Economy

The economic challenges facing the eurozone are not the same as those facing the US. On balance, however, they are even more difficult.The eurozone economy is not suffering from overheating of domestic demand to the same extent as the US. This should make the task of monetary policy easier for the European Central Bank than for the Federal Reserve. But the supply shock buffeting the eurozone is far bigger, with a huge rise in the price of energy, especially gas, after Russia’s invasion of Ukraine. That shock is both inflationary and contractionary: inflationary, in that it has raised the price level sharply; and contractionary, in that it has lowered real incomes for households and the terms of trade for countries.Crucially, the eurozone is more fragile than the US. Its national economies are diverse and cross-border insurance mechanisms relatively undeveloped. Above all, politics remain national. As a result, fragmentation is always a risk. Nevertheless, the eurozone does have advantages in handling the Covid and energy shocks compared with the financial crises of a decade ago. Recent shocks have affected members in quite similar ways, while the global financial crisis split the eurozone between domineering creditors and humiliated debtors. This time is indeed different.So, what might the future hold? And what, above all, needs to be done?Start with monetary policy. In the year to August 2022, headline consumer price inflation was 9.1 per cent in the eurozone and 8.3 per cent in the US. But core inflation (without energy and food prices) was only 4.3 per cent in the eurozone against 6.3 per cent in the US. Thus, 4.8 percentage points of eurozone inflation were due to increases in energy and food prices, against 2 percentage points in the US. Data on labour market data similarly indicate substantially less overheating than in the US.This explains why the ECB has tightened later and less than the Fed — a 1.25 percentage point rise in the intervention rate, from minus 0.5 per cent, in the former, against a 3 percentage point rise, from 0.25 per cent in the latter. Nevertheless, the ECB was right to start normalising monetary policy, too, partly because policy had been so aggressive and partly because it needed to prevent the price effects of the shocks from being embedded in expectations. Its actions were also not premature: the IMF’s Global Financial Stability Report reveals that the inflation expectations of many market participants have already shifted upwards to about 4 per cent.Nevertheless, the ECB needs to be cautious about how quickly and how far it moves. One reason for this is that the energy shock is going to impart a powerful recessionary impulse to the economy. Indeed, recessions are highly probable in the eurozone. Another reason for caution is the complexity of the transmission mechanisms, as laid out in a recent speech by Philip Lane, ECB chief economist. A particular worry is the uncertainty about the lags. It is quite possible that headline inflation will be falling fast quite soon, because gas prices have been falling. If so, the main impact of today’s monetary tightening may occur long after inflation expectations have already adjusted downwards. Indeed, it is possible that “normal” monetary policy for the eurozone remains very loose, as it was pre-Covid.A particular concern is the rising spreads on government bonds, which would then be transmitted to borrowers in the most vulnerable economies. So far, these spreads are far smaller than during the eurozone crisis. Moreover, the ECB has several tools — on its own or in co-operation with other institutions, notably the European Stability Mechanism — to deal with fragmentation. These include asset reinvestment, a new “transmission protection instrument” and, if all else fails, the “outright monetary transactions” developed in 2012, after Mario Draghi’s “whatever it takes” speech. Implementing these programmes will, however, create conceptual, practical and political difficulties, especially over the distinction between illiquidity and insolvency. Ultimately, though, it is simple: throughout these crises, the eurozone has to treat all members as if they were in much the same shape even though they are not.Will this work? The best answer is that it has to. The survival of the EU and so the eurozone, its economic core, is in the overriding national and collective interest of its members. They confront a brutal enemy of their most fundamental principles in the east and an unpredictable US in the west. The EU must not only survive, but thrive, if Europe itself is to do so. As has been shown repeatedly since Covid hit, the member countries understand this, especially the most important ones. However ramshackle and incomplete the structures of the EU and eurozone may be, members must keep everybody together through thick and thin. Right now it is going to be the latter.This means far more than ensuring that the monetary regime works for everybody. It also means shaping a common energy policy, notably one that accelerates the shift to renewables; helping member states cushion their citizens against the worst of the energy shock, agreeing a common policy towards Vladimir Putin’s Russia in conjunction with Nato, shaping a trade and economic policy that manages relations with China, and even moving towards more stable relations with the UK.The compromises needed to address the energy shock and Ukraine war will be painful. But they must be made. Without the EU, the member countries would be lost. They know this and will, I am sure, act upon that knowledge. Out of these crises must emerge a stronger EU, because there is no [email protected] Martin Wolf with myFT and on Twitter More

