It has been called Europe’s “Hamiltonian moment.” It’s true that for the first time the EU has seen a common issuance of debt.
On Tuesday European Union leaders agreed to a recovery plan funded by the bloc’s first major issuance of common debt, and some are calling it a historic moment for the Continent’s political and fiscal integration. This is a significant development, but don’t hold your breath for a United States of Europe.
The EU announced €1.8 trillion in spending to address the pandemic-induced economic contraction, with more than €1 trillion going to the bloc’s seven-year budget. The European Commission also will borrow on capital markets for a €750 billion recovery package. Some €390 billion of that will come as grants, with the rest in loans. Economic basket cases like Italy and Spain stand to be the biggest recipients.
In Italy, the agreement was preceded by a heated diatribe against the so-called “frugal” countries, in particular the Netherlands, which demanded more “conditionality:” that is, the government of the Netherlands wanted to make sure countries like Italy or Spain were not wasting the money on more government spending of the most blatantly unproductive kind. In a sense, this was paradoxical: if, in essence, the agreement enables the EU to provide loans to a number of countries—including Italy—at a rate of interest lower than what these countries could get on the market, it is precisely because the “frugal” countries kept their books in order and the “spendthrift” ones can now take advantage of these circumstances. But it also tells you that it is very likely that this new “European aid” will be wasted as our Dutch and Swedish friends fear. There is such widespread rhetoric against “austerity” that increased government spending goes with a sense of entitlement. Believe it or not, the main “argument” of Italian politicians who are opposing this deal is that the funds are (partly) provided as loans and that “we’ll need to repay them,” as if repaying a debt was an outrageous innovation foisted upon the unsuspecting Italian people.
The true novelty in the agreement is that conditionality is very limited and this move triggers the evolution of Europe towards a transfer union. These transfers will be dressed up as special anti-COVID19 aid, aiming at fostering a more innovative, greener, economy and the other shibboleths of our time. Yet the staggering thing is that nobody, within or outside of Italy, seems worried about the effect such spending will have on economic growth. Typically this sort of government intervention pretends to be “fostering growth.” Now, in the dominant political rhetoric, even mentioning growth is a taboo.
In short, we see a profound institutional transformation of the nature of the Union, with the main aim of kicking the can down the road. It is profoundly paradoxical that Italians are so happy about that. Italians have evidence in the South of their country that showering a territory with aid won’t do much for economic development. And yet they seem determined to become, for the whole of Europe, what the Mezzogiorno is for Italy.(0 COMMENTS)
Biden’s Middle East trip has messages for both global and domestic audiences
Until 1906, no US president had ever traveled abroad in office. Then Teddy Roosevelt demonstrated the power of showing up.
Even before his arrival in Israel, U.S. President Joe Biden’s decision to travel to an active war zone and the scene of an unfolding humanitarian crisis has spoken volumes.
The White House has stated that Biden’s purpose is to “demonstrate his steadfast support for Israel” after Hamas’ “brutal terrorist attack” on Oct. 7, 2023. But Israel wasn’t meant to be his only stop.
The president was also scheduled to travel to Amman, Jordan, to meet with Jordanian King Abdullah II, Egyptian President Abdel Fattah el-Sisi and Palestinian President Mahmoud Abbas. However, the meeting was canceled with Biden already en route to Israel.
The trip is a bold but risky move, a carefully orchestrated display of Biden’s belief that the United States should take an active leadership role in global affairs. It is a strategy Biden has used before, most notably in his February 2023 surprise visit to Ukraine.
As a scholar of U.S. presidential rhetoric and political communication, I have spent the past decade studying how chief executives use their international travels to reach audiences at home and abroad. I see clear parallels between Biden’s trip and similar actions by other presidents to extend American influence on the world stage.
A paramount duty
Prior to 1906, no U.S. president had ever traveled abroad while in office. A long-standing tradition held that the U.S. had left the trappings of monarchy behind, and that it was much more appropriate for chief executives to travel domestically, where Americans lived and worked.
President Theodore Roosevelt, who had an expansive view of presidential power, bemoaned what he called this “ironclad custom” and ultimately bucked it. In November 1906, Roosevelt visited the Panama Canal Zone and posed at the controls of a giant steam shovel to shore up public support for constructing the canal. Beyond pushing this megaproject forward, the trip enabled Roosevelt to see and be seen on the international stage.
Other presidents followed suit as the U.S. began to take a more active role in global affairs. Just before Woodrow Wilson departed for the 1919 Paris Peace Conference at Versailles, where world leaders convened to set the terms for peace after World War I, he stated in his annual message to Congress that it was his “paramount duty to go” and participate in negotiations that were of “transcendent importance both to us and to the rest of the world.”
