect? Important questions: it is generally thought that low rates did contribute to inflation, and the Federal Reserve is hoping like hell that higher rates will slow it. The role of QE and QT, as we’ve noted before, is trickier. There is little consensus among practitioners, academics and Fed officials about what central bank bond buying does to the economy and how it does it. It would be a lot better if we had a clear idea of what was going on.Benn Steil and Benjamin Della Rocca, economists at the Council on Foreign Relations, have argued in a recent post that QE had a very important, perhaps even determining, role in creating inflation. I suspect they’re wrong, but it’s an important argument to consider.Here’s how the argument goes (picky financial details incoming!). When, in the course of QE, the Fed buys a Treasury bond from investors, the transaction is completed through an intermediary — a bank. The proceeds from the sale become a customer deposit at that bank, a liability. At the same time, the bank is credited with a reserve deposit at the Fed for the same amount, an asset.Because a bank will always have fewer reserve assets at the Fed than deposit liabilities, the addition of the same amount to each will push the bank’s reserve/deposit ratio up. QE improved the bank’s liquidity in that sense.A bank that has more liquidity has an incentive to lend. They don’t have to lend more, but they have reason to, in order to optimise their balance sheet. This is what Steil and Della Roca call the “credit channel” of QE.In 2020, the Fed bought many billions in Treasuries, but banks’ reserves fell (they call them “excess reserves”; more on this shortly). This, Steil and Della Rocca say, is evidence that “QE was working as hoped” — that is, it was encouraging lending. When lending goes up, they argue, excess reserves fall. But the gap between the Fed’s holding of Treasuries and reserves grew wider and wider, allowing Steil and Della Rocca to predict that inflation was coming. Here is their chart:

“As that gap [between Fed Treasury holdings and reserves] began rising again in May 2021], with Core PCE inflation running at 3.5 per cent, the Fed should clearly have declared victory and ended its bond buying. Instead, it continued the [buying] binge for another 10 months. By that time, March 2022, Core PCE inflation was up to 5.2 per cent, and the Fed should have been well into hiking rates.” I suspect that this argument is wrong for two reasons, one involving how banks behave, and one about financial plumbing. I’ve been talking to bankers for several years, as an analyst and a reporter, and I have never heard of talk about the decision to lend or not in terms of having ample liquidity or being liquidity constrained. Instead, the effective constraint is loan demand — the availability of creditworthy borrowers who want money. I asked my favourite bank analyst, Brian Foran of Autonomous Research, about this, and he confirmed my suspicions. “Ninety per cent of bank lending decisions are, do my customers want to borrow and are they in good shape to do so,” he told me. “I’ve never sat in a meeting with a bank CEO who said ‘I’ve got all these deposits and I have to figure out a way to lend them out’. They might say — I have a high loan to deposit ratio and I have to work that out over the long run,” for example by retaining more of the loans the bank makes rather than selling them on to the secondary market. It could be that bankers either are unaware or hesitant to admit the role that liquidity plays in lending decisions. But there is another point, made to me by former Fed trader and the “Fed Guy” blogger Joseph Wang. Banks’ lending isn’t constrained by the volume of liquidity, but rather by its cost. If banks need cash they can always borrow it at some price. Reserves at the Fed, if they ever did matter, don’t matter now, because as Steil and Della Rocca point out in a footnote, the Fed eliminated all reserve requirements in March of 2020. Now the financial plumbing point. Here is a version of the Steil and Della Rocca chart, with two other series added: total bank credit creation, and the balances in the Fed’s reverse repo programme (more on what that is momentarily).Now, one thing in this chart fits very nicely with the Steil/Della Rocca account. The total amount of Treasuries the Fed has added to its balance sheet in the Covid era, $3.3tn (light blue line), at the moment very closely matches the new lending created by US banks (fuchsia line). Here’s the problem, though. Lending does not track reserves (blue line) at all. Now, as argued above, I don’t think there is much reason that it should. And if those two don’t track, the Steil/Della Rocca argument does not work, because it depends on the idea that higher reserves, driven up by QE, incentivise lending. And there is another explanation, other than higher lending, for