The Economist (July 13th 2019)

74 Pages·2019·14.573 MB·English

by  The Economist

The most dangerous man in Europe
China’s Silicon Valley
The IMF and the changing of Lagarde
Scoop!! Leaks from a US ambassador
JULY13TH–19TH2019
Riding high
What could bring down America’s economy?
Contents The EconomistJuly13th2019 5
The world this week United States
8 Around-up of political 25 Nuclear diplomacy
andbusinessnews
26 Jeffrey Epstein
27 Cannabis use
Leaders
28 Using facial recognition
13 America’s economy
28 Police training
Riding high
30 LexingtonRossPerot
14 Citizenship in India
Show me your papers
The Americas
14 Italy’s public finances
Ambition, please 31 Mexico’s finance minister
16 Investment banking 32 Venezuela’s stalemate
AnightmareonWall 33 BelloJoão Gilberto
Street
On the cover
17 Diplomaticleakage
America’s economic expansion Woodygate
is now the longest on record.
What could bring it to an end? Letters Asia
Leader,page 13. The factors
18 Onbanks,GPs,othering, 35 India’s hunt for
that cause recessions are
HongKong,thepromotion “foreigners”
strangely absent. For the time
curse,Greenland,sausages 36 Afghan peace talks
being: briefing, page 21. Supply
chains are undergoing their 37 Migration in Myanmar
Briefing
most dramatic transformation 38 Bears v humans in Japan
in decades. See our special 21 Theworldeconomy
report,afterpage42 Astrangelyelastic
expansion
China
•The most dangerous man
in EuropeMatteo Salvini could 39 Asecond Silicon Valley
Specialreport:Global
wreck the euro, page 47. How 42 ChaguanChinese
supplychains
to defuse the threat: leader, students in America
Aslowunravelling
page 14
Afterpage42
•China’s Silicon ValleyIt is
transforming the country, but not
yet the world,page 39
•The IMF and the changing of Middle East & Africa
LagardeA coronation for the 43 Killings in Congo
organisation’s next boss will not
44 Discontent in Eritrea
prevent a fight over its future,
45 Syria’s oil crisis
page 67
46 Race relations in Israel
•Scoop!! Leaks from a US
46 Anti-cementism in Beirut
ambassadorBritain’s man in
Washington has resigned over
cables that surprised no one. We
have been passed the dispatches
to President Donald Trump from
Woody Johnson, America’s
ambassador in London,page 17
BartlebyThe extravagant
language used in job
adverts, page 62
1 Contents continues overleaf
6 Contents The EconomistJuly13th2019
Europe Finance & economics
47 Salvini and the euro 67 Changing of Lagarde
50 Greece’s new government 68 ButtonwoodBond
liquidity
50 Siberian movies
51 Charlemagne The 69 Turkey’s economy
weakness of Germany 69 China’s foreign loans
70 Reshaping Deutsche Bank
70 Wimbledon tickets
Britain
71 Free exchange Keynes v
52 Weakness in Washington
Corbyn
53 Welfare’s new politics
54 Taxis and race Science & technology
72 Electric drivetrains
73 Anew red pigment
73 The ancientest Greek
International 74 Penguins and tourism
55 Happiness and elections
Books & arts
75 India’s stepwells
76 Nazism and suicide
77 Britain’s Atlantic coast
Business 77 The King of Vegas
59 Latin America’s 78 Colson Whitehead
struggling state oil firms
62 Bartleby Job adverts
Economic & financial indicators
63 Big Tech courts big
80 Statisticson42economies
government
63 Tuning up BMW
Graphic detail
64 Women’s football 81 Arcticleadlevelsshednewlighton Europe’s history
64 How superhumans email
65 Schumpeter The Obituary
business of the body 82 Jennie Litvack, shofar blower
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8 The world this week Politics The EconomistJuly13th2019
Uighurs—amostlyMuslim MrSalvini’sNorthernLeague Afghan groups. America has
ethnicminorityinChina— party.Hedeniedeverreceiving held seven rounds of negotia-
havebeenlockedupaspartofa “arouble,aeuro,adollarora tions with the Taliban about a
campaigntomaketheregion litreofvodka”. possible withdrawal from
lessrestive.Theletterdoesnot Afghanistan, but also wants
havetheforceofaresolution, Germany’schancellor,Angela the government and the in-
butitrepresentsarareconcert- Merkel,sufferedwhatseemed surgents to speak directly.