During World War II, President Franklin Delano Roosevelt embraced this idea of bearing a moral responsibility to speak to, and for, both U.S. citizens and a global audience. Images of FDR seated between British Prime Minister Winston Churchill and Soviet leader Josef Stalin at Tehran and Yalta symbolized global leadership – a robust vision that endured after the U.S. president’s untimely death.
Embodying US foreign policy
Going global quickly became a deliberate rhetorical strategy during the Cold War, as presidents from Harry Truman to Ronald Reagan used trips abroad to symbolize American commitment to important places and regions. By choosing to visit certain destinations, presidents made clear that these places were important to the U.S.
This is exactly what Biden no doubt hopes to accomplish through his visit to Israel. When he condemned the Hamas attack on Israel as “an act of sheer evil,” he also declared: “We stand with Israel.” Traveling to an active war zone embodies this pledge far more clearly than words alone.
And this is how Israelis have interpreted the visit. Tzachi Hanegbi, the leader of Israel’s National Security Council, described the visit as “a bear hug, a large rapid bear hug to the Israelis in the south, to all Israelis, and to every Jew.”
Addressing both sides
But Biden must also acknowledge the very real plight of Palestinians who are trapped in dire conditions in Gaza as Israel prepares for a ground invasion. This is no doubt the reason his team sought a face-to-face meeting with Abbas.
I expect that Biden will demonstrate U.S. support for Israel while also drawing a clear distinction between Hamas and the Palestinian people. And Biden will likely draw on his friendship of many years with Israeli Prime Minister Benjamin Netanyahu to urge moderation in Israel’s military response.
The home audience
Biden’s trip also has important meaning for U.S. electoral politics. A former chair of the Senate Foreign Relations Committee, Biden has long maintained that the U.S. must take an active role in the world. In the 2020 presidential campaign, he argued that Donald Trump’s policy of “America First” had left “America alone” by undercutting relationships with critical U.S. allies.
For Jewish voters, the president’s visit offers tangible evidence of an enduring U.S. commitment to Israel, especially after some far-left Democratic lawmakers refused to criticize the Hamas attack. And Biden’s willingness to condemn Hamas as a “terrorist organization” may also speak to Republican voters, who are much more likely to back Israel.
Defining an appropriate role for the U.S. in world affairs is certain to be an important issue in the 2024 presidential election, especially with active conflicts in Ukraine and now in the Middle East. Biden has consistently called for U.S. engagement abroad – not only in words, but by showing up in places like Kiev and Tel Aviv.
Allison M. Prasch does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.white house congress senate trump iran ukraine
Volta reaches the end of the line with bankruptcy filings
Headquartered in Sweden, this electric vehicle outfit also operates in the UK. The move puts 850 jobs on the chopping board, 600 of which are UK-based….
Headquartered in Sweden, this electric vehicle outfit also operates in the UK. The move puts 850 jobs on the chopping board, 600 of which are UK-based. However, the dash toward net zero emissions could possibly attract viable interest.
Volta said the liquidation of Proterra and uncertainties regarding its battery supplier resulted in supply chain issues that hobbled the company’s ability to manufacture sufficient trucks. In a press statement published on the company’s website, the Volta Board of Directors said:
The Board has not taken this course easily or lightly and is fully aware of the significant impact this will have on the organisation’s dedicated workforce, as well as customers and partners. We would like to sincerely thank the Volta Trucks team and are incredibly proud of their pioneering work to deliver such an innovative zero-emission commercial vehicle.
According to Reuters, the company raised approximately €300m from investors and had orders for more than 5,000 vehicles. Volta Trucks earmarked a factory in Austria to handle production.
Recent years saw several electric vehicle startups raising billions in funds. Most of these, however, struggled to kick start and sustain mass production. Some, such as Proterra and Lordstown had to close their doors.
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Geopolitical Tensions Lift Oil and Gold, but little Sign of Haven Buying in FX
Overview: US economic data surprised to the upside yesterday,
and although interest rates rose as one would expect, the dollar’s initial
gains were pared,…
Overview: US economic data surprised to the upside yesterday, and although interest rates rose as one would expect, the dollar's initial gains were pared, and the Dollar Index finished slightly lower on the day. This seemed, in some respects, to echo how the greenback reacted to the recent jobs report. However, then, interest rates softened, but the inability to rally on seemingly good news is notable. The heightened tensions in the Middle East have spurred a dramatic rally in oil prices. December WTI is nearly 3.5% higher near $88.50 after gapping higher. Gold has also jumped after two relatively subdued sessions and is near $1945, up more than 1%.