why banks’ reserves have come down. It was, again, explained to me by Joseph Wang. The reserves are being funnelled, somewhat circuitously, into the Fed’s growing reverse repo programme (yellow line).Here is how that funnelling would take place (now we are getting really technical, so feel free to skip the next two paragraphs). The Fed uses the reverse repo programme to sop up excess liquidity in the banking system that would otherwise force the overnight rate below the Fed’s target. Market participants, mostly money-market funds, can give the Fed their cash and receive an interest-paying Treasury security in return. It’s a collateralised overnight loan to the Fed.In recent years banks have had more deposits than they wanted, which caused problems with their capital requirements. So they have pushed clients towards money market funds. The money market funds have, in turn, put more and more money into the RRP. The way that transaction takes place is that the money market fund that wants to participate in the RRP makes (another) deposit at a bank, and then that same sum is taken out of the bank’s reserve account at the Fed, and placed in a Fed RRP account. The bank’s reserves at the Fed fall.I’m not totally confident in any of this, and look forward to hearing what Steil and Della Rocca have to say in response. But it seems to me that if QE encourages lending, the mechanism is much more indirect than the one they suggest. Zooming back out to why all this matters. Unhedged’s best guess is that QE works primarily by injecting/sopping up liquidity in financial markets, not by encouraging lending. So QT will have its effect by withdrawing liquidity from markets, making them more volatile, diminishing investor risk appetites and increasing demand for cash and risk-free assets. That, rather than weaker lending, is what we should prepare for as QT proceeds.One good readClaes Oldenburg was the man. More

The last time the European Central Bank raised interest rates in 2011 it was forced to reverse the move within months as the eurozone was plunged into a wrenching debt crisis. The market panic that followed only subsided after Mario Draghi, then head of the ECB, declared it would do “whatever it takes” to save the euro.Fears of a similar outcome are front of mind for many as current president Christine Lagarde prepares the ECB’s first rate rise in 11 years. The move, to be announced on Thursday, will come alongside a new bond-buying plan that the central bank hopes will prevent rising borrowing costs from sparking another eurozone debt meltdown.Draghi, who left the ECB in 2019 and became the Italian prime minister last year, seems bound to play a pivotal role once more as he prepares to address parliament in Rome on Wednesday, only days after his ruling coalition splintered. This has fuelled speculation about an early Italian election this year, which could shake investors’ confidence in the country’s ability to manage its swollen public debt that now stands at more than 150 per cent of gross domestic product.As well as political upheaval in Italy, economists also worry about a growing energy crisis in Germany, where officials are nervously waiting to find out if Russia will turn the gas back on this Thursday after a scheduled 10-day maintenance period for one of its main pipelines to Europe. If the gas does not flow or if there are further delays in winter, several EU countries that rely on it are set to impose energy rationing, starting with heavy industrial users, which is likely to trigger a severe economic downturn across the bloc.The worsening outlook is reflected in last week’s sharp fall in the euro below the value of the US dollar for the first time in 20 years. Yet the ECB has little choice but to start raising rates after inflation in the bloc surged to a record high of 8.6 per cent in the year to June, more than quadruple its target. “The risk ahead of us is that because of the energy crisis, the euro area could end up in recession, while at the same time the ECB will have to keep raising interest rates if inflation does not come down,” says Maria Demertzis, deputy head of the Brussels-based Bruegel think-tank. “It is an almost impossible situation.”