edeffortattheuntolobby tobeathirdpublicepisodeof
Chinaoverthecamps. uncontrollableshaking.She
insiststhatherhealthisgood. At the end of the day
JapanaccusedSouthKoreaof
failingtoenforceinternational
Britain’sambassadortoAmeri- sanctionsagainstNorthKorea Upon these stones
ca,SirKimDarroch,resigned fully.Thecomplaintwasthe A Nigerian court ordered the
afterPresidentDonaldTrump latestbarbinanescalatingrow seizure of $40m in jewellery
saidhewould“nolongerdeal betweenthetwocountries, from a former oil minister,
withhim”.Thespatcameafter afterJapanimposedrestric- Diezani Alison-Madueke.
SirKim’sconfidentialcablesto tionsonexportstoSouthKorea Muhammadu Buhari, who won
Londonwereleakedtoanews- inprotestatjudgmentsagainst a second term as Nigeria’s
paper.Theydescribedthe JapanesefirmsinSouthKorean president earlier this year,
WhiteHouseas“dysfunction- courts. campaigned on a promise to
al”,“clumsy”and“inept”,and reduce corruption.
itsoccupantas“radiat[ing] Atleast20peoplewerekilled Mexico’s finance minister,
insecurity”.TheBritishgovern- intribalviolenceinaremote The generals running Sudan Carlos Urzúa, resigned after
mentbackeditsman,butBoris areainthehighlandsofPapua since the fall in April of its claiming that the administra-
Johnson,theprobablenext NewGuinea.Pregnantwomen dictator, Omar al-Bashir, tion of President Andrés Ma-
primeminister,conspicuously andchildrenwereamongthe reached a power-sharing ac- nuel López Obrador had made
didnot.SirKimtookthehint. victims. cord with the pro-democracy his job impossible and had
movement that has been de- forced his ministry to hire
MrTrumpviolatedtheAmeri- manding an end to military unqualified people. Mr Urzúa,
canconstitutionbyblocking Master of the house rule. The deal makes provision a social democrat, was a voice
thosewhoseviewshedisliked for the generals to lead a new of prudence in the cabinet of
fromhisTwitteraccount,a Supreme Council, which will the populist leftist president.
federalappealscourtruled.It be the highest decision-mak- The country’s currency, the
saidtheFirstAmendment ing body, for 21months. Civil- peso, tumbled after the an-
forbidsapublicofficialto ians will take over for a further nouncement (though it later
operateinsuchawayona 18 months before elections. recovered).
platformusedtoconduct
governmentbusiness.Thecase A deal signed in 2015 to prevent A un report accused Venezue-
wasbroughtbytheKnightFirst Iran from building a nuclear la’s security forces of killing
AmendmentInstituteatCol- bomb came closer to collapse almost 7,000 people between
umbiaUniversityonbehalfof after its three European signa- January 2018 and May this year.
sevenblockedTwitterusers. tories (Britain, France and It singles out the country’s
Kyriakos Mitsotakis, leader of Germany) said they were con- special forces for carrying out
Greece’s centre-right New cerned that Iran was “not most of the killings and ma-
Do you hear the people sing? Democracy party, won an meeting several of its commit- nipulating the crime scenes to
Carrie Lam, Hong Kong’schief overall majority at a general ments”. The accord offered Iran suggest that the victims were
executive, declared that a election, thanks to a 50-seat relief from some economic shot for resisting arrest. It
controversial extradition bill top-up that is given to the party sanctions in exchange for came out days after a reserve
was “dead”. Protesters were not that wins the most seats. He limits on its nuclear pro- captain in the country’s navy
satisfied. They have demanded has promised tax cuts and a gramme. But President Trump died in custody, apparently
the formal withdrawal of the more business-friendly envi- withdrew America from the after being tortured.
