Economy

It’s rare that one can use the term “instant classic” in a book review, but Gary Gerstle’s latest economic history, The Rise and Fall of the Neoliberal Order, warrants the praise. It puts neoliberalism, defined as a “creed that prizes free trade and the free movement of capital, goods and people,” as well as deregulation and cosmopolitanism, in a 100-year historical context, which is crucial for understanding the politics of the moment, not just in the US but globally. The book also knits together a century of very complicated economic, political, and social trends, which are often siloed but are in fact quite interrelated, creating a new and important narrative about where America has been, and where it may be going. One of the most useful things Gerstle does for readers is to blow up the usual definitions of conservative and liberal, at least in terms of how US economic history is framed. Former Republican presidents Ronald Reagan and both Bushes were “conservative”, while their Democrat peers Bill Clinton and Barack Obama were “liberals”. And yet all of them could be described as neoliberals, in the sense that many of their economic policies were at core about unleashing (or at least not restraining) capitalism, with the underlying belief that markets would, indeed, know best.

While decades of unchecked markets ultimately contributed to everything from the financial crisis, to the rise of both Donald Trump and Bernie Sanders (reflecting again the way in which neoliberalism and its discontents have blurred political categories), they were in the beginning a necessary and in many ways useful reaction to what came before. You can’t really understand the Reagan revolution, with its dismantling of unions, deregulation, and tax-slashing, without understanding FDR’s “New Deal,” and how it so dramatically expanded the power of the public sector. And so, the first section of the book tackles the 1930s to the 1970s, in which the pendulum of economic power swung towards state planning, welfare, the curbing of corporate monopolies, and stability over speculation. The fact that a book on neoliberalism starts with Herbert Hoover, the president whose failure paved the way for Roosevelt’s success, rather than Friedrich Hayek, will throw some readers (like me). Other important works on the topic, such as Quinn Slobodian’s Globalists (2018), which Gerstle quite rightly name checks, begin with the European roots of neoliberalism in post-first world war Vienna, where economists such as Hayek and Ludwig von Mises struggled to find a way to knit a war-torn continent back together. What they came up with as a philosophy was neoliberalism, the idea being that if capital, goods, and people could more freely move across borders, conflict would be less likely. Their ideas informed the creation of institutions such as the International Monetary Fund and the World Bank, which have since stopped working as well as they once did, in part because the world was never quite as flat as New York Times columnist Tom Friedman would have had us believe. Capital, as always, moved faster than goods or people. Gerstle does a particularly wonderful job of connecting the political and economic dots in that post 2000s era in the US, a complicated and fascinating time in which the sort of “techno-utopianism” exemplified by Friedman’s book The World Is Flat (2005) collided with two ill-advised wars in Afghanistan and Iraq, as well as a Democratic party in thrall to both Wall Street and Silicon Valley, the election of the first black president, an economic crash, and a political narrative — we must save banks but not homeowners — that never quite added up to average voters. While it’s impossible to include every scintillating detail of the time in 300 pages (I craved even more on the existential splits between the neoliberal economic policy camp exemplified by Alan Greenspan, Bob Rubin and Larry Summers, and others like former Clinton and Obama administration advisers including Robert Reich and Joe Stiglitz, who worried about where it was all leading), Gerstle gets the broad brush strokes right. Low interest rates, financialisation, and Bush’s “ownership society” collided with increasing California wealth, identity politics, and creative accounting of stock options to brew up our very own version of 1929, which was quickly followed by the ugly race and class-dividing politics we have now. Gerstle has a real genius for capturing political irony — how 1960s hippies turned into Bay Area libertarians, how increased access to credit hurt minorities most, how Democrat Jimmy Carter was a deregulator, how individual “freedom” to pursue prosperity might morph into terrible inequality and insecurity. But one such point he seems to have missed is the way in which Reagan, whom he sees as the “ideological architect” of the past half century of neoliberalism, supported industrial policy, something Gerstle either misses or doesn’t explore, and used state power in the form of things such as voluntary export agreements and anti-dumping duties to bolster American trade interests.