‘Too slow and too late’ The ECB is grappling with more complex challenges than most major central banks. The eurozone is bearing the brunt of the fallout from Russia’s invasion of Ukraine. The war is driving up energy and food prices and fuelling political instability, while the risk of a fresh eurozone debt crisis is never far away due to the incomplete nature of its monetary union with different countries having separate budgets and bond markets.In these volatile circumstances, Lagarde has said the central bank intends to normalise policy “gradually” starting with a quarter point rise in its deposit rate to minus 0.25 per cent on Thursday ahead of a bigger rise above zero in September if price growth remains high.The ECB has acted more cautiously than the Federal Reserve, which has already raised US rates three times and is next week expected to raise them again by at least three-quarters of a percentage point. The IMF said that over the past year 75 of the 100 central banks it tracks have raised rates on average almost four times each, by 3 percentage points in emerging markets and 1.7 points in advanced economies. If Russian gas does not flow, several EU countries that rely on it are set to impose energy rationing © Andrey Rudakov/BloombergMany believe the ECB is being too timid to curb inflation, which hit double-digit figures in nine out of the 19 eurozone countries in June. “The very gradual and cautious normalisation process the ECB started at the end of last year has simply been too slow and too late,” says Carsten Brzeski, head of macro research at Dutch bank ING.Some members of the ECB’s rate-setting governing council — notably those in Baltic countries where inflation is close to 20 per cent — have broken ranks to call for a more aggressive half-point rate rise on Thursday.“It is like antibiotics, it doesn’t help if you take them in September if you are ill now,” says one of the more hawkish ECB council members. “Interest rates are our medicine and the timing and size of the dosage are of utmost importance.”Up to now, the eurozone economy has been relatively resilient, with retail sales and industrial production remaining above last year’s levels, while the lifting of Covid-19 restrictions has boosted summer travel and tourism.But economists expect high prices to erode the spending power of European households and weigh on industrial output as companies reduce production. “If you are a company and gas is an essential input for production, you are probably going to [have started to] produce less already in anticipation of possible supply disruptions,” says Spyros Andreopoulos, senior European economist at French bank BNP Paribas. “We are already seeing signs of this starting to happen.” Economists at Germany’s Deutsche Bank estimate the skyrocketing price of imported energy and food will deliver a €400bn negative hit to the eurozone’s balance of trade this year. This is already draining confidence among consumers and businesses, which points to a likely downturn later this year, especially as the US and Chinese economies are already slowing sharply.But the single biggest thing keeping senior ECB officials awake at night is the fear that Russia is weaponising its energy exports to press for an advantage in its invasion of Ukraine by increasing the economic pain for Europe. “The dependency of European countries — and the euro area is a case in point — on external supplies from foes, has had a major impact on prices,” Lagarde said in June. “That could contribute to inflation directly — if it leads to further rises in energy costs — or indirectly, if a higher level of energy prices makes some production uneconomic and leads to a durable loss of economic capacity.”Sven Jari Stehn, chief European economist at US investment bank Goldman Sachs, says eurozone inflation is likely to peak above 10 per cent in September. But if Russian gas flows stopped completely, he warns “the risks are skewed towards a sharp contraction and even higher inflation”, adding the eurozone economy would keep shrinking until the second quarter of next year in these circumstances.The growing energy crisis in Germany has prompted the government to slash the cost of public transport © Krisztian Bocsi/Bloomberg“It is a nightmare scenario for economic policymakers,” says Lars Feld, an economics professor at the Albert Ludwigs University of Freiburg, who advises the German finance minister. “It is more difficult than in the 2012 debt crisis, when we had a clear choice between monetary policy or fiscal policy solutions, but now both are much less clear.”Living with the ghosts of the debt crisis As long as inflation continues to rise, the ECB is expected to keep raising rates even if the economy starts to nosedive, while higher borrowing costs will make it harder for governments to spend more on shielding their citizens from the soaring cost of living. This is fuelling political tensions across Europe.Public anger over surging energy and food prices played a key role in the fracturing of Draghi’s ruling coalition in Italy, which resulted in him offering his resignation — only to have it turned down by the president. High inflation also eroded support for French president Emmanuel Macron and contributed to his failure to win a parliamentary majority in elections in June.