bill, which would allow Hong ronment. Greece still grapples deal last year and reimposed
Kongers suspected of crimes in with serious economic pro- sanctions. Iran has since The lower house of Brazil’s
mainland China to be sent blems that the outgoing left- breached caps on uranium congress approved a reform of
there to stand trial. The bill was wing Syriza government, led by enrichment. And tensions the country’s unsustainably
the initial spark for weeks of Alexis Tsipras, has failed to with the West rose after Britain generous pension system by a
massive demonstrations, resolve. seized a tanker carrying Irani- vote of 379 to 131. The measure
which now appear certain to an oil. would save taxpayers 900bn
continue. A tape surfaced that purports reais ($240bn) over ten years.
to be of a conversation be- Negotiators for Taliban in-
The ambassadors of 22 coun- tween a former close aide to surgents met representatives João Gilberto, the man who
tries on the unHuman Rights Matteo Salvini, the powerful of the Afghan government to sang “The Girl from Ipanema”,
Council have signed a letter deputy prime minister of Italy, discuss a peace agreement for died aged 88 in Rio de Janeiro.
criticising China’s mass in- and a number of Russians the first time, albeit unofficial- Mr Gilberto was a star of bossa
ternment of Uighurs in camps. concerning ways of secretly ly. The talks were disguised as nova, a musical style that fuses
Experts believe more than 1m using Russian money to fund part of a bigger meeting of jazz and samba. 1
The world this week Business The EconomistJuly13th2019 9
Marriott said they would con- InMay,aftertradetalkswith A profit warning from basf,
test their penalties. Chinacollapsed,Americahad the world’s largest maker of
blacklistedtheChinesetele- chemicals, weighed heavily on
Virgin Galactic said that it was comsfirmoversecuritycon- the German stockmarket. The
planning an initial public cernsrelatedtoitslinkstothe company slashed its forecast
offering. The firm, which CommunistPartyofChina. for full-year earnings by 30%.
hopes to take its first paying PresidentTrumpagreedto In response its share price slid
passengers into space early allowHuaweitoresumesales by 5%. The company blamed a
next year, could be valued at toAmericanfirmslastmonth. global economic slowdown,
$1.5bn. Negotiations over a caused by the trade war be-
$1bn investment from Saudi tween America and China, as
Arabia’s sovereign-wealth fund Rocket man well as a “particularly strong”
DeutscheBankrevealedde- were ended last year after the America’s stockmarkets soared downturn in car manufactur-
tailsofalong-awaited€7.4bn murder of Jamal Khashoggi, a after Jerome Powell, the chair- ing, for the downgrade.
($8.3bn)restructuringplan.Its journalist, by Saudi operatives man of the Federal Reserve,
investment-bankingdivision in Istanbul. hinted that the central bank is
willbearthebrunt.Thetrou- looking to cut interest rates
bledlenderwillcloseitsglobal America began an investiga- this month. Investors piled
equity-tradingunitandcut tion into France’s planned into shares after Mr Powell
18,000peoplefromits91,500 digital-services tax. The cited concerns that the trade
workforce.Itwillalsocreatea Trump administration says the war with China and a global
“badbank”tohouseunwanted 3% levy on the French revenues slowdown could hurt growth
assets.ChristianSewing, of big internet firms unfairly in America. The s&p500 index
DeutscheBank’schiefexec- targets American companies of shares touched 3,000 for the
utive,hopesthemovewillcut like Google and Amazon. Its first time.
