Aurelia Butler

I have previously argued that the time to plan for postwar reconstruction is while the war is still raging. That was successfully done in the second world war, and it needs to be done in Ukraine today. It was good news, then, that the Ukrainian government presented a detailed reconstruction plan at a conference in Lugano earlier this week. And it is doubly good news that the plan seems to do all that can be demanded in so little time from a government under existential threat from Russian president Vladimir Putin’s violence.I admit to not having read all the thousands of pages in the individual documents, which are here for your delectation. But to get started, look at the overarching policy document that sets out the content, conceptual framework, and costs that the plan envisages. You can also watch the whole event on video.One conclusion from doing so is clear: the Ukrainian government has undeniably done its homework.The recovery plan is comprehensive, coherent and focuses on the right goals — in particular, the need to see the reconstruction as a tool for advancing Ukraine’s compatibility with EU membership. An important part of that is to aim to “build back better” — ie create infrastructure, economic structures and governance standards that will be state of the art for advanced European countries not today but in 2050. In this, the plan hews closely to the blueprint proposed by leading economists three months ago. It is right to do so.It is also appropriately ambitious. The plan estimates a need for about $750bn in investments over a decade, and aims for a 7 per cent annual growth rate. As I have written before, this is in the right ballpark for reconstruction needs. One should not do reconstruction on the cheap; this is the sort of money needed for the investment that would make Ukraine a good fit for full EU integration. The $750bn would very roughly double the country’s prewar capital stock after replacing what has been destroyed in the war. (The capital stock was 270 per cent of gross domestic product — of which about 210 per cent was private capital and 60 per cent government-owned capital, according to the IMF — and GDP about $200bn.) If we assume that a doubling of the capital stock can roughly double annual GDP over a decade — though it could achieve more or less depending on how well it is invested — then that amounts to a 7 per cent annual growth rate.The challenge, of course, is to turn a good plan on paper into concrete achievements on the ground. But we should not dismiss how important it is even to get a good plan down on paper. While far from sufficient, it is a necessary step, without which Ukraine’s state capacity would be legitimately doubted. The Lugano presentations, in this sense, are the latest in a series of signs that the Ukrainian state and government have been upping their game significantly. For example, those close to Ukraine’s process of applying for EU membership marvel at the record speed the government got through the detailed submission formalities. Others have commended Ukrainian prosecutors’ impressive ability to collect evidence and conduct trials of Russian war crimes with full due process. All at a time of full-on war. But a successful conference only takes you so far. Here are three big questions about what comes next — and some speculative answers.Will the money come? The good news is that Ukraine’s friends are endorsing its plan. Beyond the formal declaration, there does seem to be a widespread political understanding of the need to rebuild Ukraine in a way that integrates it with the EU, and — for now — a willingness to fund this effort. The question of whether frozen Russian assets should be seized to pay for reconstruction is important to the Ukrainians but a bit of a sideshow. What is essential is for partner countries and institutions — the EU above all — to fully commit to securing the funding. Then it will be a question largely for them if they will push all legal mechanisms for making the Russian state and its proxies pay for the destruction it has caused, or let their taxpayers shoulder the burden. The political imperative is that the west must see Ukraine’s EU-oriented reconstruction as squarely in its own self-interest, not just an act of charity. How will the reconstruction effort be organised? The bigger challenge than finding the money — not to minimise that challenge but, as I said, the mood is at present good — will be how to organise the bankrolling effort. People I speak to see good reasons to fear a disorganised melee of countries and international institutions all caring about their brand, their influence, and visibility of their money. The risk is one of paralysis if no streamlined, centralised process to co-ordinate both donors and spending is agreed. The Ukrainian government has increased this risk with a scheme to match individual donors with specific regions or cities in Ukraine — Denmark, for example, is supposedly taking responsibility for Mykolayiv — that nobody quite seems to understand how it is supposed to work.No one would be served by such an organisational mess. Logic dictates that the money should flow through two entities: the Ukrainian government, which alone can identify the country’s needs, and an agency of donors that can reassure them their money is being well spent. And the only good place for that agency is as part of the EU, because reconstruction has to be combined with Ukraine’s candidacy process, and whose members will inevitably put up the bulk of the funding.Will donors trust Ukraine? The great obstacle to donor confidence is, of course, the country’s record of corruption. While nobody wants to speak too loudly about it lest they provide fodder for Russian propaganda, that record warrants scepticism among potential donors — but perhaps less than what is the case. The nuances are well set out in a recent Chatham House paper. Two very positive developments since 2014 are not sufficiently appreciated outside Ukraine. One is that the state has made significant progress on anti-corruption and transparency. Important steps have been taken to clean up the banking system, for example. And public procurement is now fully transparent, following principles of open contracting on a digital platform that as far as I can tell would be state of the art for any country — indeed, many EU countries could do well to take a look at Ukraine’s ProZorro platform. Something similar looks likely to be used to manage reconstruction.The second is the constructive role played by Ukraine’s vibrant civil society. ProZorro itself was built with non-governmental help. A network of activist monitoring of contracts, DoZorro, grew up around it. At Lugano, a new coalition of organisations was launched to provide similar civil society scrutiny to reconstruction. The work of these organisations is strengthened by outside pressure for reform, which is why it is so important that reconstruction is embedded in the EU accession process.Progress notwithstanding, there is still much more to do. Transparency is not self-reinforcing, and it is essential that the Ukrainian state improves enforcement of clean governing, taxation and spending standards. Here it is clear enough what needs to be done; indeed, the government itself included a detailed legislative and enforcement road map in its reconstruction plan. And the EU’s granting of candidate status to Ukraine last month was made on the explicit understanding of specific further progress such as fully staffing new anti-corruption entities.The stumbling stone, it seems to me, is a political willingness to limit one’s own power. Transparency and anti-corruption depend on a true separation of powers where everyone is genuinely accountable to someone independent of them. That goes against many instincts even in the most well-governed countries, and is understandably challenging in a nation that is at war, determined to sweep away old state capture, and where the president enjoys a huge parliamentary majority. Even so, it is what Ukraine — and its friends — need most of all after military victory. Ukraine’s President Volodymyr Zelenskyy has performed extraordinarily as a wartime leader — a greater act of leadership still would be to build truly independent checks and balances on everyone’s power, including himself. Other readablesCentral banks are too worried about inflation and not worried enough about the damage their tightening will do to their economies, I argue in my latest FT column. In the few days since that was published, fears of how bad that damage could get have sent commodity prices plummeting, as our sister newsletter Unhedged analyses. France’s finance minister calls the EU’s fiscal rules “obsolete”, in an interview with the FT.The Peterson Institute’s Adam Posen and Lucas Rengifo-Keller put Brexit in the context of the broader international pressures towards deglobalisation.The European parliament passed the EU’s controversial green investment taxonomy, which includes gas and nuclear projects under strict conditions as pathways to a decarbonised economy.Numbers newsMore bad luck: now a strike at Norwegian gas giant Equinor has sent European gas prices soaring again.Germany has recorded its first trade deficit in more than 30 years. More

