Aurelia Butler

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the world“We were at war with a dictator; now we are fighting against a dictator supported by a traitor.” Thus, in a brilliant speech, did Claude Malhuret, hitherto a little-known French senator, define the challenge of our age. He was right. We now know that the US and so the world have been transformed for the worse. But this should no longer be all that surprising. The doubt rather is over how Europe can and will respond.In the 1970s, I had the good fortune to live and work in Washington DC. This was the era of Watergate. I watched the congressional hearings on the ill-doing of President Richard Nixon with admiration. It swiftly became evident that members of Congress of both parties took their obligation to protect the constitution both seriously and literally. Nixon was about to be impeached and convicted. Warned of this, he duly resigned.Contrast this with the second impeachment of Donald Trump in February 2021 on the far greater crime of inciting an insurrection aimed at overturning the results of the 2020 presidential election. It is impossible for anybody sane to doubt his guilt. But only seven Republican senators voted for conviction. It was not enough. In letting him off, Congress killed the constitution. What has happened since that moment was predictable and predicted.Some content could not load. Check your internet connection or browser settings.Since the 1970s the US has suffered a moral collapse from which it is unlikely to recover. We see this daily in what this administration is being allowed to do to US commitments, to allies, to the weak, to the press and to the law. My colleague John Burn-Murdoch has also shown that Maga attitudes are close to those of today’s Russians: power will not be yielded easily.This is a truly historic catastrophe. But if the US is no longer a proponent and defender of liberal democracy, the only force potentially strong enough to fill the gap is Europe. If Europeans are to succeed with this heavy task, they must begin by securing their home. Their ability to do so will depend in turn on resources, time, will and cohesion.Some content could not load. Check your internet connection or browser settings.Undoubtedly, Europe can substantially increase its spending on defence. While there has been a rise in the share of GDP spent on defence over the past decade in the 10 most populous EU countries, plus the UK and US, Poland is the only one that spends more than the US, relative to GDP. Fortunately, ratios of fiscal deficits and net debt to GDP of the EU27 are far lower than those of the US. Moreover,the purchasing power of the GDP of the EU and UK together is bigger than that of the US and dwarfs Russia’s. In sum, economically, Europe has the resources, especially with the UK, even though it will need the reforms recommended by Mario Draghi last year if it is to catch up technologically. (See charts.)Some content could not load. Check your internet connection or browser settings.Yet this economic potential cannot be turned into strategic independence from the US overnight. As the London-based International Institute for Strategic Studies shows, European weaponry is too dependent on US products and technology for that to be possible. It will need a second and scarcer ingredient — time. This creates a vulnerability shown, most recently, by the feared impact of the cessation of US military support for Ukraine. Europe will struggle to supply what will be missing.The third ingredient is will. Europeans have to want to defend the vaunted “European values” of personal freedom and liberal democracy. To do so will be economically costly and even dangerous. In Europe, too, rightwing elements with views similar to those of Maga Republicans exist, even if these are not as dominant on the conservative side of politics as in the US. But some countries — Hungary, Slovakia and maybe soon Austria — will have pro-Putin governments. Marine Le Pen in France has more than merely flirted with being pro-Putin in the past. Also frightening is the rise of the far right and far left of Germany. In short, Europe has “fifth columns” almost everywhere.Some content could not load. Check your internet connection or browser settings.At the same time, some important European leaders and countries, Germany above all, are showing some will. In particular, Friedrich Merz, expected to be the next German chancellor, and his potential coalition partners agreed to amend the “debt brake” and spend hundreds of billions of euros on infrastructure and defence. Merz also said that Germany would do “whatever it takes” to fend off “threats to freedom and peace” in Europe. Yet will he deliver? The answer to that question is unclear.Some content could not load. Check your internet connection or browser settings.Last but not least is the essential ingredient of cohesion. Unlike the US, China or Russia, Europe is not a state. Indeed, contrary to the hysteria of the British Brexiters, it is far from being a state. Its ability to act strategically is fundamentally hampered by the twin facts that it lacks a shared politics and shared finances. It is better seen as a club that needs a high degree of unanimity if it is to act effectively and legitimately in matters of foreign policy and defence. Europeans were free riders on the US because that was the natural thing for each of them to do. Unfortunately, much the same still applies if the US abandons them. Many members will be inclined to leave the burden to a few big powers. But even co-ordinating the policies and militaries of Germany, France and the UK will be hard, because this is to be done by a committee of rough