costsby€6bnayear.Analysts probe could result in America
respondedtotherestructuring imposing tariffs or other trade Mr Powell also warned that
bysayingitwaslongoverdue. restrictions. Several European plans by Facebookto build a A Brazilian judge ordered Vale,
countries are mulling digital digital currency called Libra a mining giant, to pay full
Turkey’sPresidentRecep taxes, though all say they raise “serious concerns”. The compensation for damage
TayyipErdogansackedMurat would prefer a global deal— central banker told America’s caused when one of its dams in
Cetinkaya,thegovernorofthe which the oecd, a club of rich House of Representatives that the north of the country broke
country’scentralbank,and countries, is trying to broker. Facebook should address fears in January, killing at least 248
suggestedthattheinstitution about privacy, money launder- people. Vale must stump up for
needsanoverhaul.MrCe- The Trump administration ing, consumer protection and all the effects of the disaster,
tinkayawasapparentlyousted said it would issue licences financial stability before mov- including the cost of the eco-
forrefusingthepresident’s allowing American companies ing forward with the project. nomic hit to the region. The
requesttolowerinterestrates. to sell their products to Hua- Several executives at the social judge said it was still not pos-
MrErdoganseeminglywants wei, a Chinese technology network are scheduled to be sible to calculate a final figure
greatercontrolofmonetary firm, provided that the sales do questioned by Congress later for the total amount Vale will
policy,astancethathasprevi- not threaten national security. this month. have to pay.
ouslycontributedtorunson
theTurkishlira.
Can hack it
Britain’s Information Commis-
sioner’s Office, a data-privacy
regulator, said it would fine
British Airways (ba) £183m
($230m) over a data breach last
summer. In June 2018 crimi-
nals hacked into ba’s website
and stole personal data, in-
cluding the names, addresses
and credit-card details of
around 500,000 customers. It
was the first fine Britain hand-
ed out under the eu’s new
General Data Protection Regu-
lation, which greatly increased
the size of potential penalties.
The second came the next day,
when Marriott, a hotel group,
was told it would be fined
£99m for a data breach discov-
ered last year. Both ba and
Leaders Leaders 13
Riding high
America’s expansion will soon be the longest on record. What could bring it to an end?
Around theworldinvestors,businessesandcentralbankers aged1.6%overthecourseoftheexpansion.Inmany past down-
are grappling with a startling fact: at the end of July Ameri- turns the jobs market overheated, causing inflation and leading
ca’s economy will have been growing for 121months, the longest the Federal Reserve to hit the brakes. Today the dynamics are dif-
run since records began in 1854, according to the nber, a re- ferent. The unemployment rate has fallen to 3.7%, close to the
search body. History suggests there will be a recession soon. And lowest in half a century, but wage growth is only a tepid 3%.
plenty of people are gloomy. Bond markets have been sounding Workers have less bargaining power in a globalised economy.
the alarm, as long-term interest rates sink below short-term The Fed’s credibility helps, too—most people believe that it can
ones, often a harbinger of a downturn. Manufacturing firms are keep long-run inflation at about 2%. Given that racing prices are
wary; indices of business confidence are tumbling. Yet equity in- less of a worry and that it lacks the ammunition to deal with a se-
vestors are still buoyant. The stockmarket is going gangbusters, rious downturn, the Fed is being more active at signalling that it
rising by 19% so far this year. And in June America’s economy will ease policy when growth dips. This week the Fed signalled it
created a whopping 224,000 new jobs, more than twice as many would soon nudge rates down from today’s 2.25-2.5%, to keep
as needed to keep up with the growth of the workforce. The result growth going.
is a puzzle that matters a great deal. America’s economy accounts All this supports the idea that the familiar triggers for reces-
for a quarter of global output, so if it stumbles the world will, too. sion are still absent and that the moderately good times can roll
But if it proves able to extend the cycle a lot longer, it may be time on for years yet. The trouble with this logic is that, just as the
to rewrite the rules for how all rich economies behave. economy has changed, so have the risks. Inevitably it is hard to
The conflicting signals reflect an unusually sluggish and identify exactly what might go wrong, but three new kinds of
stretched expansion. Some of that is to be expected after the problems loom large.
