Aurelia Butler

A global deal to eliminate new car emissions by 2040 is struggling to attract support from the world’s largest carmakers and governments including the US and China, days before it is due to be revealed at the COP26 climate summit.Volkswagen has said it would not sign the deal while Toyota is still debating but is highly unlikely to agree, citing the reluctance of key governments to join the agreement, according to people close to the negotiations. The two companies are the world’s largest carmakers.BMW confirmed it would also not sign the deal, saying: “There remains considerable uncertainty about the development of global infrastructure to support a complete shift to zero emission vehicles, with major disparities across markets.”The pledge included a commitment to “work towards all sales of new cars and vans being zero emission globally by 2040, and by no later than 2035 in leading markets”, according to a version marked “final” that was seen by the Financial Times. It is due to be released on Wednesday.The absence of the US and China as well as Germany from the expected deal is one reason several carmakers have held off from agreeing.Two UK officials confirmed Germany, China and the US had not yet signed up.Ministers hope that the US, the world’s second-largest car market, might still agree despite President Joe Biden’s concerns over a domestic backlash. “With the US they haven’t explicitly said no yet . . . they might end up signing it,” said one UK official.China, the world’s largest car market, represents the most significant prize. Discussions have involved whether Beijing would accept a less onerous target for half of its vehicles to be zero emissions.Germany’s rationale for not signing up was that it wanted to pursue an option of “synthetic fuels” with a lower carbon content. “But we do not see that as zero carbon or anywhere near zero carbon,” the UK official said. Getting governments on board is key to winning the support of the auto companies, which are investing heavily in electric or hydrogen vehicles.None of the carmakers is against phasing out emissions but each had raised specific objections to the deal, people familiar with the negotiations said.VW, which has one of the industry’s most ambitious electric car programmes, would not sign because of China’s lack of commitment to phasing out coal power, said two people familiar with the company’s thinking.China is one of the largest electric car markets but much of the power generated in the country relies on coal.VW said: “While the overall global goal of reaching zero emissions . . . is non-negotiable, regions developing at different speed combined with different local prerequisites need different pathways towards zero emissions.”Toyota, which last year was the world’s largest carmaker, was reluctant to agree to the deal because markets such as Africa and Latin America might take longer to become electric, people familiar with the company’s thinking said. The group, which unlike VW has not ruled out signing the deal, also has a significant presence in the US and China.BMW had not signed because it believes the shift from combustion engine cars would take longer than expected. It is prioritising cutting emissions out of its supply chain and using more recycling to reduce its carbon impact.Ford, General Motors, Daimler and Volvo Cars are all expected to sign the deal, which will include pledges by governments, city authorities and investors to work towards ending sales of polluting models by 2040.GM has stated an “ambition” to make its cars emission-free by 2035, while Volvo has said all models would be electric by 2030.Daimler has promised it will only sell electric cars from 2030 “where market conditions allow”. Ford has said 40 per cent of its sales would be electric by the end of this decade. More

The Federal Reserve warned on Monday that stresses in the Chinese real estate sector “posed some risk to the US financial system”, pointing to heavily indebted property companies like Evergrande as a potential source of global contagion.“Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,” the Fed warned in its semi-annual Financial Stability Report.On the domestic front, the Fed also warned that a “steep rise” in interest rates could lead to a “large” correction in risky assets, in addition to a reduction in housing demand that in turn could lead to lower home prices. Employment and investments could take a hit too as borrowing costs for business rose.The US central bank said it was worried about China because the nation’s “business and local government debt remain large; the financial sector’s leverage is high, especially at small and medium-sized banks; and real estate valuations are stretched”.“In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group,” it said.The Fed said the Chinese financial system could come under pressure if there were “spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite”.The central bank’s warning came roughly two months after Jay Powell, Fed chair, described the Evergrande situation as “very particular” to China. Speaking at a news conference, Powell said he did not see a lot of “direct United States exposure” but was worried that the turmoil could have a broader effect on global financial conditions and investor confidence.In its report, the central bank cautioned that highly indebted emerging market economies could also pose a risk to financial stability, especially in the event of a “sudden and sharp” tightening of financial conditions. These have loosened to historic levels in the aftermath of the Covid-19 crises due to the actions undertaken by central banks and other policymakers globally. “A sharp tightening of financial conditions, possibly triggered by a rise in bond yields in advanced economies or a deterioration in global risk sentiment, could push up debt-servicing costs for EME sovereigns and businesses, trigger capital outflows, and stress EMEs’ financial systems,” the Fed wrote in its report.