equals — it lacks a leader.Some content could not load. Check your internet connection or browser settings.In brief, we have an irresistible force and an immovable object: Trump’s unreliability is the force; and the difficulties in getting Europe to mobilise its will are the immovable object. Moreover, overcoming the latter has to be done quickly. Until it is done, Europe will still rely heavily for its security on an unreliable US.If Europe does not mobilise quickly in its own defence, liberal democracy might founder altogether. Today feels a bit like the 1930s. This time, alas, the US looks to be on the wrong side.martin.wolf@ft.comFollow Martin Wolf with myFT and on X More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Sir Keir Starmer will not impose immediate counter-tariffs against Washington if Donald Trump hits Britain on Wednesday with his 25 per cent global levy on steel and aluminium imports to the US.Downing Street said the UK premier would take a “cool-headed” approach as he tries to keep Britain out of any wider transatlantic trade war. “You won’t get immediate counter-tariffs,” said one UK official.Starmer urged the US president on Monday in a phone call not to target British steel and aluminium makers, but is braced for the first Trump tariffs to be imposed on the UK in the early hours of Wednesday.The prime minister has pinned his hopes on Trump exempting the UK from wider tariffs as part of a possible US-UK economic deal — initially focused on technology — discussed by the two leaders in the White House last month.The US accounted for about 182,000 tonnes of Britain’s steel exports in 2024 — about 7 per cent of total exports but 9 per cent by value and worth more than £400mn.Allies of Jonathan Reynolds, business and trade secretary, said the minister will stress the government support already being given to the UK steel industry as he attempts to avoid inflaming trade relations with Washington.Reynolds’ colleagues say the minister could issue some kind of response if the US steel tariffs are applied, but it will not include an immediate wave of counter-tariffs of the kind seen during Trump’s first term in office. Officials declined to say what it might include.In 2018 Britain, which was then part of the EU, levied tariffs on iconic US products such as motorcycles, whiskey and jeans after Trump imposed tariffs of 25 per cent on steel and 10 per cent on aluminium from most countries.Those tariffs were suspended in March 2022 under a deal with the Biden administration and replaced by a tariff-rate quota system, allowing 500,000 tonnes of UK steel to enter the US annually without incurring duties.Reynolds told the Financial Times in Tokyo last week that he would “stand up” for the British steel industry and that retaliatory measures “already exist”, as he tried to exert pressure on the US administration not to hit the UK with steel tariffs.But the UK position has softened as officials in Whitehall took the view that Trump was determined to press ahead. Ministers have reserved the right to reactivate the suspended tariffs.British officials stressed that only 5 per cent of steel production by volume goes to the US, much of it highly specialised. For example, steel made in Sheffield is used by the US Navy for submarine casings.Reynolds, who is expected to give a statement to MPs on Wednesday if the US tariffs are imposed, will also note that the government has committed up to £2.5bn to rebuild the steel sector, British officials said.He will point to a new scheme capping energy costs for industries such as steel that comes into force next month, which would cut the electricity costs of energy intensive sectors such as steel by between £320mn and £410mn this year.British steel exports have fallen in recent years amid a wider industry decline but the US is the UK’s second-largest export market after the EU.Britain’s steel industry has warned that the US tariffs could deal a “devastating blow” to the sector at a time of shrinking demand and high costs. Chrysa Glystra, director for trade and economic policy at UK Steel, the trade lobby group, said on Tuesday that it was “disappointing” that the UK government had so far not secured any exemptions to the incoming tariffs although the industry was mindful of the effort made by ministers. Some UK producers, said Glystra, were already seeing their “commercial position in the US being challenged”, with anecdotal reports that US customers had paused additional orders given the uncertainty over the tariff situation.Nadine Bloxsome, chief executive of the Aluminium Federation, said UK producers were already reporting “early signs of business uncertainty”. The concern, she said, was not just about “immediate loss of contracts but the longer-term risk of trade diversion, where materials originally destined for the US are redirected into alternative markets, including the UK”. The US accounted for about 10 per cent of exports of aluminium by volume last year, worth around £225mn. More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersAfter another tumultuous week in the US, Federal Reserve chair Jay Powell was sanguine in a speech on Friday, saying the US economy remained “in a good place” despite “elevated levels of uncertainty”. If this was an effort to reassure markets, it did not work. Fears of a US recession have not abated, with even President Donald Trump not dismissing the possibility, and equities took another tumble on Monday. Is the US headed for recession? Email your thoughts: joel.suss@ft.com Looking through tariffs?A primary concern for households and businesses is the stop-start nature of Trump’s trade wars. Are import duties going to apply to the US’s closest