The International Energy Agency has warned that China’s dominance of the solar panel supply chain could slow the global transition to cleaner energy.An IEA report on the issue, the first of its kind by the organisation, found that China’s share in the manufacturing stages for solar, from the production of polysilicon to the panels themselves, exceeds 80 per cent, and in some stages could reach as high as 95 per cent by 2025. “The world will almost completely rely on China for the supply of key building blocks for solar panel production through 2025,” the agency said in the report. “This level of concentration in any global supply chain would represent a considerable vulnerability.”The report found that high commodity prices and existing bottlenecks in the supply chain had already led to a rise of 20 per cent in panel prices over the past year, which has resulted in delays in their delivery across the world.“One of the reasons we made this report is to highlight this important weakness in the solar PV supply chain, to call for the governments for diversification, to reduce the supply chain vulnerabilities,” Fatih Birol, head of the IEA, told the Financial Times. The risks of a solar panel supply chain concentrated in China “is not only a geopolitical issue. It can be a fire in major facilities. It can be floods. Disruption of [the solar PV supply chain] has huge implications for our clean energy transition and energy security,” Birol said.Solar energy is a key element in the IEA scenario of the world reaching net zero emissions by 2050. The energy source is scheduled to account for 33 per cent of global electricity generation by then.A quicker shift to solar energy is a more pressing issue for the European Union, which is facing the need to wean itself off its dependence on Russian gas. Under the bloc’s “RePowerEU” plan, it is targeting to install more than 320GW of solar PV by 2025, and almost 600GW by 2030.