Of course, protectionism and neoliberalism can marry with particularly unfortunate results such as Trump, who slashed taxes even as he started a trade war with China. As Gerstle points out towards the end of the book, the former president may have been “pushing on an open door,” in the sense that globalisation as we’ve known it since the 1980s started shifting after 2008, when both “producers and consumers” in various countries began “to question the pursuit of a borderless world”. As The Rise and Fall of the Neoliberal Order shows us, some of this reckoning is racist and xenophobic. Some of it is a necessary swinging of the economic pendulum back to a happy medium. As we wait to see where it lands, Gertle’s history of where we’ve been is essential reading for a post-neoliberal era. The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era by Gary Gerstle, OUP £21/$27.95, 272 pagesRana Foroohar is the FT’s global business columnistJoin our online book group on Facebook at FT Books Café More

The world’s finance ministers and central bank governors have decided to live with the virus: this week they are back to meeting in person for their regular April event known as the World Bank/IMF spring meetings. As usual, the IMF has published its flagship reports, which are useful reading to assess where the intellectual pinch points are in the global economic policy debate.In recent years, the IMF’s World Economic Outlook, Global Financial Stability Report and Fiscal Monitor have presented a fascinating display of rapid iconoclasm. As I have written about before, the fund sometimes seems at the forefront of a new Washington Consensus, which the current US administration has joined by overturning many of the old Washington Consensus’s dogmas. There are hints of the same this year. The Fiscal Monitor devotes a chapter (and a blog post) to cross-border co-ordination of taxation to reduce tax dodging and improve enforcement — a goal also pursued by US Treasury secretary Janet Yellen (and even her predecessor Steven Mnuchin, when Donald Trump would let him). And the WEO’s very good account of global trade in the pandemic, while arguing against concentrating production inside national borders, makes a good case for designing diversified and substitutable cross-border value chains so as to maximise resilience to shocks (you read it here first — two years ago, in fact). That sounds quite compatible with the strategy of “friend-shoring” that Yellen announced in an important speech last week.At the same time, the world has not changed so much that old challenges have gone away. Excessive private debt has long been a concern of economic technocrats, and the WEO has a good chapter (and another blog post) on the possible dangers of the rise of corporate debt in the pandemic. Among the useful advice is to make sure corporate bankruptcy regimes are fit for purpose and able to deal with insolvency problems efficiently to reallocate resources to new activities. Another debt-related problem, highlighted by a GFSR chapter (and blog post), is that government debt and national banking systems are becoming more interlinked in emerging countries, putting them at risk of the kind of sovereign-bank “death spirals” that laid several eurozone economies low in 2010. But the most innovative bit of analysis this year, in my view, is the WEO chapter on the “greening” of labour markets. I confess I had not yet thought of applying shades of green to the labour market, but it makes a lot of sense. The IMF’s research sheds light on the question on many politicians’ minds: how to decarbonise our economies without causing a jobs crisis for those employed in CO2-emitting industries. The chapter is full of useful measurements, simulations and policy advice (and again a blog post nicely summarises the findings). The classification of jobs into “green-intensive” and “pollution-intensive” is a useful, if tentative, heuristic, though probably in need of a little tyre-kicking. It finds that most jobs are neutral with respect to the carbon transition. The jobs that are particularly exposed to a fall in fossil fuel use, and those particularly in demand as decarbonisation proceeds, are concentrated among quite small groups of workers, the IMF’s methodology finds. Less surprising is the nature of the concentrated group holding the green jobs: more educated, more urban and better paid than workers in the pollution-intensive group. If the IMF’s methods for classifying jobs are robust, one hopeful conclusion emerges. The green agenda will require shifting labour from polluting to green jobs. But the required shift is of moderate scale: about 1 per cent of total employment over a decade in advanced countries, and 2.5 per cent in emerging countries. Both numbers are well below the 4 per cent of the workforce involved in the earlier shift from industry to services.The biggest political obstacle to effective decarbonisation is the fear that it will create a class of politically reactionary left-behinds. Call it yellow-vest syndrome. If the IMF research is right, that risk may be lower than it seems. But it also gives ample cause for worry: pollution-intensive jobs seem to be particularly difficult to get out of, so even a moderate rate of required structural labour market change will be hard to pull off. A bright point is that what it takes to pull it off, according to the report, dovetails with what decarbonisation in any case requires — in particular, a clear path for rising carbon prices. In addition, however, policies directly aiming to make job switches easier and safer for workers are needed, the IMF says: funding for skills training, redistribution and incentives for staying in work (though I am a bit cagey about the fund’s recommended earned income tax credits, which risk depressing wages). We are in turbulent times: much of the discussion this week revolves around how to deal with the economic fallout of Russian president Vladimir Putin’s war on Ukraine. But as these reports show, even without the shock of a war we face huge economic challenges ahead of us. Get ready for them.Other readablesI wrote six weeks ago that like in the 1940s, Ukraine and western leaders need to start planning for the peace now. This month, a group of eminent economists wrote a blueprint for Ukraine’s reconstruction. It is excellent, succinct and argues that the guiding vision should be to fit Ukraine’s infrastructure, institutions and economy for EU membership. Do read it all. But if you are short on time, take a peek at a recorded webinar with the authors — or read my column on the blueprint.There are a number of new publications worth reading about how to tighten sanctions further on Russia. An international group of experts has published a comprehensive list of the possibilities. A new CEPR Policy Insight shows how to implement sanctions on Russian oil sales. And authors from the Bruegel and Peterson Institute think-tanks show that Europe must intensify sanctions on Russian banks. A conversation with Branko Milanovic.The New York Times reports on the breathtaking progress in electric aviation.Our economies are undergoing large structural reallocation and have to undergo more still. So how can it be right for central banks to try to make investment more expensive and job growth slower?Numbers newsAlso at the spring meetings, the IMF presented downgraded forecasts for economic growth — unsurprising given the war in Ukraine. China said its economy grew 4.8 per cent in the first quarter compared with a year before. More