trading partners? Nobody knows, or perhaps can know, given the capricious nature of the commander-in-chief.The Fed is, at least outwardly, less worried about tariffs. Speaking on February 17, Fed governor Christopher Waller said “any imposition of tariffs will only modestly increase prices and in a non-persistent manner. So I favour looking through these effects when setting monetary policy.” On Friday, Powell noted the “textbook” view of looking through a one-time increase in prices, but did suggest why reality might differ: “If it turns into a series of things . . . if the increases are larger . . . what really would matter is what’s happening with longer-term inflation expectations.”Consider several rounds of impending tariffs ostensibly to come, all at different dates — Mexico and Canada, aluminium and steel, reciprocal tariffs, tariffs on the EU. Consider also retaliations such as the 25 per cent surcharge for Ontario electricity exports, in addition to threats of cutting them off altogether. Perhaps we might check off “a series of things” and “larger” increases. Great expectationsWhat about inflation expectations? In his remarks, Powell noted that “some near-term [inflation expectation] measures have recently moved up. We see this in both market and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor.” But, resonating with the generally optimistic tone of his speech, Powell added: “Most measures of longer-term expectations remain stable and consistent with our 2 per cent inflation goal.”This is true when taking a first look at long-run inflation expectations. But, worryingly for the Fed, a more careful examination of the expectations distribution is flashing red. Median long-term inflation expectations over five years from the University of Michigan’s consumer survey is in line with Powell’s message of “stable and consistent”. But measures of dispersion — or disagreements between households — have not re-anchored back to the pre-pandemic norm and are spiking again. Some content could not load. Check your internet connection or browser settings.This is driven by the right tail of expectations. Since mid-2024, 10 per cent or more of respondents expected annual inflation to average an extreme 15 per cent or more over the next five years. By contrast, the average proportion was less than 1 per cent in 2019. Uncertainty (the proportion of those responding that there will be inflation but unsure of how much) has also shot up recently. This sharp move is partly an artefact of the Michigan survey moving to online responses only from July 2024 — answering by phone results in a lower proportion of extreme inflation estimates (perhaps due to social desirability bias, where talking to someone directly makes you answer differently). It might also partly reflect partisanship biases, which are large in the Michigan survey.But only partly. An analysis of just the web-based respondents from 2017 onwards reaches the same conclusion: “Long-run expectations have risen in recent months and are elevated relative to the two years pre-pandemic, but remain below peak readings during the post-pandemic inflationary episode. They exhibit substantial uncertainty, particularly in light of policy changes under the new presidential administration.” Widening disagreement and uncertainty about where inflation is headed in the long term also shows up in the New York Federal Reserve Board’s survey of consumer expectations, even as median expected inflation is back to normal. Some content could not load. Check your internet connection or browser settings.Let’s deal with some possible objections. Household surveys elicit the average Joe’s inflation expectations, and your average Joe may have very foggy understanding of inflation, or may overweight certain items in their own consumption basket. Professional forecasters are unsurprisingly much less dispersed in their long-run estimates.But household inflation surveys capture wider society’s inflation beliefs, and households act on their beliefs about inflation, no matter how far it deviates from “rational”.US exceptionalism?Elevated divergence of expectations is not just an American phenomenon — data from Europe also shows levels that have not yet normalised. Bank of England rate-setter Catherine Mann pointed to the fatter right tails of the UK expectations distribution in a speech last week. More than 20 per cent of respondents to the BoE’s inflation attitudes survey think prices will go up by 5 per cent or more in five years’ time. This is higher than the proportion of respondents anchored at the 2-3 per cent range (roughly 15 per cent), and relative to a 2015-2019 average of roughly 13.5 per cent.Some content could not load. Check your internet connection or browser settings.It’s not just households skewing higher. In the Eurozone, a thick right tail of inflation expectations is evident in a survey of firms. Long-run expectations have also become more strongly correlated to short-run expectations, suggesting that the re-anchoring process following the post-pandemic inflation surge is not yet complete. Dispersion and uncertainty Higher inflation disagreement does not bode well for a Fed that hopes to “look-through” tariff price effects. For one, inflation dispersion is a good predictor of future inflation, as higher expected inflation becomes self-fulfilling. Mann argued that “keeping track of the tails matters”. She also presented evidence that large inflation shocks mean “expectations formation becomes more backward-looking”.And It’s not just households that take time to get over an inflation shock. A recent working paper corroborates this story using implied inflation expectations derived from