worst financial crisis in 80 years, but as our briefing explains, it First, America’s glossy corporate champions have unfamiliar
is also owing to deeper changes in America’s $21trn economy. vulnerabilities. Although fewer make physical goods, most rely
Growth is slow but more stable as activity has shifted to services on global production chains that are being shaken by the trade
and intangible assets. Thanks to new regulations and the recent war (see our special report). This is depressing investment and
memory of the bust, there are few signs of wild could yet produce a shock—imagine if Apple
mortgage lending, over-investment or reckless was cut off from its factories in China. Tech
financial firms. Inflation is remarkably sub- firms, meanwhile, now account for a third of all
dued. These forces mean that a placid expan- investment by listed firms, including intellec-
sion can continue well beyond historical tual property. Other businesses outsource their
norms, but also suggest that the way it will even- need for itservices to a few giants. One of them,
tually end will be different. Recessions used to Alphabet, spent $45bn in the past year, five
be triggered by housing bubbles, price surges or times more than Ford. But 85% of its sales come
industrial busts. Now you should worry about from advertising, which has been cyclical in the
globally interconnected firms, a financial system addicted to past. It and other tech firms also face a regulatory storm.
cheap money and a political system that is toying with extreme The second risk is financial. Although house prices and the
policies because living standards are not rising fast enough. banks have been tamed, total private debts remain high by his-
Average gdp growth during this expansion has been a mere torical standards, at 250% of gdp. An edifice of asset prices and
2.3%, much lower than the 3.6% that was seen in America’s three borrowing rests on the assumption of permanently low and sta-
previous expansions. That reflects some deep malaises. The ble interest rates, making it more fragile than it looks. If rates rise
workforce is ageing. Big firms hoard profits and invest less. Pro- there will be distress among some firms, and trouble in debt
ductivity growth has been slow. Robert Gordon, an economist, markets—there was a sell-off in late 2018. If, by contrast, the Fed
worries that America’s genius for innovation is flagging. Emojis has to cut rates to near zero for a prolonged period to sustain
and bitcoins are no substitute for breakthroughs such as jet en- growth, it could weaken the banks, as Europe has found.
gines or the internet.
That is the bad news. The good news is that the economy may Arecession made in Washington?
be less volatile. A third of America’s 20th-century recessions The last danger is politics. As the economy has trodden a narrow
were caused by industrial slumps or oil-price shocks, according path, the boundaries of economic policy have been blown wide
to Goldman Sachs. Today manufacturing is just 11% of gdp and apart, partly out of frustration at a decade of sluggish wages.
each dollar of output requires a quarter less energy than in 1999. President Donald Trump has tried to gin up growth, by cutting
Services have become even more vital, at 70% of output. Instead taxes and attacking the Fed. Most Democrats are keen to let rip on
of fickle factories and Florida condos, investment has shifted to government spending. More extreme policies hover in the
intellectual property, which now accounts for more than a quar- wings. On the left, modern monetary theory (a kind of money
ter of the total. After the searing experience of 2008, the value of printing) and massive state intervention are popular. One of Mr
the housing stock is 143% of gdp, well below the peak of 188%. Trump’s new nominees to the Fed board supports a gold stan-
Banks are rammed full of capital. dard. The greatest threat to America’s long and placid expansion
Most remarkable of all is very low inflation, which has aver- is that a new era of wild policy may be just beginning. 7
14 Leaders The EconomistJuly13th2019
Citizenship in India
Show me your papers
India’s hunt for “illegal immigrants” is aimed at Muslims, many of them citizens
Amitshah,India’shomeminister,callsthem“termites”and Muslims make up a third of Assam’s population. The state’s
“infiltrators”. The government will hunt them down and shifting demography is mainly the result of a higher birth rate
throw them into the sea, he thunders. Unfortunately, it is not among Bengalis already in Assam, not migration. But that has
justthestandardblusterfromanativistpoliticianrailingagainst not stopped the Bharatiya Janata Party (bjp), which dominates
illegalimmigration.LastyearbureaucratsintheIndianstateof boththestateandnationalgovernments,fromvowingtocollar
Assam,whichhasapopulationofabout33mpeople,produceda lotsofillegalimmigrants.Andsincesofewofthemexist,more
list of more than 4m of its residents whom they consider for- hadtobeinvented.