Birol has previously told the Financial Times that Europe needs to prepare for a total shutdown of Russian gas exports.Countries and groupings like the EU “need to have tailor-made investment policies” to spur investment in solar panel manufacturing and build their own supply chains, Birol said. China currently enjoyed a major advantage on solar panel manufacturing, because of lower energy and labour costs, according to the IEA chief.“Tax incentives for manufacturers, build a manufacturing facility in industry clusters to reduce land cost — those could be some concrete, quick implementable policies that could be introduced in order to provide a competitive edge vis-à-vis cheap cost of manufacturing in China,” Birol said.The report also noted that China’s Xinjiang province accounted for 40 per cent of global polysilicon manufacturing. China has faced allegations of widespread human rights violations there, and the US in late June started enforcing a ban on imports from the region, including solar panel materials.While the report did not mention the alleged use of forced labour in Xinjiang, it said the world needed to “strengthen international co-operation on creating clear and transparent standards, taking into account environmental and social sustainability criteria”. More

Manmohan Singh is a senior economist at the IMF. The views below are his own, rather than that of the IMF or its executive board.Two recent Federal Reserve papers have argued that the balance sheet run-off (or shrinking in the size of its asset holdings) is equivalent to tightening. A Federal Reserve Board of Governors paper by Edmund Crawley et al says $2.5tn of Fed balance sheet unwind would approximately equate to a 0.50 percentage point of tightening, or 20 basis points per trillion dollars. Meanwhile, Stefania D’Amico and Tim Seida of the Chicago Fed analyse 10 year US Treasury bonds data to reach an estimate of 25 bps per trillion dollars.Remember that under the previous timetable, a $1tn unwind would take around two years. From this September, the faster pace of unwind ($95bn a month of US Treasuries and mortgage-backed securities), will take about a year.Similar research has been done by IMF (published in CATO journal) in which we show that a $1tn change in pledged collateral can move short‐​term rates by as much as 20 basis points. Intuitively, bonds with long tenors can be sliced/diced for very short term in repo/sec lending/prime brokerage/derivative markets. And intuitively, more UST (or similar good collateral like MBS or German Bunds) in the market domain means more collateral availability, and better market functioning (ie, “reverse” monetary policy transmission improves). In other words, if you factor in collateral reuse, effective supply from collateral going to market is more than the nominal amount that the Fed unwinds. Thus, the trillion dollar unwind applied in the two Fed papers means more than $1tn (ie, 20-25 bps tightening per $1-2tn of unwind, assuming duration of collateral released allows that is around 2 at present, as explained by my previous post on collateral velocity). Such equivalence to interest rate tightening is marginal at best, especially if unwinding a trillion takes a very long time (1-2 years plus).The intuition can be seen from the lens of moneyness. Many textbooks still use the conventional IS-LM model to describe the relationship between interest rates and economic output. Here, the IS curve represents investment and savings. The LM curve represents liquidity demand and money supply. The point where they intersect represents the equilibrium in output and money markets. We were taught (illustratively) that via IS/LM curves, LM shifts are parallel:

But LM can pivot, since the role of collateral in money markets is often overlooked in macroeconomics:

Technical explainer: the LM curve is typically derived from the equation M=f(Y, r), where money demand is a function of output (Y) and benchmark interest rates (r). The latter is assumed to be sufficient to determine the entire yield curve, inclusive of all money market rates and risk premia. However, the role of pledged collateral markets (C) in the transmission of monetary policy is ignored. C is also f(r) and a metric for moneyness.In the “old” framework, an inward shift in the IS curve due to a contraction in the economy can be neutralized shifting the LM curve out and lowering rates (even to negative levels), so they intersect at the same level of output as before. This IS-LM framework suggests that, via QE, the LM curve shifts right (money is pumped into the economy) but ignores the good collateral (and moneyness) that was taken out of the economy via QE.In the “new” IS-LM model, changes in monetary policy may not always result in a parallel shift in the LM curve; here, the LM curve may pivot and intersect the IS curve at different points, depending on the slope. Some research suggests that QE may increase output initially but may have a decreasing effect as QE increases in scale. The new IS-LM model supports these findings. The red dots illustrate the change in output relative to the slope of the new LM curve after netting the “moneyness” that is taken out as collateral is silo-ed by central banks. Illustratively, too much QE may result in output that is below the initial starting point before the crisis. Similarly, too little QT does not bring us back to the starting point.As policymakers chart a course through balance sheet policies, they should recognize the trade-off between the moneyness lost (or gained) by purchasing (or unwinding) collateral during QE (or QT). Cross-border portfolio shifts (eg, US Treasuries) can diminish or even reverse the impact of ever-larger QE interventions on asset prices, as described in a paper by John Geanakoplos and Haobin Wang. Similarly, marginal QT will do little towards the “T”. The ‘new’ LM curve factors in the role of collateral in money markets and adds a new wrinkle to the monetary policy framework. More

The writer is Head of European Economics Research at BarclaysWhen Covid-19 struck the world, policymakers responded with an extraordinary co-ordination of monetary and fiscal stimulus. The result was a sharp V-shaped economic recovery from the pandemic lows. As the eurozone confronts a surge in inflation spurred by the Ukraine war, it will have to step up co-ordination once more to avoid reawakening the ghost of the European sovereign debt crisis.The European Central Bank is seeking to design a tool for the transmission of policy across the euro area, to curb so-called fragmentation when there is a more disorderly rise in bond yields in one country than another.The various operational, legal and political challenges of this are many. But a key one is related to the conditions countries will need to satisfy before benefiting from the new facility. Conditionality means policy will have to be co-ordinated.Back in the European sovereign debt crisis, financial conditions tightened on the back of the ECB’s interest rates hikes. As insolvency concerns mounted, governments in countries dubbed “peripheral” had to abruptly tighten fiscal policy to either secure IMF or EU support, or to maintain market access. This failure to co-ordinate policy weakened activity further, particularly in those countries such as Italy that implemented “fiscal consolidations” which hit growth — mainly increasing taxes and by cutting public investment rather than reducing current government spending. A monetary fiscal doom-loop was created.History does not repeat itself, but it rhymes. Although it is not Barclays’ base case for the eurozone outlook — we expect a shallow recession followed by a mild recovery — the current macro backdrop dangerously resembles that of 2010-2011.The market nervousness from June 9-14 was a testament to that, as Italian bond yields rose sharply above German equivalents. The euro area outlook could take a turn for the worse if governments are forced to tighten fiscal policy rapidly again on the back of mounting debt sustainability concerns, the result of higher borrowing costs and lower real growth.So far, the ECB’s commitment to prevent financial market fragmentation has calmed markets. The agreement of credible anti-fragmentation facility at its July 21 governing council meeting is a necessary condition if the ECB wants to prevent a fiscal crisis during its planned tightening, but we doubt it will be sufficient.To start with, we believe the governing council will not ex-ante agree on levels of yields or spreads to target. The pricing of the yields of countries on macro and fiscal factors is an art as much as a science and council members are likely to have divergent views on that. Also, the council could well disagree on whether sovereigns with weak fiscal and growth fundamentals face a liquidity or a solvency crisis when their borrowing costs rise. In anticipation of such disagreement, financial markets could test the determination of the central bank to avoid fragmentation, putting pressure on individual countries by pushing up their sovereign bond yields.The challenge ahead lies in designing a policy mix that simultaneously lends credibility to the ECB’s commitment to bring inflation down to target while minimising the risk of economies falling into such a path. In our view, some degree of co-ordination between monetary and fiscal authorities will be necessary. National fiscal authorities should embark on credible fiscal consolidations that will not damage growth. This time around the EU Next Generation pandemic recovery fund will help to shield public investment from the tightening.A degree of fiscal discipline should be reintroduced to reduce fiscal risks and moral hazard. Some fiscal support to low income households and small to medium-sized enterprises could be funded via European low interest rate loans, as was done during Covid-19. At the same time the ECB, by internalising the impact of a tighter fiscal stance on growth and inflation, could commit to tightening monetary policy less and in a very gradual way. It needs to ensure its actions do not make the job of the national fiscal authorities even more economically and politically challenging. Although not easy to co-ordinate, this seems to us a realistic compromise that could put the euro area on a more virtuous trajectory than the one in which high-debt governments continue to run large primary deficits, while the ECB tightens monetary policy. More