financial markets. The authors find the 2021-24 high-inflation episode has left “scars” evidenced by “persistently elevated probabilities of a future inflation disaster”. Inflation uncertainty also matters, and perhaps more than dispersion. Some experimental work shows that higher uncertainty led to lower consumption of durable goods, and portfolios comprising safer assets. Other work shows how inflation uncertainty can lead to a drop in investment and industrial production.Add growing inflation uncertainty on top of the other sources of uncertainty the Fed and other central banks need to be wary of. Strong and credible communication can help reduce uncertainty and lower inflation disagreement. But keeping inflation expectations anchored depends on central bank credibility, which depends heavily on central bank independence, both in law and practice. As concern mounts about political interference at the Fed, expectations may disperse further. The required policy response to tariffs may need to veer far from the textbook.What I’ve been reading and watchingAnticipating my question at the top, Tej Parikh has a nice chart-filled piece arguing that the US economy is heading for a recession.It is not common for former central bankers to become political leaders, but that’s just what former Bank of Canada and Bank of England governor Mark Carney has accomplished after winning the leadership election for the Canadian Liberals. Ilya Gridneff has an excellent profile. The Atlanta Fed’s GDP nowcast showing a sharp contraction in the US economy this quarter caused a stir. Over in Alphaville, Valentina Romei and Robin Wigglesworth dig into the details and uncover the main culprit — “a truly massive surge in US gold imports”. The “gold adjusted” nowcast is for small, yet positive growth of 0.4 per cent. The Economist digs into its archives to show how Donald Trump’s tariffs are a throwback to the 1930s.Daniel Susskind writes how the UK Office for Budget Responsibility has become “the ultimate arbiter of whether the government’s plan to achieve its central mission — more economic growth — is the right one”.A chart that mattersAs if signs of the inflation anchor slipping was not worrying enough for the Fed, there are some early indications of supply chain worries. Negative sentiment in the Fed’s own beige book about supply chains spiked in March (left panel), although levels are still far below the pandemic. US corporates are also increasingly mentioning supply chain risk in earnings calls (right panel).Some content could not load. Check your internet connection or browser settings.Recommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back to FirstFT Americas. We’ll bring you right up to date with events on global stock markets after a nerve-racking day and here’s what else we covering: US-Ukraine talks get under way in JeddahPhilippines’ ex-president Rodrigo Duterte arrested in Manila And the British fintechs trying to crack the US marketStock markets around the world are calmer this morning after a sell-off yesterday that saw high-growth technology shares tumble as worries about the outlook for the US economy and Donald Trump’s trade policy deepened.The S&P 500 index closed down 2.7 per cent, after falling 3.1 per cent last week in its worst weekly performance in six months. The tech-focused Nasdaq Composite sank 4 per cent, its worst day in two and a half years. The tech-heavy index is down more than 13 per cent from its December peak, leaving it in correction territory. Futures contracts point to a calmer start on Wall Street, while markets in Europe edged lower on Tuesday morning and Asian markets recovered earlier losses.US tech stocks — which had driven Wall Street markets higher in the previous two years — were among the biggest laggards, extending a recent rout. Tesla, the electric-car company headed by Trump ally Elon Musk, plummeted 15.4 per cent. It has now given up all of those post-election gains and has fallen more than 50 per cent since its December high. Chipmaking giant Nvidia, which has been one of the biggest winners from recent investor enthusiasm for artificial intelligence, fell 5.1 per cent.Financial services companies also fell. Morgan Stanley and Goldman Sachs were down 6.4 per cent and 5 per cent respectively, while shares in private investment groups KKR and Ares shed 6.2 per cent and 8.9 per cent respectively.“This big sell-off feels ugly, it feels nasty,” said Drew Pettit, an equity strategist at Citigroup. “We were coming off very high sentiment and very high growth expectations. All of this is just recalibrating to the new risks that are in front of us,” he added.The latest jolt of volatility, which also dragged down markets in Europe and Asia, came after the US president on Sunday declined to rule out a recession or a rise in inflation as he dismissed business concerns over lack of clarity on his tariff plans.The White House yesterday dismissed the sell-off and doubled down on its economic and trade policies. “We’re seeing a strong divergence between animal spirits of the stock market and what we’re actually seeing unfold from businesses and business leaders, and the latter is obviously more meaningful than the former on what’s in store for the economy in the medium to long term”. Read more on how markets in Asia and Europe are trading today.Trump and Tesla: The US president yesterday promised to buy a Tesla in a rebuke to “Radical Left Lunatics” who, he said, were “trying to illegally and collusively boycott Tesla”.Opinion: Financial markets have witnessed a change that is upending many consensus trades. Mohamed El-Erian asks: What is behind the dramatic shift?For more markets commentary, sign up for our