The “inflation mania” that has gripped debt markets this year has gone too far, according to some investors and analysts who say now is a good time to snap up bonds at a discount. A Bloomberg index of long-term US government bonds has dropped more than 18 per cent this year, leaving it on track for its biggest fall on record dating back to 1973. The retreat in bond prices has pushed the 10-year Treasury yield — a benchmark for bond markets around the world — to nearly 3 per cent as investors position for a rapid tightening of monetary policy from the Federal Reserve and other central banks tackling soaring inflation. But fund managers and investment banks are increasingly questioning how much further yields can rise as rapid inflation, along with interest rate rises designed to combat it, cause economic growth to slow, something which typically burnishes the appeal of safe assets like government bonds.“We view the current level of 10-year [US yields] as a compelling location [to buy the debt],” said rates strategists at Bank of America on Wednesday. “Inflation concern has reached a level of mania or panic,” the bank said, citing the “extreme” inflows into inflation-protected bonds as well as a spike in internet searches for “inflation”.“Our forecasts point to inflation peaking this quarter and falling steadily into 2023. We believe this will reduce the panic level around inflation and allow rates to decline,” Bank of America added.Higher payouts now provided by holding bonds are already proving tempting to some fund managers.“Gosh, they’re high enough now to buy,” said Edward Al-Hussainy, senior interest rates strategist at Columbia Threadneedle. “That’s what we’re doing.” He cautioned, however, that rates might move higher yet. “I don’t think you can be certain this is the top until you get a signal from the Fed that they have overshot, or you get a correction in risk assets,” Al-Hussainy said. Even some persistent bond bears are beginning to ponder whether the sell-off is overdone. Dickie Hodges, who manages a $3.9bn bond fund at Nomura Asset Management, said he had been “adding little bits of exposure” to long-dated bonds as yields rose. “I think it’s too early to call the top in yields right now,” Hodges said. “But central bankers know that raising interest rates materially from these levels is going to push economies into recession. And I’m convinced inflation is going to roll over later this year, so long-end yields are starting to look attractive.”Still, many investors are wary of calling time on the bond drop too soon. Barclays this week ditched a recommendation published earlier this month to buy 10-year Treasuries after yields continued their ascent. The bank said the odds of the Fed “over-tightening” and pushing the US economy into a “hard landing” had receded, with the central bank instead likely to allow higher inflation expectations to become entrenched.A greater emphasis on reducing the Fed’s holdings of Treasuries — in addition to raising short-term interest rates — could also weigh further on long-term bonds, whose yields have been pushed down by asset purchases. Fed board member Lael Brainard said earlier this month the central bank would begin a “rapid” reduction of its balance sheet that might begin as soon as its May meeting. This possibility has left some fund managers reluctant to buy Treasuries — at least for now.“If I could close my eyes and come back in six months I think I would be comfortably in the money by buying here,” said James Athey, a bond fund manager at Abrdn. “But the potential journey to get there is so uncertain that it’s hard to get the timing right. All it takes is a big upside surprise to inflation or some loose-lipped Fed speak and yields shoot up again.” More

Nestlé pushed up prices for its products by more than 5 per cent in the first three months of the year, in the latest sign of steep commodity inflation feeding through to consumer prices for branded goods.The world’s largest food company said on Thursday it had increased pricing by 5.2 per cent in the quarter, helping to produce organic sales growth of 7.6 per cent, ahead of analysts’ expectations.“We stepped up pricing in a responsible manner and saw sustained consumer demand,” said Mark Schneider, Nestlé chief executive. “Cost inflation continues to increase sharply, which will require further pricing and mitigating actions over the course of the year.”The price rises were largest in North and Latin America, where Nestlé drove up pricing by 8.5 per cent and 7.7 per cent respectively. The maker of Maggi noodles, Purina pet food and KitKats confirmed its outlook for the full year despite the cost pressures, saying it expected organic sales growth of about 5 per cent and underlying trading operating profit margin between 17 and 17.5 per cent.“As seen at other food and beverage companies, it appears that high inflation has not (yet) had an impact on consumer appetite for strong branded products,” said Jean-Philippe Bertschy, analyst at Vontobel.Nestlé’s update follows news from Procter & Gamble that it had also increased prices by 5 per cent in the three months, helping it to achieve its strongest sales growth in two decades. Heineken, the world’s second-largest brewer, on Wednesday reported price rises of 5.2 per cent.Nestlé’s figures exclude Russia, where it announced last month it would strip its business down to essentials such as infant formula and medical nutrition, suspending major brands such as KitKat and Nesquik following the country’s invasion of Ukraine.Russia had previously accounted for just under 2 per cent of the company’s revenues.Growth at the Vevey-based group was led by pet food, while confectionery and water also posted double-digit growth, boosted by households spending more time outside the home as coronavirus restrictions lifted. Reported sales reached SFr22.2bn ($23.4bn). More