EU debt rules for member states are “obsolete” and should be rethought to reflect the costs of pandemic, war and rising inflation, France’s finance minister has warned.Bruno Le Maire said a “new economic model” was emerging in Europe as public spending ballooned and said any contrast between “frugal” northern EU member states, led by Germany, and profligate southern countries was no longer relevant.“Is there a single state in Europe, in the eurozone, that has left its citizens on their own to face inflation? Not one,” Le Maire said in an interview. “This concept of ‘frugal states’ has been dead for a long time. The Netherlands are not particularly frugal. Germany is not particularly frugal. They spend as much as we do to protect their citizens from inflation.”The French minister’s insistence on new economic thinking in the EU — given the need for big investments in renewable energy to tackle climate change and for more defence spending following the Russian invasion of Ukraine — contrasts with the more frugal views of Christian Lindner, the German finance minister.Lindner said in May that the EU needed to become “tougher, not softer” in reducing public debt.Le Maire conceded that the EU still needed limits on member states’ public debt and annual deficits, a set of requirements known as the stability and growth pact. But the rules — which have been suspended during the pandemic and which are supposed to limit a nation’s public debt to 60 per cent of gross domestic product — “should be rethought”, he said.“The debt rule is obsolete, simply because you have a gap of more than a hundred percentage points between one country and another in the same monetary union [the eurozone],” he said. What was important now, he added, was the trajectory of debt reduction.The suspension of the stability and growth pact was extended until the end of 2023 because of the war and the subsequent surge in inflation. Germany’s public debt, at 69 per cent of GDP, exceeds the EU guidelines, while France’s has risen to 113 per cent, Italy’s to 151 per cent and Greece’s to 193 per cent, according to EU statistics.Investors are growing nervous about EU economic stability. Recent rises in the spreads between the borrowing costs of different countries have triggered concerns about another eurozone debt crisis, with the European Central Bank agreeing to come up with new policies to counter any unwarranted sell-off in a country’s bonds.Le Maire defended the EU’s target of keeping budget deficits below 3 per cent of GDP. He said plans for France foresaw public debt falling from 2026 onwards and the deficit being cut to less than 3 per cent in 2027, compared with this year’s deficit forecast of 5 per cent.Le Maire’s comments come as France seeks to pivot from a period of heavy government spending aimed at helping consumers and businesses through Covid-19 and inflation sparked by the war in Ukraine.

The finance minister, who has been a key member of Macron’s government since 2017 and runs a “super-ministry” of finance and industry, said an upcoming bill to blunt the impact of inflation would include more “targeted and temporary measures”, following €26bn of broader spending programmes including fuel subsidies and caps on retail electricity and gas prices.Although Macron, who is starting his second term, has lost control of parliament, Le Maire pledged to continue pro-business reforms and tax cuts that he said were aimed at achieving full employment, something that has eluded France for more than 50 years.“Achieving full employment is the key to repairing France’s public finances. Getting there will require continuing to reform the labour market, unemployment benefits and training, as the president has promised,” he said. Changing the costly pensions system to raise the retirement age remained a priority, he added.The government will need to hammer out compromises on each law with opposition MPs.“Faced with this new political situation, we must stand firm and remain calm,” Le Maire said. “There are 164 deputies in parliament who are not of the far left or the far right with whom we are perfectly willing to work and who will allow us to strike compromises.”The far left is pressing the government to pass a windfall profits tax — similar to those implemented in the UK and Spain — on energy companies that have prospered from the impact of the war in Ukraine and rising oil and gas prices.Asked whether he would implement such a tax, Le Maire did not rule it out but said he wanted to wait until the end of the year to judge whether it was needed. “The burden of inflation must be fairly shared between the state and business,” he said, adding that he had already convinced companies including Total and container shipping group CMA CGM to make voluntary moves to blunt the inflation pain. More