“I fear political instability in Europe, in Italy and, of course, in France,” says Vítor Constâncio, former vice-president of the ECB who is now economics professor at the University of Navarra in Madrid. “If Macron has problems approving the budget next year there could be elections in France and the prospect of an Italian election is also a complicating factor, no doubt.”Borrowing costs are already rising faster for heavily indebted southern European countries, such as Italy, than for some of their more fiscally solid northern counterparts, recalling the demons of the sovereign debt crisis that nearly ripped the eurozone apart a decade ago.This is an uncomfortable reminder for the ECB that, unlike the Fed or the Bank of England, it sets monetary policy for 19 different countries, each with its own budget and — crucially — bond market. That leaves the single currency vulnerable to a divergence in borrowing costs between countries which can test the sustainability of national debt levels.“Of course you always have this general risk of a crisis in the periphery of the euro area playing out in the background,” says Dirk Schumacher, head of Europe macro research at French bank Natixis. “It is something the Fed doesn’t have to deal with.”In response, the ECB is expected to announce that it will tackle any unwarranted divergence in a country’s bond yields by buying its bonds using a new scheme it calls the transmission protection mechanism. Unlike the yield curve control policy of Japan’s central bank, which is buying as many bonds as needed to cap the country’s borrowing costs at a fixed level, the ECB is unlikely to target a specific bond yield for each nation and will instead use its judgment on when to intervene. That has sparked worries, particularly in more frugal countries such as Germany and the Netherlands, that the ECB will encourage fiscal profligacy among member states and stray into “monetary financing” of governments — the printing of money by a central bank to prop up a country’s budget — which is against the EU treaty.“Distinguishing what is political risk from market speculation empirically is impossible,” says Feld, the former chair of Germany’s council of economic experts. “The market pricing will have some disciplining effect on political decisions and we should let it work.” Watching for market disruptions The mounting anxiety in EU capitals over how best to respond to the punishing combination of rising prices and slumping growth is clear. While not forecasting a recession, the European Commission last week downgraded growth estimates and sharply increased predictions for inflation, which is now tipped to hit 7.6 per cent in the euro area this year and remain at twice the ECB’s 2 per cent target in 2023. Economists estimate the skyrocketing price of imported energy and food will deliver a €400bn negative hit to the eurozone’s balance of trade this year. © Eric Gaillard/ReutersDraft commission proposals, due for release this week, would limit energy usage in public buildings, as it scrambles for ways of conserving gas given the threats from Moscow. Officials are blunt about the economic headwinds facing Europe. Klaus Regling, head of the European Stability Mechanism bailout fund, last week warned that while the economy and consumers were under “massive strain”, markets are facing greater volatility given the combination of higher inflation and interest rates — something many traders have never experienced in their professional lives.That does not mean we are facing a new “euro crisis”, insists Regling — a sentiment echoed by Paschal Donohoe, the eurogroup president, who has repeatedly stressed the stronger institutional set-up that the euro area enjoys today compared with a decade ago. Nevertheless, the dangers of a sudden loss of market confidence are hanging heavily over officials’ planning — with Italy front and centre of their concerns. The eurogroup last week discussed the creation of an informal task force of officials to monitor the markets during the summer break — a period in which low liquidity and thinly staffed trading floors can give rise to disruptive movements in bond yields and stock markets. The group will scan for emerging market hazards and have the power to convene policymakers if trouble erupts, according to people familiar with the plans. The search for closer co-ordination between institutions and member states speaks to a broader concern among finance ministries — namely the risk of disjointed or contradictory action by different member states that ends up eroding, rather than shoring up, market confidence. Emerging from a meeting in Brussels last Tuesday, Sigrid Kaag, the Dutch finance minister, stressed the need for unity among the currency union’s capitals, warning: “Everyone is struggling with the same issues, and if a recession is looming . . . I think we need to meet and converge around the same choices”. The 19 eurozone finance ministers say they have already agreed not to boost demand via extra borrowing next year, to ensure they don’t further stoke inflationary pressures.