This is Lauly Li in Taipei, covering the tech industry’s hardware supply chain, from semiconductors to smartphones to EVs.My fellow tech correspondent Cheng Ting-Fang and I have seen some incredible changes over the past four years. I remember back in March 2018, the chairman of a key Apple supplier told me it would be “impossible” for suppliers to move production outside of China, despite the rapidly growing tensions between Washington and Beijing.But the impossible happened, and Apple began moving its AirPods production to Vietnam while HP, Dell and Google have been shifting their production to south-east Asia, too.Today, geopolitics and the COVID-19 pandemic are reshaping the tech supply chain in ways that few could have imagined, and both businesses and consumers are feeling the effects. We are here to bring you in-depth stories on the next “impossible” developments.Shanghai under strainThe situation for tech and auto suppliers in Shanghai is becoming critical.Top executives in China, including Huawei’s Richard Yu, are warning of “massive losses” across industries if COVID-19 restrictions in and around the city don’t ease soon. Xpeng Motors founder He Xiaopeng has said all of the country’s automakers would basically have to suspend production from May if manufacturing operations in the Shanghai area were not allowed to resume quickly.Criticism of the government’s handling of the COVID situation from such prominent figures is rare, and underscores the growing concern that prolonged disruptions to supply chains will have knock-on effects for the wider economy, Nikkei Asia’s Cissy Zhou, Cheng Ting-Fang and Lauly Li write.Their warnings also highlight how Shanghai is as much a tech hub as a financial centre. Over half of Apple’s 200 main suppliers have facilities in the city and in Jiangsu Province, Nikkei Asia’s analysis showed. Shanghai also boasts the world’s busiest port, which is straining under the COVID-related travel restrictions. Local authorities, judging by their remarks, are painfully aware of the dilemma. But with Beijing insisting it will stick to its zero-COVID policy, managers and executives worried that relief will not come soon enough.Keyboard wizardsYield Guild Games, a Philippine start-up, is recruiting online gamers — it calls them “scholars” — to play video games that earn cryptocurrency. Under the set up, YGG provides the initial funding for scholars, who in turn split their earnings with the company. One YGG investor calls the company’s model “the future of work,” and it has proved explosively popular in Southeast Asia, writes Nikkei Asia’s Wataru Suzuki.But building a business around cryptocurrency is not for the faint of heart. Valuations of digital coins can swing wildly, and a $600 million heist involving crypto gaming company Sky Mavis last month underscored the security risks in the sector. The other challenge for YGG and the games it backs: making sure all of these newly minted scholars stick to their “studies.”Xiaomi takes on AppleSmartphone maker Xiaomi, and its larger-than-life founder Lei Jun, were the embodiment of China’s technology ambition. Lei, who conducted Apple-style product launches in Steve Jobs’ signature black shirts, built the company from nothing to one of the world’s top phone players in the space of just 10 years, writes the Financial Times’ Primrose Riordan in Hong Kong.Xiaomi grabbed market share in countries from India to Spain thanks to a no-frills philosophy of combining strong specifications, such as advanced processors, with affordability. Now Lei wants to go even bigger and beat Apple and Samsung in the premium market within the next three years.But convincing global customers of its high-end credentials might be Xiaomi’s biggest challenge yet, according to current and former executives. They say that while the brand has a successful playbook in the low and mid-range markets, and the company is making strides in gaming and advertising, its efforts to go premium have had only middling results so far.Branding is one of the biggest hurdles in achieving the goal. The supply chain issues plaguing the wider tech industry are another. With investor doubts mounting — the company’s stock is down by 50% over the past year — and China’s tech crackdown continuing, Lei will need to harness all the charisma and energy he is known for to take up the fight with Apple and Samsung.The price of successBushes and scrubland cover much of the Ciaotou district of Kaohsiung, in southern Taiwan, but real estate agents are already popping open the champagne. News that Taiwan Semiconductor Manufacturing Co. will build its first chip plant in the harbour city has sent property prices soaring.Kaohsiung used to be a hub for oil refining and petrochemicals, but it was left behind when semiconductors and other high-tech business came to dominate the Taiwanese economy. “Old” and “poor” were how politicians described the once-bustling city. The imminent arrival of TSMC — and other tech heavyweights, including Foxconn and ASE Technology — promises to change that image.Transforming the southern city from a heavy industrial centre into a new chip and EV cluster would tick a number of boxes for the government. Most immediately, it would help spread the economic benefits of Taiwan’s tech prowess. More strategically, expanding the island’s tech manufacturing footprint will help bolster its all-important chip industry, the cornerstone of Taiwan’s global strategic importance.But not everyone is celebrating. One local resident says that not a day goes by that he doesn’t regret not buying a home in the area before TSMC’s plans were announced.Nikkei Asia’s Cheng Ting-Fang and Lauly Li visit Kaohsiung to reveal how Taiwan’s greatest economic strength can also be a source of major headaches for ordinary people.Recommended readsTech Tonic Podcast: US-China Tech Race: Shock and Awe (FT)Red-hot Chinese chip investment fuels boom in used equipment (Nikkei Asia)Mitsubishi Heavy aims to build ‘reactor-on-a-truck’ by 2030s (Nikkei Asia)The tortuous route of Toshiba’s path to auction (FT)The robot dogs policing Shanghai’s strict lockdown (FT)ASML sees chip production capacity remaining tight into 2023 (Nikkei Asia)TSMC raises revenue forecast as global chip shortage persists (FT)Rakuten will double ecommerce turnover by 2030: CEO Mikitani (Nikkei Asia)LG-Magna venture breaks ground on EV motor factory in Mexico (Nikkei Asia)Lex: Binance: crypto platform’s US affiliate could find chilly market reception (FT)We hope you are enjoying #techAsia. If so, please recommend to your friends to receive it every week by signing up here.If you have any comments, or ideas on stories you would like to see us cover, we would be happy to hear from you at [email protected]. More

Rosenthal, one of Germany’s oldest porcelain manufacturers, has seen plenty of disruption in its 140-year history. But nothing has prepared it for this: the threat of a cut-off of natural gas that would bring production of its bone china plates, bowls and vases to an abrupt halt.“We can’t live without gas,” says Mads Ryder, Rosenthal’s chief executive. “We don’t have an alternative energy source.”The war in Ukraine is reordering the global energy landscape. Shocked by the devastation visited on Ukrainian cities by Russian bombs, the EU has imposed swingeing sanctions on Russian hydrocarbons. Coal is banned; oil could be next. Gas may also be on the agenda. But talk of a full-scale embargo on Russian energy is spreading panic in Germany, which until the war received 55 per cent of its imported gas from Russia. The fear is that any sudden gas shut-off could paralyse large parts of the country’s industry. Martin Brudermüller, chief executive of the chemicals group BASF, says it would plunge German business into its “worst crisis since the second world war”.