“Widespread and persistent stress” could have repercussions on the US financial system, the Fed said, adding that businesses with “strong links” to the most vulnerable countries were particularly at risk. “There was a notion of correlation [in the report],” said Padhraic Garvey, regional head of research for the Americas at ING. “The fear is that if one thing goes, the rest could go.”In a special section of the report, the Fed also analysed “recent volatility in so-called meme stocks”. So far, it said “the broad financial stability implications of these developments have been limited” as trading volatility subsided, but deserved “continuing monitoring”.The Fed said reasons for concern included the relatively high leverage ratios of younger investors and the possibility these would leave them “more vulnerable to large swings in stock prices”, particularly when so many market participants are trading equity options.The central bank said it also worried that the interaction between social media and retail investors “may be difficult to predict” and that “the risk-management systems of the relevant financial institutions may not be calibrated for the increased volatility”.

Video: Is China’s economic model broken? More

Tensions between the UK and the EU are rising again over the implementation of post-Brexit trading arrangements for Northern Ireland, with talks on possible reforms seemingly deadlocked.Ireland’s foreign minister Simon Coveney warned at the weekend that the entire EU-UK Trade and Cooperation Agreement could be terminated if the UK made good on its threats to trigger Article 16 and fundamentally rewrite the protocol on Northern Ireland. The protocol, part of the EU-UK withdrawal agreement, was agreed in order to avoid the return of a north-south trade border on the island of Ireland.At the same time tensions are growing in Northern Ireland, where the mainly Protestant Unionist parties have rejected the agreement. Two buses have been set on fire in the past week, in apparent protests over the protocol.Why has Article 16 become so controversial? And how could it affect EU-UK relations more broadly?What is Article 16?This is a safeguard clause in the Northern Ireland protocol which either side can trigger if they believe the arrangement has caused “serious economic, societal or environmental difficulties” or the “diversion of trade”.The UK says this threshold has already been reached as a result of the trade frictions caused by the protocol, which requires all goods travelling from Great Britain into Northern Ireland to conform to EU rules. Although the arrangement was agreed by Boris Johnson in October 2019 the British government now says it has caused far greater disruption than anticipated at the time and needs to be fundamentally rewritten.UK ministers also argue that the unionist community has lost confidence in the protocol and its continued application could destabilise the already fragile politics of the region.