PARIS (Reuters) -Regional train traffic in France was cut by about half on Tuesday as several unions called a nationwide strike, seeking to capitalise on anger with decades-high inflation to expand a weeks-long industrial action at oil refineries to other sectors.There were also some disruption to schools, as the strike primarily affected the public sector.Trade union leaders were hoping workers would be energised by the government’s decision to force some of them to go back to work at petrol depots to try and get fuel flowing again, a decision some say put in jeopardy the right to strike.But a survey by Elabe pollsters for BFM TV showed only 39% of the public backed Tuesday’s call for a nationwide strike, while 49% opposed it, and growing numbers opposed the strike by oil refinery workers.The refinery workers’ strike has become one of President Emmanuel Macron’s stiffest challenges since his re-election in May.Government spokesperson Olivier Veran said the requisition of more staff for refineries could occur during the day, as queues of motorists worried about supply disruption grow at petrol stations.”There will be as many requisitions as deemed necessary … Blocking refineries, when we have reached an agreement on wages, this is not a normal situation,” Veran told France 2 TV.Just under 10% of high school teachers were on strike on Tuesday, with numbers even lower in primary schools, education ministry data showed. The call for strike was most observed in vocational schools, where teachers oppose planned reforms. On the transport front, Eurostar said it was cancelling some trains between London and Paris because of the strike.French public railway operator SNCF said that traffic on regional connections was down 50% but that there were no major disruptions to national lines.As tensions rise in the euro zone’s second-biggest economy, strikes have spilled over into other parts of the energy sector, including nuclear giant EDF (EPA:EDF), where maintenance work crucial for Europe’s power supply will be delayed.A representative of the FNME-CGT union on Tuesday said strikes were affecting work at nuclear power plants, including at the Penly plant. The strikes are happening as the government is set to pass the 2023 budget using special constitutional powers that would allow it to bypass a vote in parliament, Prime Minister Elisabeth Borne said on Sunday.Demonstrations are scheduled all over the country, with one in Paris from 1200 GMT.Thousands of people took to the streets of Paris on Sunday to protest against soaring prices. The leader of hard-left La France Insoumise (France Unbowed) party, Jean-Luc Melenchon, marched alongside this year’s Nobel Prize winner for Literature, Annie Ernaux. More

Adeyemo, who has led work on U.S. sanctions over Russia’s invasion of Ukraine, will represent the United States when the Asian Economic Cooperation (APEC) finance ministers meet in Bangkok on Wednesday and Thursday, Treasury said. He will also meet with Thailand’s Finance Minister Arkhom Termpittayapaisith.In Singapore, he will meet with Finance Minister Lawrence Wong, Trade and Industry Minister Gan Kim Yong, and Ravi Menon, the managing director of Singapore’s Monetary Authority, as well as business executives from the financial services, shipping and petroleum industries, Treasury said.Throughout his trip, the department said Adeyemo would reaffirm the U.S. commitment to the Asia-Pacific region, while highlighting initiatives such as the Indo-Pacific Economic Framework (IPEF), which both Thailand and Singapore have joined. The newly relaunched G7 Partnership for Global Infrastructure and Investment (PGII) and U.S. efforts to build up supply chains with trusted partners were also on the agenda.The visit comes ahead of the APEC leaders summit in mid-November and days after the United States unveiled a new national security strategy aimed at China and Russia, and as China continues to push to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade pact.Treasury said Adeyemo’s discussions would focus on efforts to combat climate change, and coordination of unilateral and collective responses to economic headwinds caused by challenges including the COVID-19 pandemic and the war in Ukraine.”While the U.S. economy remains resilient in the face of these headwinds, the Deputy Secretary will work with partners to increase resilience in their economies,” it said.Discussions would also touch on sanctions and export controls placed on Russia by more than 30 countries after Russia’s Feb. 24 invasion of Ukraine, and how a G7 price cap on Russian oil due to take effect on Dec. 5 will ensure market supply while lowering Russian oil revenues used to fund the war. More

