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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldFour years ago, the Bank for International Settlements (BIS) — the central bankers’ central bank — unveiled an innovation project that carried the ugly moniker “mBridge”.This aimed to create a cross-border central bank digital currency linking the central banks of China, Hong Kong, Thailand, UAE and (latterly) Saudi Arabia.You might think this is arcane. If so, think again: the geeky project symbolises a bigger battle that could matter deeply under US President Donald Trump.More specifically, last autumn, just before the US election, the BIS unexpectedly pulled out of mBridge, in effect ceding control to China and the rest. BIS claimed this was just because it had reached “minimal viable product” stage. But few believe this. “The Americans demanded [the BIS] stop because it’s a threat,” one participant tells me, explaining that Washington worried that “it might be used to evade [dollar] sanctions”.And while Agustín Carstens, BIS head, publicly denied that, speculation bubbles on — not least because Trump is undeniably on the monetary warpath: on Truth Social last month he repeated threats to impose “100% Tariffs” on countries trying to “replace the mighty U.S. Dollar” with new currencies or payments systems.So investors should watch what happens next. For while it is Trump’s threats around trade tariffs that have been grabbing headlines recently, this less-visible fight around money matters deeply. After all (as I have noted before), it is the dollar-based global financial system that is the real source of America’s hegemonic power today, and which Washington wants to defend.On paper, Trump has no reason to worry. Recent data from the IMF shows that the dollar accounts for about 58 per cent of central bank reserves. This is slightly lower than at the start of the century, but recent diversification has mostly involved smaller currencies — not rivals such as the euro or renminbi.More striking, Swift data suggests that 49.1 per cent of all payments were in dollars last year, a 12-year high. But there are three crucial caveats. First, central banks are hoovering up gold “at an eye-watering pace”, as the World Gold Council recently noted. That suggests a desire to hedge their fiat dollar exposure.Second, the Swift data may be a little misleading since activity is swelling outside western platforms. China is building its own Cross-Border Interbank Payment System. This is small and rudimentary, but it has 160 members and transaction volume has jumped 80 per cent since 2022. Third, Washington’s financial weaponisation seems to be fuelling — not halting — efforts by others to imagine alternatives. Hence why mBridge matters: if those digital pipes ever work at speed and scale (a big “if”), this would challenge the “hub and spoke” system centred on the US Federal Reserve.So how will Washington respond? Chris Giancarlo, head of the Commodity Futures Trading Commission during the first Trump administration, hopes it will use carrots — ie policies that make dollar usage utterly compelling for non-Americans. That means championing good economic “values”, he tells me, and embracing more cyber innovation. A “digital dollar project” he co-leads will outline how to do this next week. This is eminently sensible. But Trump seems minded to use sticks. Last month he issued an executive order banning any central bank digital currency usage in America, since they “threaten the stability of the financial system, individual privacy, and the sovereignty of the United States”.Instead, he championed bitcoin (never mind that this is viewed as a fiat dollar hedge). More significantly, he also backed the “growth of lawful and legitimate dollar-backed stablecoins worldwide”.This might seem odd, not least because it is diametrically opposed to the European Central Bank. Some cynics will undoubtedly attribute it to the fact that Howard Lutnick, commerce secretary, helped to build tether, the biggest existing coin. But, there is another factor, too: Trump’s team think stablecoins might be a secret weapon to promote more — not less — dollarisation. “It’s very good for us,” one tells me. That is because 21st-century stablecoins — like the 20th-century eurodollar market — enable transactions in offshore dollars that are free from onerous onshore