Video: Opinion: why Brexit will become a negotiation without end

Which parts of the protocol does the UK want to change and why?There are five main areas that the UK wishes to change, which were set out in a formal command paper published last July.In order to reduce friction on the Irish Sea border that the protocol has created, the UK asked for an “honesty box” approach to checking goods entering from Great Britain. This would mean only goods travelling south to the Republic of Ireland would face checks. London also asked for the scrapping of any paperwork on goods travelling from Northern Ireland to Great Britain. In addition, London demanded that the European Court of Justice should no longer have the right to enforce main elements of the protocol and wanted it to be replaced with a “treaty-based” arbitration mechanism. The EU has rejected this request, arguing that since Northern Ireland is following EU rules and regulations for goods, only the ECJ can rule on their application.The bloc has offered to reduce customs and health checks on the Irish Sea border, but the UK says this offer not go far enough. Why would Article 16 be a problem for the EU?If the UK fails to maintain an effective border in the Irish Sea, and there is no north-south trade border in Ireland — as both sides agree is necessary to preserve the 1998 Good Friday Agreement that brought peace to the Island — then this creates a backdoor into the EU single market.Brussels argues that without full legal controls on animal and plant products, Ireland’s place in the EU single market is undermined because its goods can no longer be trusted, so may require checks as they enter the EU. The UK would therefore be threatening Ireland’s economic rights as an EU member. This may be seen as intolerable by the 26 other EU member states.For its part, the UK says this concern is overstated. It argues that in-market surveillance by both sides can address concerns about any non-compliant goods flowing into Ireland via Northern Ireland, and that the actual risks to the EU single market from UK goods are negligible. How would Article 16 affect trade?Once the UK notifies the European Commission of its intention to trigger Article 16, including what measures it intends to take to address the “serious economic, societal or environmental difficulties”, the two sides immediately enter into consultations to discuss the British proposals.These cannot come into force for a month, except under “exceptional circumstances”, where the UK argues that immediate action is required. Crucially, Article 16 says any action taken must be limited to what is “strictly necessary in order to remedy the situation”. The response from Brussels would therefore depend on how expansively the UK used Article 16. If London identified specific problems with the protocol — for example the ability to trade in chilled meats or plant products with Northern Ireland — the EU would likely take limited steps to address the fallout in those areas.But if the UK used Article 16 to suspend key parts of the protocol — for example Articles 5 and 7, which form the basis for leaving Northern Ireland in the EU single market for goods — then Brussels has suggested it could take far more draconian action. For instance, it could argue that because the EU-UK trade deal was always predicated on London first addressing the Northern Ireland border issue, any UK decision to unravel the protocol would therefore be undermining the entire basis for the Trade and Cooperation Agreement with the EU. Under the TCA, either side must give 12 months’ notice of termination, before they would revert to trading on World Trade Organization terms. This would effectively create another “no deal” cliff-edge during which Brussels hopes the UK would return to the negotiating table.Alternatively, Brussels could take the lesser step of applying targeted tariff measures against the UK on sensitive products such as cars, whisky or fish.Could there be longer-term consequences? If the two sides cannot agree on reforms to make the protocol function, there could be a serious rupture of economic and political ties.The souring of relations could also extend to foreign affairs and co-operation on a range of fronts, from data flows to pan-EU scientific research projects.A trade war would also cause job losses in the EU, especially in France, Belgium and the Netherlands, which still have big economic links with the UK. The EU has already set aside €5bn to compensate governments and companies which took an economic hit from Brexit. As was seen in the four years after the 2016 Brexit vote, trading on WTO terms could also deter investment and damage business confidence in the UK. More

Central bankers have outlined starkly different responses to the global surge in inflation, with senior US and UK officials signalling that interest rates are likely to rise soon in their countries despite such a policy shift remaining a distant prospect in the eurozone.Philip Lane, the European Central Bank’s chief economist, said on Monday that the eurozone was in a “completely different” situation to other countries, adding there were “powerful reasons” for inflation to fall in the region next year. It would be “counter-productive to tighten monetary policy at the current juncture,” he added.In contrast, US Federal Reserve vice-chair Richard Clarida said the “necessary conditions” for US interest rates to rise from their current near-zero level will be met by the end of next year should the economy progress as expected. The Bank of England has been criticised for leading markets to believe there would be a rate rise at its meeting last week, when it left rates unchanged. Even so, governor Andrew Bailey has insisted that the vote was a “close call” and the BoE “won’t bottle it” if the economy develops in line with its forecast.

Their comments highlight the diverging views among central banks over how quickly they should tighten monetary policy in response to rising global inflation. Resurgent consumer demand, supply chain bottlenecks and rising energy costs are pushing prices higher around the world. Analysts said the ECB was bound to be the slowest to raise rates after it spent much of the past decade struggling to avoid Japan-style deflation. Eurozone economic activity and employment levels also remain weaker than in the US and UK.“On all fronts, the risk of a self-sustained wage-price spiral looks much lower in the euro area than in the US or in the UK,” said Frederik Ducrozet, strategist at Pictet Wealth Management. The US economy has already rebounded above pre-pandemic levels, boosted by its stronger fiscal policy response. In contrast, the eurozone is only expected to achieve pre-pandemic levels of output later this year. Although the bloc’s unemployment levels have returned to pre-crisis levels, millions of people remain on furlough schemes and have left the workforce.Erik Nielsen, chief economist at UniCredit, said: “The key differences with the eurozone inflation outlook compared to the US are the difference in fiscal stimulus and the much more flexible US labour and housing markets, while UK inflation outlook is being affected by the long-term hit to supply stemming from Brexit and the likely effects of sterling depreciation.”Clarida said on Monday that if the US unemployment rate drops to 3.8 per cent from its current 4.6 per cent, as projections suggest, that would be consistent with his assessment of maximum employment — and warrant tighter monetary policy.The Fed’s preferred inflation gauge, the core personal consumption expenditure index, surged to 3.6 per cent in September from a year earlier and is on track to end the year at 3.7 per cent, according to its latest forecasts.In the UK, consumer inflation has averaged the BoE’s 2 per cent target over the past decade. It also has tighter labour markets than the eurozone, and the BoE will pay particular attention to the labour market effects of the end of the UK’s furlough scheme in October. “There will actually, as a matter of fact, be two official labour market data releases between now and our next meeting” in December, Bailey said last week.