WASHINGTON (Reuters) – The Federal Aviation Administration (FAA) and the Japan Civil Aviation Bureau (JCAB) agreed to partner on advanced air mobility certification and operations, the U.S. regulator said Tuesday. The two countries in Tokyo were set to sign a declaration of cooperation to support future aircraft development and operation and formalizing ongoing discussions on certifying and validating new aircraft, production, airworthiness, operations, and personnel licensing.The announcement comes as companies around the world are racing to develop and eventually win regulatory approval to deploy air taxis known electric vertical takeoff and landing aircraft (eVTOL).”The FAA and the JCAB have enjoyed a long and strong working relationship, and that will extend into this new era of aviation,” said Acting FAA Administrator Billy Nolen in a statement. “Close collaboration with our international partners is critical to successfully and safely integrating these new technologies.”The announcement follows the FAA’s announced partnerships with the United Kingdom, Canada, Australia and New Zealand in the National Aviation Authorities Network to harmonize certification and integration plans.The low-altitude eVTOL urban air mobility aircraft has drawn a huge amount of interest around the world as numerous eVTOL companies have gone public.Last week, Delta Air Lines (NYSE:DAL) said it invested $60 million in air taxi startup Joby Aviation for a 2% equity stake, in a partnership that initially plans to offer passengers air taxi transport to and from airports in New York and Los Angeles.Airlines and others are looking at developing transport services using battery-powered aircraft that can take off and land vertically to ferry travelers to airports or on short trips between cities, allowing them to beat traffic.Joby in May received its Part 135 Air Carrier Certification from the FAA, but before it can begin service will need additional regulatory approvals for its eVTOL aircraft, as well as for building airport infrastructure and so-called “Vertiports” in neighborhoods for takeoffs and landings. It hopes to receive approval to begin commercial flights in 2024. More

LONDON (Reuters) – British company owners are pulling investments as a crisis triggered in Westminster pushes up borrowing costs and hits confidence in an economy once seen by businesses as a haven of stability.Companies have struggled to navigate a fractious political landscape ever since Britain voted to leave the European Union without a plan. But the fallout from Prime Minister Liz Truss’s now-abandoned mini-budget has taken that to another level. In the last month, business leaders have had to contend with radical changes to tax, a collapse in the pound and a surge in borrowing costs that forced the appointment of a new finance minister to reverse the tax cuts and slash spending instead.A two-year scheme to help homes and businesses with high energy costs has been cut to six months to save money. With Jeremy Hunt taking up the role on Friday, Britain has had four finance ministers in just four months. Prior to the 2016 Brexit vote, Britain had four finance ministers in 23 years, underlining a sense of stability that is now gone. “It’s been absolutely ridiculous,” Nimisha Raja told Reuters at her factory producing air dried citrus fruit, vegetables and ingredients. “I have no idea what they’re talking about half the time.”Raja sold her home and a coffee shop to start Nim’s Fruit Crisps, based in Kent, south east England, over seven years ago. When post-Brexit bureaucracy made the cost of selling to Europe prohibitive, she developed new products for Britain such as citrus slices for gin and vodka drinks. Confronted with a pandemic, she supplied ingredients for subscription boxes. But with interest rates rising she is unwilling to borrow again. A survey of top finance directors by Deloitte shows she is not alone – 56% now view credit as expensive, forcing them to adopt defensive strategies of cutting costs and managing cash.”If we borrowed a lot of money, we may not be able to pay it back. It’s far too risky at the moment,” said Raja, who employs 22 people and had planned to increase that to 30 over the next 18 months. “The mini-budget completely knocked us off kilter because it was supposed to be all about growth, and it was anything but.”FROM ONE DISASTER TO THE NEXTIn central England, Gary Seale is also wondering which way to turn at his Idry business that produces air dryers for the care industry.Truss’s promise of tax cuts and deregulation initially led to a surge in international orders after the pound plunged. “We’re thinking this is fantastic, here we go,” he said. But when he looked to see if he could combine that income with a 10-year loan to finally launch a new version of his product in Britain, he found borrowing costs had leapt. “We just seem to crash from one economic or political disaster into the next,” Seale said. Britain’s latest crisis started on Sept. 23 when new prime minister Truss and then-finance minister Kwasi Kwarteng announced 45 billion pounds of unfunded tax cuts to snap the economy out of stagnation. The response was brutal: the pound slumped, government borrowing costs surged, lenders pulled mortgage deals and the Bank of England had to intervene to stop some pension funds from going under. Truss initially said the market turmoil was linked to international events, before reversing course. That followed earlier U-turns by Truss