Holding a clear agreed line will, however, be much easier said than done. Italy is the main focus of member states’ concerns, given the risk that Rome will fall behind on its reform commitments or fail to keep a tight grip on public borrowing. Giuseppe Conte, the head of the Five Star Movement, last week withdrew its support from Draghi’s national unity government, throwing the ruling coalition into chaos. Conte accused the prime minister of doing too little to help families clobbered by soaring energy and food prices. If the government were to collapse it would raise doubts about Rome’s ability to pass a budget in November, fanning fears in northern capitals that Italy will once again emerge as a dangerous weak spot in the euro area’s armour. The prime minister’s residence at Chigi Palace in Rome. Mario Draghi will address parliament on Wednesday, amid speculation about an early election in Italy © Guglielmo Mangiapane/ReutersAsked on Thursday about the situation in Rome, Paolo Gentiloni, the European economy commissioner, stressed the importance of not adding political tremors given the febrile global situation. “In these troubled waters — war, high inflation, energy risks, geopolitical tensions — stability is a value in itself. Now is the time for sticking together, for cohesion,” he said.After the Covid-19 pandemic hit in 2020, plunging much of Europe into a record postwar recession, Lagarde said there were “no limits” to the central bank’s commitment to the euro. That pledge may be about to be tested again. More

British shoe designer Manolo Blahnik has won the right to use his name in China for the first time, ending a costly 22-year legal battle.In a rare ruling, China’s highest court cancelled a trademark incorporating the Manolo Blahnik name that has been owned by Chinese businessman Fang Yuzhou.The decision will enable Blahnik — who started his business in London in 1971 and became a household name in the early 2000s through HBO’s Sex and the City — to sell his brand in the world’s fastest-growing luxury market for the first time.“It was a huge hole in our existence,” Kristina Blahnik, chief executive of Manolo Blahnik and the founder’s niece, told the Financial Times. “When we got the call . . . genuine tears were shed.”China has a “first to file” trademark system, which has left many foreign companies vulnerable to “pirates” who try to sell trademarks when those businesses enter China. Even small start-up British designers find their names have already been registered in China, according to one lawyer familiar with such cases.Intellectual property theft has been a long-running source of tension between China and its trade partners, particularly the US.Amendments designed to strengthen trademark legislation were implemented in China in November 2019, and in recent years more foreign companies have won disputes in Chinese courts.Last year, US sportswear brand New Balance won a lawsuit against two local companies for imitating its “N” logo and received Rmb25mn in damages, among the largest compensations granted to foreign brands in trademark court fights.Former NBA superstar Michael Jordan was able to stop Chinese sportswear manufacturer Qiaodan Sports using its trademarks after a nine-year lawsuit that was handed down in late 2020. Jordan argued that Qiaodan, which is the literal Chinese translation of his name, had infringed his rights.

A pedestrian passes a branch of Chinese sportswear shop Qiaodan Sports in Shanghai © Peter Parks/AFP/Getty Images

Other luxury brands including Italian menswear group Zegna and British label Dunhill have also won trademark infringement lawsuits in China.There have also been high-profile defeats. French luxury group Hermes lost a court battle in 2012 to stop a Chinese menswear company using Ai Ma Shi — a Chinese translation of Hermes — on its products. Hermes’s lawyers have been trying to invalidate the trademark since 1997.Manolo Blahnik had several earlier appeals dismissed because the company could not prove it had a reputation in China before 2000, and because Fang Yuzhou appeared to be actively using the trademark for a shoe label he had shares in, legal experts said.Blahnik said the company’s plans for the Chinese market were still in the early stages, but she hoped to begin selling directly in China by the second half of next year. “We won’t be racing with a rocket into China, but gently walking,” she said.The decision is likely to act as a bellwether for other foreign brands locked in disputes.“It could be a landmark case for not only other luxury brands but also brands such as [Japanese retailer] Muji, which is in a 20-year trademark battle,” said Rieko Michishita, veteran China IP lawyer at law firm Bird & Bird.The ruling will allow Blahnik and its retailer partners to begin selling in China without fear of legal retaliation and to fight counterfeits being sold in and exported from the country, he added. The privately owned shoemaker will face tough competition from brands such as Louis Vuitton.

Manolo Blahnik had sales of €42.3mn in 2020 — the most recently filed accounts — down 7 per cent from the previous year due to the coronavirus pandemic.Although the company has not sold directly in China, it has courted Chinese luxury consumers via stores in Tokyo, Hong Kong, Singapore, Taipei and Seoul.On the costs of the legal challenge, Blahnik said: “I would have a heart attack if I really had to add it all up.” More