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Rosenthal, a small company with 600 employees near the Czech border, would be profoundly affected. “If the gas is cut off we would have to close down our production within a few days or weeks,” says Ryder. A long closure “would mean the end for some companies in the industry”, which, burdened by high labour and energy costs, is “already fighting for its survival”.It is this fear that explains Germany’s profound opposition to the idea of turning off the Russian gas tap. In early April, Chancellor Olaf Scholz told the Bundestag that Germany’s energy reliance on Russia had “grown over decades and cannot be ended from one day to the next”. All of the country’s big parties agree with him.But that view could become increasingly indefensible as the war in Ukraine progresses. The mounting evidence of war crimes committed by Russian troops in places such as Bucha and the launch of a major new Russian offensive in the eastern Donbas region this week are raising the pressure on all European countries to at least consider a gas import ban — and Germany is no exception.Meanwhile, Germany also faces the risk that Russia could itself retaliate against western sanctions by unilaterally stopping the flow of gas to Europe. Either way, Berlin is facing a scenario unthinkable even a few weeks ago — a gas supply shock that would force it to ration energy to industry and could shutter some of the country’s largest factories.Energy veterans are at a loss. “I’ve seen many disruptions,” says Leonhard Birnbaum, chief executive of German energy group Eon. “I’ve seen the energy transition from zero to, let’s say, full steam. I’ve seen Fukushima . . . I’ve seen turbulent times. But what we are observing right now is . . . unprecedented.”The pressure on Europe feeds off outrage at the vast sums it has been handing over to the Kremlin for its hydrocarbons, even as it prosecutes a war that has claimed thousands of civilian lives and laid waste to Ukrainian towns and cities. Since the war began the EU has forked out more than €35bn for Russian energy supplies, according to Josep Borrell, the EU’s foreign policy chief. His colleague Charles Michel, president of the European Council, said in early April that “sooner or later” the bloc would have to consider banning imports of Russian oil — and even gas.But German businesses insist such an embargo would have catastrophic consequences. Siegfried Russwurm, head of the BDI business association, says a sudden gas import ban would bring whole sectors of industry to a standstill and “massively damage Germany’s greatest strength, also in international conflicts — its economic strength and stability”.In its insistence on a gradual approach, the government has been given cover by some of Germany’s leading economists. A forecast released on April 13 by its top economic institutes said a full EU energy embargo would trigger a sharp recession in Germany, sending output down 2.2 per cent next year and wiping out more than 400,000 jobs.“Germany would forfeit €220bn in economic output in 2022 and 2023, equivalent to 6.5 per cent of gross domestic product,” says Stefan Kooths of the Kiel Institute for the World Economy.Such gloomy predictions come with Germany already looking like the sick man of Europe. Its GDP shrank in the final quarter of last year under pressure from global supply chain bottlenecks and, unlike the US, China, the UK and the overall eurozone, Germany has not rebounded to pre-pandemic output levels. Eon chief Leonhard Birnbaum says of the energy crisis: ‘I’ve seen Fukushima . . . I’ve seen turbulent times. But what we are observing right now is . . .  unprecedented’ © Ina Fassbender/AFP/Getty ImagesBut debate continues to rage over the future of Germany’s gas supplies from Russia. Some analysts and economists say the projected costs of a moratorium, and the difficulty of filling the supply gap, have been overstated. Others think the economic importance of Russian gas should not be policymakers’ sole consideration. Janis Kluge, an expert on eastern Europe at the German Institute for International and Security Affairs, thinks Germany should consider a gas embargo — if only for moral reasons. “By not exerting enough pressure on Moscow in this war, we’re losing political capital in Europe and the west,” he says. “Germany doesn’t seem to realise what huge costs doing too little entails.” The Berlin-Moscow energy axis The gas dilemma goes to the heart of a far wider debate in Germany that revolves around a simple question: how did it come to be so reliant on a country that under Vladimir Putin has morphed into a revisionist dictatorship willing to invade its neighbours and plunge Europe into war?The close energy relationship has its roots in a historic agreement between then West Germany and the Soviet Union in 1970, which saw the Germans pay for Soviet natural gas with exports of steel pipes.“It was a great deal for everybody, including the Soviets,” says Eon’s Birnbaum. “They got their export infrastructure financed from the West . . . and we got cheap gas.”As the relationship bedded in, Russia gained the reputation as a reliable supplier that kept pumping gas even when the Soviet invasion of Afghanistan brought east-west tensions to boiling point. “There was an element of stability . . . at an operational level because of the symbiotic nature of customer and supplier,” says Frank Mastiaux, chief executive of EnBW, Germany’s third-largest energy company.