regulations. This appeals to many financiers grappling with geopolitical risk (even if stablecoins, unlike eurodollars, do not pay returns). In practice, the current market cap of stablecoins — about $220bn — is still piddling compared with eurodollars, let alone the $6tn-odd US capital markets.But the key point is this: as Trump keeps trying to remake — or smash up — the postwar geopolitical order, it is not just tariffs and tanks that matter; financial plumbing does too. These nascent battles about CBDC and stablecoins could well “take centre stage this year”, as the Atlantic Council notes. Anyone know how to parse mBridge in Chinese? gillian.tett@ft.com More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldDonald Trump is considering tariffs on countries that levy digital services taxes against American companies and tightening rules on Chinese investment in the US as he widens the scope of his global trade war.The president signed a memo on Friday ordering the US trade representative to look into reopening investigations begun during his first term into digital services taxes imposed by a host of EU countries as well as the UK and Turkey. It also assesses potential new probes into other countries including Canada.  “My administration will not allow American companies and workers and American economic and national security interests to be compromised by one-sided, anti-competitive policies and practices of foreign governments,” the president wrote in the memo. Since retaking office Trump has sought to reshape the country’s trading relationships with the world, threatening and executing a range of tariffs against various countries and sectors.He had already signalled digital services taxes would be in his sights as he looks to unshackle the nation’s Big Tech groups operating abroad and overhaul the global tax regime. Under the memo, Washington will look into taxes imposed by foreign governments on US companies and also any regulations or policies that “inhibit the growth” or “jeopardise [the] intellectual property” of American corporations operating abroad. The memo mentions digital service taxes in France and the UK, whose leaders are set to visit Washington for talks with the president in the coming days. “What they’re doing to us in other countries is terrible with digital,” Trump said on Friday ahead of the signing.The president also signed a memorandum aimed at boosting foreign investment into the country while protecting national security from China and other adversaries. It said the administration would create a “fast-track” process to enable investment from US allies and partners.The memo added that the Committee on Foreign Investment in the United States (Cfius), which vets inward-bound transactions for security risks, would be used to “restrict Chinese investments in strategic US sectors like technology, critical infrastructure, healthcare, agriculture, energy, raw materials, and others”. Former president Joe Biden ordered Cfius to take a tougher approach on China in a range of similar sectors, including technology.The White House said it would protect farmland and real estate near sensitive military facilities and would strengthen Cfius’s authority over “greenfield” investments, where companies build or expand new facilities and operations in a foreign country.It said the administration would consider new or expanded restrictions on American outbound investment to China in sensitive technologies, including chips, artificial intelligence, quantum and biotechnology, to prevent capital from being used to support China’s “military-civil fusion” strategy, which forces Chinese companies to share technology with the People’s Liberation Army. “We will also adopt new rules to stop US companies from pouring investments into China, and to stop China from buying up America, allowing all of those investments that clearly serve American interests,” Trump said in a statement.China’s commerce ministry criticised the Trump administration move as an “arbitrary expansion of national security” and indicated Beijing might retaliate.A ministry spokesperson said the proposals would “undermine the confidence of Chinese enterprises in investing in the US” and called any further restrictions on investing in China “highly unreasonable”. Additional reporting by Steff Chávez in Washington and Ryan McMorrow in Beijing More