and her predecessor Boris Johnson on issues such as tackling obesity and windfall taxes. John Allan, chairman of Britain’s biggest supermarket Tesco (OTC:TSCDY), expressed his frustration in June when he said companies planned years ahead: “Unlike the government, you know, whose view is that having an idea and sticking with it for more than a week constitutes real achievement.” Chief executives and chairmen told Reuters that the impact would be felt for years. While Truss had touted low corporation tax as a way to attract business investment, the executives said they wanted stability. “IRRELEVANT” TAX CUTS”The major factor is does the investment make sense?” advertising boss Martin Sorrell said. “And if you’ve got uncertainty to the degree that you’ve got at the moment, it doesn’t.” One executive at a U.S. tech company told Reuters at the recent conference of Truss’s Conservative Party that corporation tax was a “rounding error” for his global business, and that issues like visas were a bigger driver of investment decisions.The Institute of Directors trade group said it had not called for corporation tax cuts either. Sorrell, who built WPP (LON:WPP) into the world’s biggest advertising company before creating S4 Capital, said the crisis had come at the worst possible time, just as companies planned budgets. “If you’re running a global business, your centres of attention move to those areas of the world where you think there is greater certainty,” he told Reuters. One retail boss who asked not to be named said companies would now plan cautiously. He described a general sense of disbelief that a country known for having “fiscal responsibility to the core” had gone so awry.British business investment, which flatlined after the 2016 Brexit vote and then fell sharply during the pandemic, was 6% lower in the second quarter of this year than its level of six years ago, in stark contrast to international peers.That will weigh on the broader economy, which looks set to tip into recession as energy and food prices rise. “Uncertainty is at its maximum and there’s lots of volatility ahead,” Stuart Machin, head of major retailer Marks & Spencer (OTC:MAKSY), told investors last week. “It’s an everything crisis.” More

Foxconn probably made your iPhone. One day it may build your Tesla too. Hon Hai — the name under which Foxconn is listed in Taiwan — has just released two new electric cars. It plans to build electric cars for global brands. But being a Taiwanese company does little to shield it from the latest US-China trade sanctions. Foxconn launched two new electric vehicles on Tuesday, prototypes of its Model B crossover SUV and the Model V pick-up truck. These back up its hopes to attract new outsourcing clients for electric vehicle production. It already makes electric cars for Taiwanese automaker Yulon Group.For now, Foxconn’s profits remain dependent on its consumer electronics business for half of its sales. It is Apple’s main contract manufacturer of iPhones and also makes iPads and MacBooks. Cloud and computing products make up another 45 per cent of revenue. Assembly and contract manufacturing earn razor thin profits. Foxconn’s operating margins of less than 2.5 per cent last year is not far from its 10-year average. Foxconn is in a tricky position for other reasons. It acts as a key supplier for Apple and has also worked closely with other US tech groups including HP, Google and Amazon. Meanwhile, its consumer electronics manufacturing is still mainly based in China. At Zhengzhou, the world’s largest manufacturing base for iPhone production, it employs about 350,000 people.Shares have fallen nearly a third in the past year. At 9 times forward earnings they trade at half that of Chinese rival Luxshare. That gap reflects the growing uncertainties in Foxconn’s core business. Given this backdrop, its move into electric cars and components makes some sense. Despite its large presence in China, none of its electric car-related production is in China — with most of that in Taiwan, Thailand and the US. That speaks volumes about looming US-China trade risks.Foxconn must navigate the twisty road between retaining US tech clients and narrow profit margins, dependent on Chinese manufacturing. That effort will keep its valuation depressed. More

The Treasury’s Federal Insurance Office said in a Federal Register notice that it was seeking public comment on the proposal, under which it would collect current and historical underwriting data on homeowners’ insurance.The zip-code level data would provide the insurance office with “consistent, granular, and comparable insurance data needed to help assess the potential for major disruptions of private insurance coverage in regions of the country that are particularly vulnerable to the impacts of climate change.”The move comes less than three weeks after Hurricane Ian devastated Fort Myers Beach and other parts of Florida’s southwest coast, causing billions of dollars in both uninsured and insured damage and pushing some insurers to forecast financial losses.U.S. Treasury Secretary Janet Yellen has pressed U.S. financial regulators to make assessment of climate change risks a normal part of their everyday work, including a demand that companies increase disclosures of such risks to investors.Treasury said the proposed data collection rule would help the Federal Insurance Office to assess both the availability of insurance for millions of Americans as well as the affordability of such insurance.“Today’s action by the Federal Insurance Office is an important step in determining how Americans are being affected by the increasing costs of climate change,” Yellen said in a statement. “The recent impacts in Florida from Hurricane Ian demonstrate the critical nature of this work and the need for an increased understanding of insurance market vulnerabilities in the United States.” More