Unhedged newsletter here if you’re a premium subscriber, or upgrade your subscription. Here’s what else we’re watching today:Congress: The Republican-controlled House of Representatives could vote as early as today on legislation that would avert a weekend government shutdown.Greenland: Voters go to the polls to elect the 31 members of parliament amid a long-simmering independence debate. Portugal: The centre-right government of Luís Montenegro faces a confidence vote, triggered by a scandal over his family business.Results: Department store chain Kohl’s is set to post a fall in fourth-quarter revenue. See our Week Ahead newsletter for the full list.Five more top stories1. Officials from the US and Ukraine have kicked off high-stakes talks in the Saudi Arabian coastal city of Jeddah. The talks begin as Moscow’s authorities reported that nearly 100 drones had targeted the Russian capital last night, in one of the biggest drone attacks on the city since Russia’s full-scale invasion in 2022. Keep up with the talks here. US-Ukraine minerals deal: A major lithium project in Ukraine, backed by US mining company TechMet, could be the first project to benefit from the minerals deal that is close to being finalised.EU: The European Commission has proposed borrowing €150bn worth of loans against the EU budget for member states to spend on weapons.2. Former Philippines president Rodrigo Duterte has been detained under an arrest warrant issued by the International Criminal Court over a crackdown on drugs that resulted in the deaths of thousands of mostly poor Filipinos across the south-east Asian country. Duterte, who served as president from 2016 to 2022, oversaw a crackdown on illicit narcotics leading to the deaths of thousands of mostly poor Filipinos. Read the full report here.3. Argentina’s President Javier Milei has issued an executive decree preapproving a loan agreement from the IMF, signalling the imminent conclusion of a long-awaited deal that is essential to his economic plan. Milei said he needs fresh funds from the IMF, to which Argentina already owes more than $40bn, to replenish the central bank’s scant currency reserves.4. OpenAI has forged a near-$12bn contract with CoreWeave and will take a stake in the cloud computing provider, boosting the group ahead of its expected $35bn public listing. The ChatGPT maker has signed a five-year deal in which CoreWeave will supply computing power to train and run OpenAI’s artificial intelligence models, said two people with knowledge of the deal.5. President Donald Trump has said the arrest of a Columbia University graduate for taking part in pro-Palestinian protests was “the first of many to come”, stoking fears of a clampdown on free speech and campus-based activism across the country. Here’s more on the arrest. Today’s big read© FT montage/Getty ImagesThe UK’s two leading digital banks, Revolut and Monzo, are hoping to crack the US market as fintechs are once again attracting investment following a funding drought caused by rising interest rates. But the push across the Atlantic is no easy feat. Here’s why. We’re also reading and listening to . . . Chart of the daySome content could not load. Check your internet connection or browser settings.The US’s India trade deficit reached more than $45bn last year — less than half of the “almost $100bn” deficit Donald Trump claimed at the White House, but the 10th largest of America’s trade partners. Trump is pushing Indian prime minister Narendra Modi to lower tariffs. Trade experts say the talks promise to be fraught, especially when it comes to agriculture. Take a break from the news . . . The latest fashion shows in Milan and Paris suggest men’s clothing is going through something of a transformation from tight-fitting trousers and jackets to more roomy and baggy shapes — a shift welcomed by market columnist and sartorial correspondent Robert Armstrong. Giorgio Armani’s autumn/winter show at Milan Fashion Week in January More

This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. US stocks got taken out to the woodshed yesterday. The S&P 500 fell 2.7 per cent and the Nasdaq fell 4 per cent, its biggest one-day fall since 2022. A few things are clear. US growth and tariff policy are major concerns for investors at a moment when the country’s risk assets are very expensive. Inflation risks remain on the table. And the Trump administration’s “short-term pain, long-term gain” rhetoric about markets and the economy has scared everyone out of their trousers. Beyond that, it is hard to say much definitively. We try to find some order in the chaos below. If there are points we have missed, email us: robert.armstrong@ft.com and aiden.reiter@ft.com. Anatomy of a routWhen stock markets really panic, analysis can only take you so far. Logic fails and emotion takes control. That said, there are some patterns in yesterday’s rout which — if confirmed in the days to come — will tell us something about what is going on.Monday looked like a worse case of the same illness the market suffered from last week. Big tech was hardest hit, led by Tesla (15.4 per cent down), Microchip Technology (10.6 per cent) and Palantir (10.1 per cent). Even Apple, the most defensive of the Mag 7, which has held up relatively well over the past month, was off by almost 5 per cent. Banks were down hard, too, showing that investors are concerned about growth, and that the recent hopes that this would be a good year for trading, capital markets and deregulation have been dashed. Defensives did well overall, especially in healthcare and staples. Utilities finished the day up. On its face, this looks like a flight to safety, as investors rush to take profit in the stocks with