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldWill the latest iteration of the Trump administration’s supercharged “flood the zone with sh*t” strategy be a global macroeconomic mega-deal — an agreement that outdoes even the famous 1985 Plaza Accord in ambition?That was a deal between the US and its major trading partners struck at the Plaza Hotel (of Home Alone 2: Lost in New York fame) to engineer a dollar devaluation, after Fed chair Paul Volcker’s war on inflation had sent the greenback soaring. It was a notable success, in an era of damp-squib international agreements. Donald Trump (also of Home Alone 2: Lost in New York fame) already demonstrated an affinity for economic history by purchasing the Plaza Hotel in 1988 (the deal ended up in bankruptcy). He really wants a weaker dollar. Conveniently, he also owns the Mar-a-Lago resort in Florida, which might be a profitable good venue for a new accord.Versions of the “Mar-a-Lago Accord” idea have therefore been floating around ever since the first Trump presidency. His victory in November naturally led them to resurface. Alphaville mentioned the possibility in our how-to-devalue-the-dollar guide the day after the 2024 election. The chatter then died down, but has now apparently come back on the news agenda. Most of the basic contours of the supposed plan seem to be derived from this November 2024 paper by Stephen Miran. Miran is currently a senior strategist at Hudson Bay Capital, but he served a stint in the US Treasury during the first Trump administration, and is now Trump’s nominee for chair of the Council of Economic Advisors. And you can’t fault his ambition: The next Trump term presents potential for sweeping change in the international economic system and possible accompanying volatility. It is important for investors to understand the tools that might be employed for such purposes, as well as the means by which government may attempt to avoid unwelcome consequences. This essay attempts to provide a user’s guide: a survey of some tools, their economic and market consequences, and steps that can be taken to mitigate unwanted side effects. Wall Street consensus that an Administration has no means by which to affect the foreign exchange value of the dollar, should it desire to do so, is wrong. Government has many means of doing so, both multilaterally and unilaterally. No matter what approach it takes, however, attention must be paid to steps to minimise volatility. Assistance from trading partners or the Federal Reserve can be helpful in doing so. In any case, because President Trump has shown tariffs are a means by which he can successfully extract negotiating leverage — and revenue — from trading partners, it is quite likely that tariffs are used prior to any currency tools. Because tariffs are USD-positive, it will be important for investors to understand the sequencing of reforms to the international trading system. The dollar is likely to strengthen before it reverses, if it does so. There is a path by which the Trump Administration can reconfigure the global trading and financial systems to America’s benefit, but it is narrow, and will require careful planning, precise execution, and attention to steps to minimise adverse consequences.It is tempting to discount the whole thing, as this is a ~cough~ freewheeling administration with a multitude of hangers-on throwing policy proposals around like confetti. Some aspects — such as forcing countries to swap their Treasuries for century bonds — seem a bit fantastical. It’s essentially a glorified protection racket scheme with some lipstick. Even Miran noted that restructuring the global financial system will require “careful planning, precise execution and attention to steps to minimise adverse consequences”. And, let’s face it, these aren’t qualities that the first or (thus far) second Trump administrations have demonstrated a lot of. Moreover, the world is a radically different place today than it was back when the original Plaza Accord was struck in 1985. Mark Sobel, a former US Treasury grandee, wrote in December that a Mar-a-Lago Accord was “far-fetched and implausible”. However, the chatter can’t be ignored completely. The Trump administration has clearly shown a remarkable willingness to slap tariffs on friends and eject them from its security blanket. China has its own struggles right now. Some countries might therefore be willing to swallow some sort of Mar-a-Lago Accord to avoid the drama. As Stephen Jen of Eurizon SLJ wrote last month:We agree that the conditions are not ripe now for a Mar-a-Lago Accord, but the circumstances could change in 2-3 quarters’ time. Also, our sense is that Beijing’s aversion to participating in such a co-ordinated effort to drive down the dollar may not be as strong as before, especially when threatened with punitive tariffs.  John Connally — US Treasury Secretary in 1971 — famously said, ‘The dollar is our currency, but it is your problem.’ While this quote is still valid, the Plaza Accord in 1985 was an episode where other stakeholders participated to right a wrong in the dollar’s value. The interventions in 2000 to purchase euros was a similar agreement, which also addressed a stark imbalance in currency markets.  Given how mispriced the dollar is now, we believe the probability of a Mar-a-Lago Accord will rise in the coming quarters. More