The safe haven buying in foreign exchange market is limited. The dollar is heavier against most of the G10 currencies but the euro and Swedish krona. The yen is little changed after the BOJ bought bonds in an unscheduled operation, and the Swiss franc is up by less than 0.2%. Most emerging market currencies are also firmer against the US dollar. The biggest decline is in the Polish zloty, which seems to be subject to profit-taking after its recent run-up. Equity markets are mostly lower. In the Asia Pacific region, Japan, South Korea, and Australia saw minor gains. Europe's Stoxx 600 is slightly lower and US index futures show a heavier bias. Fixed income is also not showing safe haven demand. Yields in Europe are mostly 1-2 bp higher. UK Gilts and Italy's BTPs are under more pressure and yields are up nearly six basis points. The 10-year Treasury yield is flattish near 4.84%.
China reported stronger than expected Q3 GDP. The 1.3% quarter-over-quarter growth compares with a 0.9% median forecast in Bloomberg's survey. This put year-over-year growth at 4.9%, better than the 4.5% pace anticipated. Beijing has promised more measures to bolster growth, and this looks to entail more fiscal and monetary support. The September details were mixed. Industrial output was steady on a year-over-year basis at 4.5%, but retail sales picked up (5.5% vs. 4.6%). Fixed asset investment was slipped to 3.1% (from 3.2%), while property investment contracted by 9.1% (vs. -8.8% in August). The surveyed jobless rate eased to 5.0% from 5.2%.
The Bank of Japan announced another unscheduled bond buying operations today after the 10-year yield reached 0.815%, a new high. Separately, but perhaps not totally unrelated, some press reports suggested the BOJ was considering raising its inflation forecasts at the meeting later this month. Japan will report September trade figures tomorrow. Japan's trade balance improves in September, or it has in 19 of the past 20 years. August's JPY938 bln trade deficit may have been halved in September as exports may have risen on a year-over-year basis for the first time in three months. Imports have been falling since April but the 17.7% year-over-year decline in August may mark the bottom, with the pace slowing in September. Australia reports September's employment situation. It has created an average of almost 38k jobs a month this year through August, slower than the nearly 51k average in the first eight months of 2022. Of those jobs, about 23k on average have been full-time jobs this year compared with 51k in the year ago period.
The dollar rose to a marginal new high of JPY149.85 yesterday, which is its best level since the JPY150 level was breached on October 3. It has held below there today. The nearly 24 bp rise in the 10-year US yield in the past two sessions proved too much. But as we noted the BOJ intervened in the bond market not the foreign exchange market. Still, the yen and the JGB yield are little changed. The Australian dollar set the session high shortly after Europe went home yesterday near $0.6380. It stopped slightly short of the 20-day moving average and the (61.8%) retracement of sell-off from last week's high near $0.6445. Central bank Governor Bullock's first formal speech played up the risks to inflation and may have helped the Aussie extend its gains to almost $0.6395. A move above $0.6400 targets last week's high. The greenback's uptrend against the Chinese yuan remains intact. It initially fell to a four-day low slightly below CNY7.2990 before recovering and setting new session highs near CNY7.3130. China's discount to the on 10-year rates fell to a new extreme around 215 bp. The PBOC set the dollar's reference rate at CNY7.1795 compared with the average forecast in Bloomberg's survey for CNY7.3085.
The UK's CPI rose by 0.5% last month as expected, which left the year-over-year rate unchanged at 6.7%. The core rate eased to 6.1% from 6.2%, which is the slowest since January. Services inflation ticked up to 6.9% from 6.8%. Producer prices are still falling on a year-over-year basis. Note that September's inflation is used to set cost-of-living increases in some transfer payments. The UK reports September retail sales before the weekend. In the swap market, the odds of a hike on November 2 slipped slightly but rose to a bit above 50% for the last meeting of the year on December 14.
The eurozone has a relatively quiet economy schedule until next week's ECB meeting, where there is practically no chance of a hike in key rates. Earlier today was the release of August construction output, which tumbled 1.1% after a 0.8% increase in July. It is not a market-mover even in the best of times. Next week, ahead of the ECB meeting, the markets and officials will see the preliminary October PMI (which has been below the 50 boom/bust level for the past four months) and September M3 money supply (it contracted on a year-over-year basis in July and August for the first time since 2010).