eigners,withoutanyrighttolivethere.Afurther100,000people Thelawthegovernmentiseagerlyenforcingrequiresallresi-
weredeemednon-citizensinJune(seeAsiasection). dents to prove that they or their forebears were in the state by
MrShahinsiststhatallthesepeoplewillbedeported.Inprac- March24th1971.Thatisabighurdleforpoorfarmersanditiner-
tice,neighbouringBangladesh,fromwhichtheyaresaidtohave ant workers, especially women, many of them illiterate. Sus-
migrated, will not accept them, since in most cases there is no pectscanbedenouncedasnon-citizensbyanonymoustips,an
evidencethattheyareanythingotherthanIndianstoopoorand invitationtoabuse.Therehavebeenlotsofmistakes,suchasa
uneducated to navigate the complex bureau- decoratedwarherowhowasdeclarednottobe
cracy of citizenship. But even if the threatened Indian. Roughly 60% of those found not to be
NEPAL BHUTAN
massdeportationsnevertakeplace,theprocess Assam citizens at the 100 “foreigners’ tribunals” the
of declaring people aliens, and hauling lots of INDIA state government is setting up were not even
themofftointernmentcamps,isnotonlyarank BANGLADESH present for the proceedings. Some 3.7m of the
injustice,butalsoathreattostability.Thesup- 4mpeopledeclaredillegalimmigrantsarechal-
West MYANMAR
posed illegal immigrants are overwhelmingly Bengal lenging their designation. There has been a
Muslim. The purge is therefore exacerbating spateofsuicidestiedtoadverserulings.
BayofBengal
sectarian tension in a state that saw bloody Worse,likesomanyofthebjp’sschemes,the
Hindu-Muslim riots as recently as 2012, when some 400,000 huntforillegalimmigrantsisopenlyanti-Muslim.SomeHindus
people were displaced. Yet Mr Shah considers the campaign in have been caught in the dragnet, but Mr Shah says they do not
Assamagainstillegalimmigrantssuchasuccessthathewantsto needtoworry,sincethegovernmenthasdraftedabilltomakeit
replicateitthroughouttheentirecountry. easy for Hindu refugees to claim citizenship. Christian, Bud-
IndigenousAssamesehavelongcomplainedthattheyarebe- dhist,Jain,ParsiandSikhrefugeescantoo—justnotMuslims.
ingswampedintheirownhomelandbymigrantsfromBengal, Anythingthatpolarisesvotersbyreligionbenefitsthebjp,es-
thedenselypopulatedregiontothesouth(seeAsiasection).In peciallyinnearbyWestBengal,whereMuslimsareoveraquarter
colonialtimes,therewassuchaninflux,sincetherewerenobor- ofthepopulationandthebjpislockedinapoliticalknife-fight
derstostoppoorBengalismovingnorthinsearchofabetterlife. witharegionalpartyitaccusesofcoddlingMuslims,theTrina-
Assamesenationalists,pointingtoBengalis’everhighershareof moolCongress.WestBengalisoneoftheplaceswhereMrShah
the state’s population, insist the flow of migrants continues to has railed against termites. But it is not phantom foreigners,
this day, even though the Muslim part of Bengal has become a ratherthebjp,throughitsstirringofsectariantensions,thatis
separatecountry,Bangladesh. gnawingawayatthefoundationsofIndiandemocracy.7
Italy’s public finances
The most dangerous man in Europe
How to defuse the threat Matteo Salvini poses to the euro
On july8th euro-zone watchers breathed a sigh of relief. The sence of growth. If Italy is to dispel the ever-present air of crisis, a
zone’s 19 finance ministers backed the European Commis- much more far-sighted deal will be needed.
sion’s decision that Italy should not be penalised for allowing its Since the euro was introduced, over 20 years ago, Italy has
public-debt burden to rise in 2018 in violation of the eu’s fiscal steadily fallen behind the rest of Europe. The average citizen in
rules. Thanks to savings of 0.4% of gdpfor the current year, cob- Germany, France and Spain is a fifth better off, in real terms, than
bled together by Italy’s governing coalition, a damaging confron- in 1999; incomes in eastern Europe have more than doubled. But
tation seems to have been resolved. the average Italian is no richer.