the biggest gains over the past few years. But there are several aspects of the market action we still don’t quite understand.Why didn’t bonds rally more? The yield on the 10-year Treasury only fell 10 basis points. We would have expected more given the size of the move in equities. Was the rally restrained by fears of rising inflation? Perhaps not — break-even inflation was down a touch, and the term premium up a little.Also, why did some cheap cyclical stocks do OK? General Motors, Ford and 3M were all up at the end of the day, for example. Meanwhile, staples fortresses Walmart and Costco were well down. Their decline probably has more to do with people selling stocks where they have seen gains or were overweight — both Walmart and Costco have had great runs over the past year or two. But the growth scare figures in here, too.Today we will be watching for signs that we are seeing an adjustment rather than the start of a full-on bear market. Do investors buy the dip, and if they do, will the sellers rush back in? Tomorrow’s close will be particularly interesting in this respect. Signs of a bigger flight into bonds will be important, too. Severe contagion to international stock markets will tell us something about whether what we are seeing is the reversal of the overcrowded US trade or something much worse — a global flight from risk. And, like everyone else, we will be looking for any signal that the White House will moderate its policy approach in the face of market mayhem.Germany and EuropeAs US assets start to crack, Europe’s entire financial system may be changing fundamentally.Last week, Germany’s chancellor-in-waiting Friedrich Merz announced that his government would circumvent the country’s long-standing debt limits to boost defence and infrastructure spending by up to €500bn. Then the European Commission said that it would also push forward a €150bn defence funding loan scheme. Other plans are also being floated, including seizing Russia’s frozen assets and, most radically, issuing special defence Eurobonds. Bond yields have jumped and banks have upgraded their growth forecasts for the continent, and all of this has pushed the Euro higher against the dollar:At the same time as the fiscal chessboard has been rearranged, European stocks have performed strongly this year, even as US indices tumble. The fiscal boom and the equity rally appear to be closely linked. But they are not one and the same. Some points to bear in mind:The European rally: The shifting fiscal outlook has some investors seeing a secular growth story, with carry-over to the stock market. Though that may be true, Europe’s outperformance started a month before Germany’s big announcement. This has been more about rotation away from the US, says Thierry Wizman, chief FX strategist at Macquarie Group:European growth will do better overall than it otherwise would have, in light of the government spending. But unless that spending is directed broadly towards Europe’s private sector, it does not necessarily bode well for European stocks . . . higher sovereign bond yields will pressure multiples lower, and crowd out some private-sector led growth, especially if compounded by worries about sovereign debt rising too fast . . . What is happening in European stocks still feels like a rotation out of the US, rather than [being] supported by European fundamentals on their own merits.Some of the biggest moves in European shares are, indeed, tied to European defence and the secular growth narrative. Defence companies have carried the market for the past two weeks, and banks have done extremely well. But, zooming out, this is a wide rally, and it does not cut cleanly across defensives and cyclicals:Some content could not load. Check your internet connection or browser settings.The growth signal from bank stocks risks being overstated, too. Europe’s banking sector has been more or less left for dead since 2008. When a sector goes from “dead” to “mostly dead”, stocks move a lot, but this does not indicate an economic renaissance.In some regards, the reassessment of European equities is long overdue; they were probably a bit too cheap. But that does not mean that the bull run will be sustained, even if fiscal largesse nudges growth up. We still do not know, for example, how Trump’s tariff plans will affect European company profits.Growth hopes and the fiscal space: Though markets are excited about Germany’s change and what it portends for broader EU growth, it’s worth tempering expectations. We do not know how these fiscal packages will pay out. Just yesterday, the German Green party vowed to block Merz’s proposal (this might just be a negotiating tactic, though; as Nico FitzRoy at Signum Capital notes, there is reason to think the Greens will come around). There is also uncertainty about the EU’s plans. Though the EU does not need unanimous approval to push through the €150bn plan, more audacious plans — issuing a raft of new debt, or seizing Russian assets — would require full approval from the bloc. That invites pushback from countries more sympathetic to Russia, such as Hungary.For fiscal spending to translate into growth, countries need to be able to deploy that capital to the private sector, and spending needs to be able to spread from defence and infrastructure to the rest of the economy. While Germany definitely has the fiscal space, it might not actually be able to deploy its budget efficiently or in a timely manner, says James Athey at the Marlborough Group:Taking everything at face value, [Germany] is expected to spend an additional 1 to 2.5 percentage points of GDP per year. But detail is lacking on how shovel-ready proposed infrastructure projects are. And we do not know how constrained the defence industry is; there is a notion that there needs to be an expansion of defence capacity before [the fiscal spending] could go to work. Other countries would face the same issues, but with less fiscal space to play with. And they could have even less fiscal space going forward; it is possible that a flood of new issuance from Germany, or a tranche of Eurobonds, crowds out other sovereign debt. Spreads between the Bund and other European debt have narrowed since last week — but that could change once new Bund or Eurobond supply hits the market.