Despite the weakness of the German economy, which last grew in Q3 22 and may expand in a single quarter this year, Berlin is undeterred in its political agenda. It wants the re-establishment of the Stability and Growth Pact that enforces fiscal discipline on members. The fact that Italy is thus far avoiding a recession means that it cannot take advantage of the same exception as Germany. Italy's 10-year premium over Germany that had recorded the year's low in mid-June below 160 bp is back above 200 bp. Germany is also having a row with France continues. The debate is over the extent that government funds should be used to extend the life of nuclear reactors. Spain, which holds the rotating EU presidency, is trying to work out a compromise that would allow France to keep its aging nuclear reactors functioning while minimizing the risk that it undercuts power prices in Europe. The EU summit later this month will likely take up the issue, but a resolution does not seem imminent.
The euro was surprisingly resilient in the face of the stronger than expected US data and the jump in US rates. The single currency fell by about a third of a cent after the US retail sales surprise but did not make a new low on the day. It proceeded to recover fully and make record new session highs after European markets closed near $1.0595. It met the (61.8%) retracement (~$1.0585) of the sell-off from the October 12 high before stalling. Still, it settled above Monday's high (~$1.0565). The euro is little changed within yesterday's range. There are nearly 1.0 bln euros in options struck at $1.06 that expire today. Sterling is uninspiring. It was confined to Monday's range (~$1.2125-$1.2220) and the close was near mid-range. Unlike the euro, it was unable to record session highs in North America, but it did manage to recover from about $1.2135 to almost $1.2210 before faltering. It is firm today and still within Monday's range. It needs to resurface above $1.2255 to be significant.
Rather than lose momentum as Q3 wound down, as we expected, the US economy strengthened. Retail sales rose by 0.7%, more than twice the median in Bloomberg's survey. Even the core measure, which exclude autos, gasoline, building materials and food services rose by 0.6%. The median forecast was for a 0.1% rise. Moreover, retail sales for August were revised up to 0.8% (from 0.6%) on the headline and 0.2% on this core measure (from 0.15). Industrial output also surprised. It was expected to be flat and instead rose by 0.3%, led by a 0.4% rise in manufacturing production. Here, unlike retail sales, August revisions were downward. The 0.4% rise initially reported in August industrial output was revised to flat and the 0.1% rise in manufacturing was revised to -0.1%. Business inventories stronger than expected, rising by 0.3% in August and 0.1% in July (after an initial flat estimate). The Atlanta Fed's GDP tracker ticked up from 5.1% for Q3 to 5.4%. Still, the futures market, the odds of a Fed hike at the conclusion of the October 31-November 1 meeting, firmer to a still low 12% from about 8%. The odds of a hike at the last FOMC meeting of the year (December 12-13) rose to about 48% from about 37%. However, the market also made a large adjustment to converge toward the Fed's latest dot plot that implied only two cuts next year. The implied yield of the December 2024 Fed funds futures contract settled with an implied yield of 4.84%, an increase of 11.5 bp, the most since early September. The current effective Fed funds rate is 5.33%.
On tap today, the US reports September housing starts and permits. They are expected to unwind some of August's changes, when permits rose by 6.8% and starts fell by 11.3%. Economists expected permits to soft and starts to recover about 2/3 of its decline. Late in the session, the Fed's Beige Book, prepared for the upcoming FOMC meeting will be released. Six Fed officials speak throughout the session, but the slightly different views are largely known already.
Softer than expected Canadian September CPI weighed on the Canadian dollar as it reduced the perceived chances of a central bank rate hike next week. Instead of increase, the headline rate slipped by 0.1% and this allowed the year-over-year rate to fall to 3.8% from 4.0%. The underlying core measures also fell by more than expected. The swaps market downgraded the chances of a hike next week to about 15% from around 43% before the report. The probability of a hike this year fell to about 43%, the lowest in a month, from nearly a 65%. Canada also report September housing starts today. They have fell in July and August and are expected to have fallen again. The median forecast in Bloomberg's survey is for a little more than a 5% decline that would take starts to about 240k, a six-month low.
In response to the combination of US strong retail sales and easier than expected prices pressures in Canada saw the greenback spike back to last week's high slightly above CAD1.3700. Over the next few hours, it trended back to almost CAD1.3620. It spent the North American afternoon in a 20-pip range around CAD1.3640. The US dollar is trading heavier and looks set to test CAD1.3600, where there are about $655 mln in options that expire today. There is another set of options there for $1.6 bln that expire Friday. A break likely spurs a test on the CAD1.3550-70 area. The greenback has been stuck in a range against the Mexican peso. It traded between roughly MXN17.8450 and MXN18.11 before the weekend and remained in the range the last two sessions. Like it did against the other currencies, the dollar initially rallied on the economic data, unwound the gains, and then consolidated. The US dollar made a marginal new session low in early North American afternoon dealings near MXN17.8720. It is straddling the MXN18.00 area today.
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