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As Germany’s energy policy shifted, it grew ever more reliant on Russian gas. Under former chancellor Angela Merkel, Berlin decided to phase out nuclear power in 2011 and later also moved to close all of the country’s remaining coal-fired power stations. Yet with the buildout of renewables stalling, gas as a bridge fuel to a low-carbon future began to loom even larger in the energy mix.“In the last 20 years we have shut down every alternative,” says Birnbaum. “The Germans didn’t want anything . . . no hard coal, no lignite, no nuclear, and all of a sudden we were overdependent [on Russia].”Even as Russia invaded Georgia, intervened in Syria, annexed the Crimean peninsula and fomented a separatist war in eastern Ukraine, Germany continued to expand its energy partnership with Russia.Not only did Merkel’s government back the Nord Stream 2 pipeline to increase the flow of Russian gas pumped directly to Germany across the Baltic Sea, it also stood by as key pieces of Germany’s energy infrastructure were snapped up by Kremlin-controlled companies. One example is the PCK oil refinery in the east German town of Schwedt that is now owned by Rosneft; another, Rehden, western Europe’s largest gas storage facility, is owned by Gazprom. Both acquisitions occurred after Russia invaded Crimea.Meanwhile, Berlin took decisions that locked it into Russian supplies of gas for decades to come, to the exclusion of other sources. The Nord Stream 1 and 2 pipelines destroyed the business case for building import terminals for liquefied natural gas, which would have allowed Germany to diversify its energy inflows.The German politicians seen as having fostered close ties to Russia are now being pilloried. One is Frank-Walter Steinmeier, a former foreign minister in Merkel’s government who is now Germany’s president. He had planned to visit Kyiv last week but was told by Volodymyr Zelensky’s government that he would be unwelcome — a spectacular snub. A worker inspects parts at Rehden, western Europe’s largest gas storage facility, which is owned by Russia’s Gazprom © Joerg Sarbach/APBut the Berlin-Moscow energy axis was in fact the work of successive German governments. And it was driven not just by economic factors — the relative cheapness of Russian gas — but also by the imperative of Wandel durch Handel, or change through trade, the idea that a “growing interdependence would stabilise the Russia-Germany relationship”, says Kluge.“That political narrative took away the fears people might otherwise have had of this lopsided dependence on Russia,” he says.‘Freeze for freedom’Despite its preference for a slow unwinding of this relationship, Germany is now actively preparing for the eventuality of a Russian gas shut-off. After EU states rebuffed Moscow’s demand to be paid in roubles for its gas last month, the German government activated the first of three warning stages in its emergency supply plan, a scheme put in place during the Arab oil embargo of the 1970s. Under its provisions, in the case of acute shortages the German government would eventually nationalise the country’s gas distribution network, ensuring supplies would be reserved for critical infrastructure, such as hospitals, and for households. Industry would be forced to cut back on its gas consumption, though it remains unclear whether small or large companies would be asked to do so first, or by the same measure. Moscow: Vladimir Putin greets Frank-Walter Steinmeier, Germany’s president, who planned to visit Kyiv last week but was told he would be unwelcome © Mikhail Svetlov/Getty ImagesGerman boardrooms are in uproar. Government officials say they have been inundated with letters from industries insisting how “systemically relevant” they are — particularly from the chemicals sector, which feels that the true importance of its core products to the broader economy has not been fully understood. Companies jostling for a place in the rationing queue are hiring lawyers to advocate on their behalf. They point out that while a car assembly line can be idled and then restarted with minimal permanent damage, the same cannot be said of blast furnaces at steel plants or large steam crackers that break down hydrocarbons.As part of the government plan, the Federal Network Agency, the regulator that oversees Germany’s energy infrastructure, has been holding talks with businesses to prepare for “unavoidable shutdowns” should energy supply shortages occur. “Unfortunately we can’t exclude a situation where we have to make decisions that have terrible consequences for companies, jobs, supply chains, whole regions,” Klaus Müller, the agency’s president, told the newspaper Handelsblatt. Already, some companies such as Thyssenkrupp and BASF are drawing up lists of production units they can afford to shut down in an emergency. Some retailers are reducing the temperature in their outlets to cut energy costs. Former German president Joachim Gauck last month called on his compatriots to “freeze for freedom.” Meanwhile, the government is scrambling to find alternatives to Russian gas. Economy minister Robert Habeck, a prominent figure in the Green party, travelled to Qatar last month to secure long-term LNG supplies from the Gulf state. Habeck has optioned three floating storage and regasification units that will provide Germany with 27bn cubic meters of gas a year, and he has also expedited a deal to build a permanent LNG terminal in Brunsbüttel, a port near Hamburg. The PCK