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Friedrich Merz, the Christian Democratic Union’s candidate for chancellor, has not shied away from blasting Olaf Scholz’s economic policies and linking them to the lackluster state of Europe’s biggest economy.
But experts say a Merz-led government may also not give the German economy the boost it needs.
The German economy contracted in both 2023 and 2024.

Production at the VW plant in Emden.
Sina Schuldt | Picture Alliance | Getty Images

The struggling German economy has been a major talking point among critics of Chancellor Olaf Scholz’ government during the latest election campaign — but analysts warn a new leadership might not turn these tides.
As voters prepare to head to the polls, it is now all but certain that Germany will soon have a new chancellor. The Christian Democratic Union’s Friedrich Merz is the firm favorite.

Merz has not shied away from blasting Scholz’s economic policies and from linking them to the lackluster state of Europe’s largest economy. He argues that a government under his leadership would give the economy the boost it needs.
Experts speaking to CNBC were less sure.
“There is a high risk that Germany will get a refurbished economic model after the elections, but not a brand new model that makes the competition jealous,” Carsten Brzeski, global head of macro at ING, told CNBC.

The CDU/CSU economic agenda

The CDU, which on a federal level ties up with regional sister party the Christian Social Union, is running on a “typical economic conservative program,” Brzeski said.
It includes income and corporate tax cuts, fewer subsidies and less bureaucracy, changes to social benefits, deregulation, support for innovation, start-ups and artificial intelligence and boosting investment among other policies, according to CDU/CSU campaigners.

“The weak parts of the positions are that the CDU/CSU is not very precise on how it wants to increase investments in infrastructure, digitalization and education. The intention is there, but the details are not,” Brzeski said, noting that the union appears to be aiming to revive Germany’s economic model without fully overhauling it.
“It is still a reform program which pretends that change can happen without pain,” he said.

Geraldine Dany-Knedlik, head of forecasting at research institute DIW Berlin, noted that the CDU is also looking to reach gross domestic product growth of around 2% again through its fiscal and economic program called “Agenda 2030.”
But reaching such levels of economic expansion in Germany “seems unrealistic,” not just temporarily, but also in the long run, she told CNBC.
Germany’s GDP declined in both 2023 and 2024. Recent quarterly growth readings have also been teetering on the verge of a technical recession, which has so far been narrowly avoided. The German economy shrank by 0.2% in the fourth quarter, compared with the previous three-month stretch, according to the latest reading.
Europe’s largest economy faces pressure in key industries like the auto sector, issues with infrastructure like the country’s rail network and a housebuilding crisis.
Dany-Knedlik also flagged the so-called debt brake, a long-standing fiscal rule that is enshrined in Germany’s constitution, which limits the size of the structural budget deficit and how much debt the government can take on.
Whether or not the clause should be overhauled has been a big part of the fiscal debate ahead of the election. While the CDU ideally does not want to change the debt brake, Merz has said that he may be open to some reform.
“To increase growth prospects substantially without increasing debt also seems rather unlikely,” DIW’s Dany-Knedlik said, adding that, if public investments were to rise within the limits of the debt brake, significant tax increases would be unavoidable.
“Taking into account that a 2 Percent growth target is to be reached within a 4 year legislation period, the Agenda 2030 in combination with conservatives attitude towards the debt break to me reads more of a wish list than a straight forward economic growth program,” she said.

Franziska Palmas, senior Europe economist at Capital Economics, sees some benefits to the plans of the CDU-CSU union, saying they would likely “be positive” for the economy, but warning that the resulting boost would be small.
“Tax cuts would support consumer spending and private investment, but weak sentiment means consumers may save a significant share of their additional after-tax income and firms may be reluctant to invest,” she told CNBC.  
Palmas nevertheless pointed out that not everyone would come away a winner from the new policies. Income tax cuts would benefit middle- and higher-income households more than those with a lower income, who would also be affected by potential reductions of social benefits.

Coalition talks ahead

Following the Sunday election, the CDU/CSU will almost certainly be left to find a coalition partner to form a majority government, with the Social Democratic Party or the Green party emerging as the likeliest candidates.

The parties will need to broker a coalition agreement outlining their joint goals, including on the economy — which could prove to be a difficult undertaking, Capital Economics’ Palmas said.
“The CDU and the SPD and Greens have significantly different economic policy positions,” she said, pointing to discrepancies over taxes and regulation. While the CDU/CSU want to reduce both items, the SPD and Greens seek to raise taxes and oppose deregulation in at least some areas, Palmas explained.
The group is nevertheless likely to hold the power in any potential negotiations as it will likely have their choice between partnering with the SPD or Greens.
“Accordingly, we suspect that the coalition agreement will include most of the CDU’s main economic proposals,” she said. More