In truth, however, it has merely been postponed. The grim re- Dissatisfaction at this record has been skilfully converted
ality of Italy’s public finances remains unchanged. Its deficit is into votes by Italy’s government, an unwieldy coalition between
on course to exceed the eu’s threshold of 3% of gdpin 2020, its the Northern League and the Five Star Movement. The League’s
debt is sky high and, worst of all, it is plagued by a persistent ab- leader, Matteo Salvini, has been able to whip up anger against 1
16 Leaders The EconomistJuly13th2019
2two main enemies: the eu, which he says is a “gulag” that im- Many of the reasons for Italy’s bleak growth prospects date
poses wretchedness, and the inflow of migrants from Libya, back decades. Courts operate at a glacial pace; bureaucracy is lab-
which he also blames in part on the eu. Six years ago the League yrinthine. The services sector is sheltered from competition.
managed only 4% at the ballot box; today it is the country’s most Countrywide pay agreements keep wages too high in the south,
popular party. Thus Mr Salvini has used the politics of grievance discouraging formal employment there. Far from tackling these
to make himself the most powerful man in Italy (see Europe sec- ingrained problems, the government has ignored them and in-
tion). He is not yet prime minister, but he surely intends to be. stead undone unpopular but necessary reforms to the pensions
This is a recipe for continual confrontation with Brussels. system. In light of all this, last-minute concessions to the eu’s
And that, in turn, is the eu’s most alarming problem. Italy’s pub- fiscal rules solve nothing. Confrontation is merely deferred until
lic debt is a colossal €2.3trn ($2.6trn), or 132% of gdp. The country the next time the commission reviews Italy’s books. The threat of
is too big to bail out. Its failure to grow makes its finances—and an accidental bond crisis never fully recedes.
the banks exposed to them—fragile. A row over its budget last Instead of haggling over tenths of a percentage point, the
year unsettled markets before the coalition made hasty conces- commission should enter negotiations over next year’s budget
sions. The latest uneasy truce is unlikely to last. aiming for a more ambitious agreement. It should be flexible
The Italian coalition says the eu’s fiscal rules choke off de- over public spending, on the condition that Italy enacts growth-
mand-led growth. Mr Salvini has promised huge tax cuts. Luigi enhancing reforms. Those reforms are more likely to work if
Di Maio, his coalition partner, wants more welfare. Brussels says their implementation is supported by fiscal easing. The public-
the problem is structural; anyhow, it has already granted Italy debt ratio would then fall more quickly.
over €30bn of extra fiscal space since 2015, nearly 2% of annual Such a deal offers something to both sides. Italy’s populists
gdp. This vexes northerners, who want the rules enforced. may ignore reprimands from Eurocrats, but they do worry about
Neither side is entirely in the right. Italy’s economy, hit by the markets. If they were to accept some curbs on their spending,
slowing global trade, is unlikely to be as near its potential as the they would regain some of their credibility with investors, and
commission reckons. But the coalition’s attempt at stimulus last bank the electoral benefits of higher economic growth to boot.
year backfired when markets took fright. Though interest rates For Brussels, a deal along these lines would defuse the long-term
have since come down, Italy’s borrowing costs, once near those threat that Italy poses to European financial stability. Eurocrats
of Spain, are now within spitting distance of Greek yields, which should remember that, as Italy falls further behind, the resent-
have fallen with the prospect of a new centre-right government. ment that has fuelled Mr Salvini’s alarming rise will only grow. 7
Investment banking
A nightmare on Wall Street
Deutsche Bank’s retreat ends European hopes of conquering Wall Street. But American dominance is not assured
In the 1980s the first of what was to become a procession of European rivals; in 2018 it was 52% versus 26%, according to Dea-
European banks began an assault on Wall Street. Credit Suisse logic. The American banks’ average return on equity is 13%, dou-
bought First Boston in 1988. Deutsche Bank swallowed Bankers ble the Europeans’.