oil refinery in the east German town of Schwedt that is now owned by Russia’s Rosneft © Krisztian Bocsi/BloombergMeanwhile, the government is pushing for more wind farms and solar parks to increase its share of renewable power. But it might also allow Germany’s coal-fired power stations, which are slated for closure by 2030, to operate for longer — a bitter pill for the Greens to swallow. Habeck’s ministry says that since Russia invaded Ukraine, the government has reduced its dependence on Russian coal from 50 to 25 per cent, oil from 35 to 25 per cent, and gas from 55 to 40 per cent. The plan is for Germany to all but wean itself off Russian gas by mid-2024 and become “virtually independent” of Russian oil by December. Eon’s Birnbaum, however, says it will take three years for Germany to fully break its addiction to Russian energy imports. Others, though, disagree. According to a report by the DIW think-tank, Germany could easily fill its gas supply gap were Russian exports to stop, partly by increasing pipeline imports from Norway and the Netherlands, tapping more LNG via import terminals in Rotterdam, Zeebrugge and Dunkirk, and forcing industry to conserve energy.“German industry has been developing these horror scenarios, saying we just can’t do without Russian gas, and by doing this they’re taking the whole economy hostage,” says Claudia Kemfert, an energy expert at the DIW. “But we’re living in a different world now . . . We can’t do business with Russia any more and industry has to realise that.”But government officials dismiss suggestions that Germany can somehow make do without Russian gas. “Russian gas imports are still, in our view, irreplaceable,” says one.The costs of a cut-offOpinion is just as mixed about the potential economic impact of an energy embargo, on Germany and the EU. Some leading economists support the government’s gradual approach, warning a sudden, continent-wide supply cut-off could permanently damage the competitiveness of Europe’s economy and even fuel social unrest.“It would be a very asymmetric shock, hitting Germany and Europe very hard, much harder than the US and other parts of the world,” says Marcel Fratzscher, head of the DIW. “There is a risk of a social backlash if we have a long period of much higher prices, company closures and rationing of gas supplies.”A fuel truck passes the Nord Stream 2 pipeline in Lubmin. Nord Stream 1 and 2 destroyed the case for building LNG import terminals, which would have diversified German energy inflows © Krisztian Bocsi/BloombergNot so, says Rüdiger Bachmann, an economics professor at the University of Notre Dame who co-wrote one of several reports after the invasion of Ukraine estimating that ending Russian energy imports would be “manageable” for the German economy. “It is a temporary crisis,” he says. “We can protect jobs with short-time work and support companies with capital injections by the government. We have done this before with Covid. Germany has the fiscal capacity to pay for this.”Veronika Grimm, an economics professor at the University of Erlangen-Nüremberg, who sits on the council of economic experts advising the government, agrees, saying efficiency measures could also reduce gas consumption in the short-term by as much as 15-25 per cent.Such calculations are met with scorn by many German companies, who warn of the chaotic consequences of a sudden shut-off of Russian gas. Rosenthal is an example. It fires its porcelain in kilns that are heated to 1,200C and that temperature must be maintained constantly.“We can’t just reduce our gas consumption a little,” says Ryder. “If we don’t have a constant temperature the porcelain doesn’t fire and starts to break.” He is already working on an emergency plan for the eventuality of a gas supply shortage — but the outlook is bleak. “If we’re cut off slightly, or 100 per cent, we would be able to work on the existing inventory, packaging and finishing the goods, but only for a while. Then we’d have to send our people home.” More

The 19th century French philosopher Auguste Comte got it wrong: demography is not destiny. Population trends are some of the strongest forces in economics, affecting global prosperity, the growth of individual nations and the strength of public finances. But reducing the success of countries and regions to their trends in births, deaths and migration is a simplification too far. As the coronavirus pandemic has shown, the confident predictions in 2020 of a lockdown baby boom followed by the 2021 fear of a Covid baby bust demonstrate that demographic trends are far less stable than often imagined. Small changes in fertility, mortality and migration can have immense effects. As recently as 2014, the official UK government projection was for the country’s population to rise to 85mn by 2080 up from 67mn in 2020, but the most recent iteration with higher death rates and lower birth rates has brought that figure down to only 72mn people.The economics of demography is also easy to diagnose wrongly, especially with often-used comparisons that are typically both simple and misleading. The US economy is frequently said to be more dynamic because the nation is more youthful than Japan. In the 19 years between 2000 and 2019, the US economy grew 46 per cent compared with only 26 per cent in Japan. But the latter achieved its growth rate with a falling working age population and its per capita growth rate for everyone aged between 16 and 64 was 5 per cent higher than that in the US over the same period.