LONDON (Reuters) -Prime Minister Liz Truss apologised for threatening Britain’s economic stability after she was forced to scrap her vast tax-cutting plans and embark on a programme of “eye-watering” public spending cuts instead. After weeks of blaming the markets and “global headwinds” for investors dumping the pound and government bonds, Truss said she was sorry for going “too far and too fast” with her radical economic plan to snap Britain out of years of stagnant growth.Markets, which plunged after her Sept. 23 “mini-budget”, are still under strain even after Truss’s finance minister Jeremy Hunt tore up her plans on Monday, and she is now fighting to survive, just six weeks after she became prime minister.It was not clear whether Truss’s apology would quell a growing rebellion in her ruling Conservative Party, with a handful of lawmakers urging her to quit. Dozens fear they will lose their jobs at the next election.Even one of her ministers said she could not afford to make any more mistakes – something that could be difficult when her government looks for deep savings which could deepen an expected recession. Already Hunt has refused to guarantee the budgets of departments such as health and defence.A new YouGov opinion poll suggested even those Conservative Party members who backed her for prime minister were having second thoughts. It showed more than half of those members polled said she should resign, while a third wanted her predecessor, Boris Johnson, to replace her.”I do want to accept responsibility and say sorry for the mistakes that have been made,” Truss told the BBC late on Monday.”I wanted to act to help people with their energy bills, to deal with the issue of high taxes, but we went too far and too fast.” She added she was “sticking around” and that she would lead the Conservatives into the next election due in about two years time, although the statement was accompanied by a laugh.Truss watched silently in parliament on Monday as Hunt demolished the economic plan she proposed less than a month ago, and which triggered a bond market rout so deep that the Bank of England had to act to prevent pension funds from collapsing.’THE GHOST PM’For some in the party, the sight of a prime minister humbled in parliament provided little confidence she could fight on.The Daily Mail, which had hailed Truss’s plan, ran a front page with her leaving parliament on Monday underneath the headline “In office but not in power”, while the also supportive Sun newspaper called her “The Ghost PM”.James Heappey, a minister for the armed forces, said Truss, his boss, could not afford to make any more mistakes.Truss held a meeting of her cabinet team on Tuesday and was due to speak later to her lawmakers, who have been urged by some close to government to hold off from any move to oust her before the government presents its full fiscal plan on Oct. 31. Truss was elected by Conservative party members, not the broader electorate, on a promise to slash taxes and regulation to fire up the economy in a policy dubbed by critics as a return to 1980s Thatcherite-style “trickle-down” economics. But markets reacted so dramatically that borrowing costs surged, lenders pulled mortgage offers and pension funds fell into a tailspin. The Bank of England said a report in the Financial Times about a new delay to the start of its sales of government bonds was inaccurate. The FT said it had learned that top officials were likely to decide a delay was needed after judging the gilts market to be “very distressed” in recent weeks.Ryanair boss Michael O’Leary described Britain’s economic situation as a “car crash” which he blamed on the country’s decision to vote to leave the European Union in 2016.SPENDING SQUEEZEWith Britain’s economic reputation shattered, Hunt may now have to go further in finding public spending cuts than the government would have done had Truss not unleashed her economic plan at a time of surging inflation.Torsten Bell, the head of the Resolution Foundation, a think tank, told BBC radio the government may need to find public spending cuts of around 30 billion pounds ($34 billion) – a politically very difficult task after successive Conservative governments cut departmental budgets over the last 10 years.One area of spending already to go is Truss’s vast two-year energy support package that was expected to cost well over 100 billion pounds. Hunt has said support to households and businesses will now last until April, before it is reviewed, prompting analysts to say families could face energy bills of 5,000 pounds next year.On Monday Hunt refused to guarantee previous policies, such as a commitment to increase pensions in line with inflation.($1 = 0.8807 pounds) More