(Reiter)One good readA warning, perhaps.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyFinancial markets have witnessed a dramatic change that is overturning the consensus trades that dominated until early February of this year. Falls in US stocks and their under-performance relative to other countries reflect a remarkable turnaround in investors’ views about the economic outlook for America and Europe — and to a lesser extent China. What is less clear is whether the resulting mix of all this is favourable or unfavourable over the longer term. And that matters a lot for global wellbeing, inflation and financial stability.Three key factors underpin the recent 180-degree turn in consensus views on stocks, bonds and currency: growing worries over the US economy; a potential “Sputnik moment” in Europe driven by a possible change in Germany on fiscal policy and European funding; and hints of a more determined policy response from China. Belief in American exceptionalism has been eroded with not only US shares dropping but bond yields falling on growth concerns and the dollar weakening.Having dealt with a whiff of stagflation, markets are suffering a good old-fashioned growth scare due to a significant bout of US policy volatility. The uncertainties associated with the on-again/off-again tariffs on America’s major trading partners and allies such as Canada and Mexico were compounded by concern about the impact on employment and income of the ongoing public sector cuts.US government officials argue that these “disturbances” are small and should be seen as part of a bumpy journey to a much better destination — one of fairer international trade, great public sector efficiency, reduced fiscal dominance, and the unleashing of more powerful private sector entrepreneurship and activity. Indeed, according to them, it is only a matter of time before the journey itself improves due to lower energy prices, tax cuts and significant deregulation.The worry is that the bumpy journey may lead to a different, less favourable destination. The recent bout of US unpredictability risks robbing the US of one of its important and differentiating “edges” — long-term investor confidence in policy framework and decision making.Some content could not load. Check your internet connection or browser settings.US policy is also responsible for the markets’ sudden change of view about Europe that now sees the potential at long last for a dramatic economic policy shift. Jolted by America’s treatment of long-standing security alliances and the change in its Ukraine policy, Germany is suddenly contemplating a relaxation of its long-held fiscal constraints. This could translate into increased defence spending, larger infrastructure investments and greater regional funding.Meanwhile, China is signalling a move towards a more potent mix of stimulus and reforms. Markets see this as essential to counter the growing threat of the Japanification of the Chinese economy which was highlighted again in data on Sunday with both consumer and producer prices falling in February.On paper, this confluence of factors presents two possible scenarios for convergence among what was previously the good (US), bad (China) and ugly (Europe) of the global economy. The optimistic view anticipates an upward convergence of global growth, with Europe and China accelerating to get closer to the hitherto exceptional performance of the US economy. This would result in a higher overall level of global growth as a short-term US deceleration is more than compensated by the pick-up in China and Germany.The more pessimistic outlook would be a downward convergence featuring stagflation. This scenario would be due to delays in Germany’s policy implementation; China’s continued struggle to balance stimulus and reforms; and a US economy decelerating towards stall speed amid low consumer confidence, job insecurity, a corporate wait-and-see approach on investment, and the stagflationary pressures of tariffs.While it remains unclear which path the global economy will take, absolute and relative price levels in markets suggest expectations that are slightly more weighted to favourable convergence over the long term. This implies a belief in Europe’s ability to overcome its fiscal inertia, China’s capacity to navigate its policy challenges and the resilience of the US economy despite its current disturbances. The bet is that the global economy is still likely to escape the clutches of stagflation and achieve a more balanced and sustainable growth trajectory. We should all hope this is right. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.What do bankers and care home workers have in common? They are both more likely than your average employee to have volatile pay packets that gyrate over the course of a year.A newly available UK data set, which comes from HM Revenue & Customs payroll records on more than 250,000 working-age people between 2014 and 2019, has raised the lid on a hitherto hidden aspect of the world of work: the stability — or otherwise — of people’s pay from one month to the next.Unpredictable shifts are a well-known problem for people on zero-hours contracts, but this group only accounts for 3.3 per cent of those in employment. Analysis of the new payroll data by the Resolution Foundation think-tank shows that 14 per cent of continuously employed workers experienced four or more months in a year where their earnings deviated from their monthly average by 25 per cent or more. In other words, volatile pay is surprisingly prevalent in the British economy. The phenomenon is most common at the bottom and top of the wage ladder, accounting for 30 per cent of people in the bottom pay decile and 18 per cent of those in the top.This is a useful reminder not to conflate “instability” with “insecurity”, nor to assume it is necessarily a problem. We can safely assume that investment bankers can cope with the ups and downs that come from bonuses and so forth, for example.That said, it is a concern that volatile pay is most prevalent among the lowest-paid workers, who are the least likely to be able to build up savings to cushion the shocks. Nest Insight, the research arm of the UK state-backed pension fund, tracked 51 low-and-moderate income households in England and Scotland, which experienced on average a little over £500 in volatility each month. The research found that people in this position were vigilant and ingenious money-managers. They developed all sorts of coping mechanisms, from informal circles of friends and family who would supply short-term loans to one another, to moving money between multiple accounts to ringfence and pay for bills. But Sope Otulana, Nest Insight’s head of research, told an event hosted by the Resolution Foundation, at which I also spoke, that the sheer effort and stress was wearing people out. One couple in the study, who both had volatile incomes, made 170 transactions each month on average just between themselves, in an attempt to keep all the plates spinning.There are two ways to approach a problem such as this: tackle the root cause, or help people cope with the effects. On the former, the government is pushing through legislation to make employers give low-paid workers a right to a contract that reflects their regular hours, and compensate them for cancelling shifts last-minute. The advantage is that this will tackle not just zero-hours contracts, but also short-hours contracts, which only guarantee a bare minimum. The disadvantage is that it will be fiendishly complicated, and employers don’t like it. I have some sympathy for businesses, which have also been hit with higher taxes. But the new data underscores the need to rebalance some of the risk of fluctuations in customer demand from the shoulders of individual low-paid workers on to the books of employers.As for helping people cope with volatile pay, wouldn’t it be great if this was something the government safety net could do? Indeed, this was the initial intention of universal credit, which replaced six means-tested benefits and tax credits with a single household payment. It is paid monthly in arrears and is meant to respond swiftly to changes in income, earnings and circumstances. Before it was rolled out, I remember speaking to a farmer who hoped he would be able to recruit more British workers because UC would insulate them from the ups and downs of being paid by the piece for picking fruit.But if anything, it can have the opposite effect: people with unstable pay often find that UC exacerbates the problem. This is partly because of one-size-fits-all design flaws such as assessing income by the month, when many low-paid workers are paid by the week which means they have four pay packets in some months and five in others. The good news is that design flaws can be tweaked. Unlike many policy ideas, which often come with huge price tags, some technical changes here, such as converting non-monthly earnings into a monthly equivalent, could make a positive difference to people’s lives. Volatile pay isn’t always a problem, but in the places where it is, the answers are in reach.sarah.oconnor@ft.com More

For the residents of some of Scotland’s Orkney Islands, one of the UK’s most remote areas, receiving mail is a logistical feat. In the past two years, newcomers have joined Royal Mail’s fleet of distinctive red vans and lorries on the archipelago: aerial drones.In partnership with Royal Mail, Skyports has operated a delivery service between Stromness and smaller islands Graemsay and Hoy since April 2023, with several flights a day.And soon, Skyports and Royal Mail will have a new rival, albeit further south on the UK mainland. Amazon, the US tech group, recently announced plans to launch a drone delivery service in the northern English town of Darlington, adding to its existing services in College Station, Texas, and Tolleson, Arizona.Unlike existing UK drone delivery services — as well as the Orkney operation, a hospital trust in south London uses uncrewed aerial vehicles to transport blood samples in partnership with Apian and Alphabet’s Wing — Prime Air will deliver directly to customers’ homes in Darlington, which was selected because Amazon has a fulfilment centre on the edge of town.Under the plans, eligible customers would be able to choose drone delivery as an option alongside same-day delivery, explains Amazon spokesperson Av Zammit. At launch, delivery time will be up to 2 hours, though the company hopes to get this down to under 30 minutes. “It’s all about speed”, he adds.By the end of 2029, Amazon wants to be delivering 500mn packages a year worldwide by drone, he says — one-tenth of the total number of packages it delivered by same- or next- day delivery last year.A drone used by Royal Mail for deliveries in the Orkney islands More