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Demographic trends and their relation to economic dynamism are clearly more complicated than some simple statistics suggest. Overall growth rates of middle-income and rich countries are strongly linked to population growth, but living standards are not. Over the next 20 years, some trends are clear. Declines in fertility rates leading to a shrinking natural population in the US, less than one baby born per woman in South Korea and deep concerns about fertility across Europe will make sustained rapid economic growth ever harder to achieve. They will increase the burden of high levels of public and private sector debt for potentially shrinking populations and put pressure on governments to raise taxes to pay for the greater income, health and care needs of the elderly. After 30 years of decline amid China’s achievement of middle-income status, global inequality is also likely to rise again. This will be driven by the fact that the only area with a rapidly growing population is sub-Saharan Africa, the world’s poorest region. UN projections show that roughly one in seven people lived south of the Sahara desert in 2019, a figure projected to rise to one in six by 2030, and to one in three by the end of the century. If the public finance difficulties of richer countries, amid slower growth and greater global inequality, are relatively likely consequences of current global demographic trends, the effect of ageing on global inflation is much disputed. In their book, The Great Demographic Reversal, authors Charles Goodhart and Manoj Pradhan predict a sustained rise in inflation as large numbers of advanced economy residents retire and the era of cheap labour in China comes to an end. Japan’s experience of ageing alongside persistent mild deflation suggests the outcomes will be less certain, especially as ageing societies are not known for rampant consumerism.The world can therefore expect slower growth alongside falling fertility rates in middle and advanced economies, similar income levels per family and uncertain effects on inflation. The gaps between standards of living in rich and poor countries and the growing African population of young people will increase the incentives for migration as inequalities become ever starker. This will generate difficult choices across the world. Richer countries that welcome and successfully integrate migrants will be able to smooth many of the financial pressures of ageing. Others will try to offer financial incentives to increase birth rates, even though they have scant evidence of their effectiveness. Cultural change to make lives easier for parents, especially mothers, will also be needed. Where longevity is rising, later retirement will also become important. Demography is not economic destiny. It is too fickle a variable for that to be true. But neither can it be ignored. As the Swedish economist Knut Wicksell proposed more than a century ago, economics needs to start with demography because it frames the important issues. But wider policies will determine success in the rest of this century. More

War, political tensions and a deteriorating macroeconomic outlook are testing the skills of central banks in Hungary, Poland and Romania. They add up to the region’s third great challenge after the 2008 financial crisis and the transition from communism to a market economy in the 1990s.Month by month, the central banks are raising interest rates to curb inflation pressures that were already rising before Russia’s invasion of Ukraine in February drove up the prices of oil, gas, metals, food and fertilisers. Yet real interest rates remain deep in negative territory, a sign that more hikes will be needed to reduce or anchor inflation expectations.For the central banks, the question is how high and fast to raise rates without harming the post-pandemic economic recovery that was taking shape before February. Unfortunately, some factors that might ease their task lie beyond their control.Hungary, Poland and Romania hope to maintain economic growth with the help of tens of billions of euros from the EU’s €800bn post-Covid recovery fund. But disputes over the rule of law with Brussels mean that Hungary and Poland have yet to receive a cent from the fund, whilst doubts persist about Romania’s ability to absorb EU money efficiently.The region’s central banks need to manage inflation without excessively pushing up debt-servicing costs, Jakob Suwalski and Levon Kameryan of Scope Ratings wrote last week. “Inflation expectations are rising. Currency volatility will persist amid possible capital outflows, putting pressure on foreign exchange reserves even as central banks tighten monetary policy.”Hungary is a case in point. Its central bank raised its base rate by 100 basis points last month to 4.4 per cent, but annual inflation is currently 8.5 per cent. The central bank estimates average inflation this year will be 7.5 per cent to 9.8 per cent.More rate increases are clearly on the way. Peter Virovacz of ING bank sees a chance for a positive real interest rate by the end of this year, which would probably mean 8 per cent or higher. But Hungary’s central bank is not operating in a policy vacuum.Before this month’s parliamentary elections, Hungary’s government wooed voters with lavish social benefit payments, wage settlements and tax cuts. These measures increased Hungary’s budget deficit, which came under more pressure from expenditures related to the Ukraine war.The forint fell in early March to a record low of 400 to the euro. It has stabilised since then, but to reassure investors the government must bring public expenditure under control. Yet spending cuts and sharply higher interest rates, coupled with lack of access to the EU recovery fund, would put the Hungarian economy under considerable strain.Annual Polish inflation hit 11 per cent last month and is expected to average about the same for the whole year. On April 6, its central bank raised its benchmark interest rate by 100 basis points to 4.5 per cent. Adam Antoniak of ING foresees the rate rising to 6.5 per cent this year and 7.5 per cent in 2023.Interest rates may therefore remain negative this year, even as pressure mounts on the fiscal side. The war in Ukraine is generating increased spending on defence and education as well as healthcare and social protection for the more than 2.5mn refugees who had arrived in Poland by early April.Furthermore, the government plans to cut the personal income tax rate to 12 per cent from 17 per cent and introduce other tax benefits. Such measures make the task of managing inflation expectations especially urgent. Adam Glapinski, the central bank governor, rightly points to the Polish economy’s strong fundamentals. To protect them, he may raise rates more aggressively than some investors anticipate.Annual Romanian inflation rose to 10.2 per cent in March, but the main interest rate is only 3 per cent despite a 0.5 percentage point increase in early April. Economists expect average inflation this year of around 9 per cent.For the National Bank of Romania, the difficulty is that higher rates seem necessary but economic growth is fading. “A ‘do the least and hope it holds’ strategy seems to have been the tool of choice so far and we have little reason to expect any change in the policy stance,” says Valentin Tataru of ING.Central and eastern Europe’s economies are vulnerable to the fallout from the Ukraine war. To defend them, the region needs central banks willing to tame inflation — but also governments willing to take tough decisions on spending and relations with the [email protected] More