By contrast, Lane said eurozone inflation had averaged 0.9 per cent from 2014 to 2019, adding: “Despite the high current inflation rate, the analysis indicating that the euro area is still confronted with weak medium-term inflation dynamics remains compelling.”Eurozone inflation reached a new 13-year high of 4.1 per cent in October — well above the ECB’s 2 per cent target. But Lane said several factors pushing up prices today were expected to fade next year, including supply chain bottlenecks and the impact of a temporary German tax increase.He added that the eurozone’s large current account surplus, generated by more exports than imports, highlighted the bloc’s “weak medium-term aggregate demand conditions”.Furthermore, despite vast government aid packages in response to the pandemic, Lane said fiscal policy in Europe was “constrained by high aggregate national debt levels and the lack of a permanent central fiscal capacity”. “These factors reinforce our strategic assessment that extensive monetary accommodation is required to ensure that inflation pressure builds up on a permanent basis in order to stabilise inflation at 2 per cent over the medium term,” he said. More

In the tortuous negotiations over Brexit, Boris Johnson’s government believes it has learned one big truth: hardball tactics with the EU work. It is convinced it extracted concessions by threatening a no-deal exit in late 2019, and again last year by preparing to override parts of the withdrawal agreement it signed months earlier. With talks on reforming the post-Brexit protocol on trade with Northern Ireland seemingly stuck, Downing Street is indicating it is ready to trigger a clause that would suspend key parts of that accord. Forceful negotiating tactics are one thing. Carrying out the threat would be a grave mistake.Like any “safeguards clause”, Article 16 of the protocol exists to be used, by both sides, if applying the agreement leads to “serious economic, societal or environmental difficulties” or reduces trade. Corrective steps can be taken unilaterally, but must be restricted purely to what is needed to remedy the situation. With two buses set alight by masked men in the past week, a Northern Irish first minister forced to resign in the summer, and trade being crimped, Downing Street argues the threshold to pull the alarm cord has been met.But the article is supposed to apply to unforeseen issues. There may be truth in Britain’s argument that the EU has applied the protocol in overly legalistic fashion and, until last month, was slow to offer compromises. Much of what the UK objects to about how the protocol is working, however, was entirely foreseeable. It flowed directly from the hardline Brexit Johnson’s government insisted upon. Unless all of the UK stayed in a customs union with the EU, Northern Ireland had to remain in the EU’s single market for goods, to prevent a destabilising “hard” trade border being created with the Republic.Downing Street set out in a July paper five desired changes to the protocol — including removing the right of the European Court of Justice to settle disputes — that amounted to a rewrite of key elements. If the UK used Article 16 not in a narrow, limited way but to try to force these changes, that would fall well outside the clause’s purpose. It would be tantamount to one party using the safeguards clause to unravel the deal and compel a renegotiation.Britain would almost certainly lose ensuing EU legal action, on those grounds. But that would take time. The UK government hopes it could, meanwhile, establish facts on the ground and allow it to demonstrate that its preferred approach — involving, in essence, no border in the Irish Sea but in-market surveillance — is workable. That would entail two unacceptable risks.First, since maintaining the integrity of its single market is an EU article of faith, it is not inconceivable — as Ireland’s foreign minister Simon Coveney has warned — that the EU might respond by setting aside the post-Brexit Trade and Cooperation Agreement with the UK. That would need 12 months to take effect. But it would create a new potential “no deal” cliff-edge — just as supply bottlenecks, labour shortages and rising energy costs are creating a cost of living crisis. Damage to the economy, and the government’s political fortunes, could be severe.Secondly, it would torpedo the UK’s credibility as a reliable partner as it seeks trade deals across the world. Negotiated solutions exist to the Northern Ireland frictions, similar to the EU’s veterinary and dispute resolution agreements with Switzerland. Downing Street has played chicken twice on Brexit and thinks Brussels swerved. It should not assume it will happen a third time. And in a head-on collision with a much heavier vehicle, there is little doubt who would come off worse. More