Trust a decade later. After the turn of the century, ubs,rbs, Bar- How were they able to pull so far ahead? The answer lies in a
clays and others also waved their chequebooks. The motive was series of missteps by European banks and circumstances beyond
partly to follow customers as business globalised, but also de- their control. Start with the banks’ faults. The financial crisis ex-
fensive: a response to American rivals’ charge into Europe. posed a vulnerability: European banks with big dollar-funding
This week Europe’s dream of going toe to toe with home- needs required large liquidity injections from the Federal Re-
grown investment banks in the world’s deepest serve. But the banks had misfired long before.
capital market came to a shuddering end with They underestimated the cultural challenges of
the capitulation of Deutsche Bank. Its overdue integrating firms steeped in their own lore and
restructuring will involve 18,000 job losses, stuffed full of prima donnas. They touted inju-
mostly in London and New York. The retreat is a diciously for business as they scrambled to
humiliation for a bank that once signalled a de- catch up with the Americans—hence, for in-
sire to knock Goldman Sachs off the top of global stance, Deutsche’s willingness to lend to Donald
investment-banking league tables. Before the fi- Trump long after American banks began to steer
nancial crisis Deutsche was the biggest-spend- clear. Controls were loosened to help the expan-
ing and brashest of bulge-bracket firms. In 2007 it was in second sion along. It is no coincidence that the worst mortgage-related
place, snapping at Goldman’s heels. Now it languishes outside blowups and money-laundering and sanctions lapses were at
the top five—and it may have farther to fall. European banks. When trouble hit, many were lamentably slow
Today the Europeans are shadows of their former selves. to flush out bad assets and build up their equity. Some stubborn-
Some have given up on Wall Street to focus instead on consumer ly refused to restructure, even as headwinds howled.
and corporate banking at home (rbs) or on wealth management But the Europeans would have been hamstrung even if they
(ubsand Credit Suisse). The top five global investment banks— had avoided such mistakes. Their ambitions are built on a less
led by JPMorgan Chase—are all American. In 2007 the Ameri- solid foundation: American banks enjoy a giant, homogeneous
cans’ share of industry revenue was 46%, against 39% for their home market, whereas Europe’s remains fragmented. America’s 1
The EconomistJuly13th2019 Leaders 17
2economy has grown faster than anaemic Europe. Regulatory fat. The most likely source of competition in the long term is Chi-
fragmentation has taken a toll, too. American firms were forced na. Its big banks have zoomed up the league tables in Asia, and
to face up to their problems quickly, in 2008, taking government their ambitions stretch far beyond the region. Still, managing
money and recognising losses under the tarpprogramme. With giant egos and pay packets is not easy. This year citicSecurities,
no central authority willing or able to impose it, competitors the biggest mainland firm, has faced an exodus of top staff from
across the pond received no such tough love. Slow to react to the its international arm. In the meantime, the Americans can sa-
crash of 2008, European policymakers have since been slow to vour their defeat of the European upstarts.
agree on financial fixes. Yet victory has a sting in the tail. The share prices of most of
America’s trouncing of Europe in securities sales, trading and the big American banks have lagged the stockmarket since
dealmaking has a clear benefit: greater efficiency. Wall Street’s 2008—none too impressive for masters of the universe. It is
homegrown giants are leaner, better managed and able to spend worth remembering that, even as thousands of Deutsche bank-
more on technology. But a reduction in competition is to be la- ers are shown the door, the big winners of the past quarter-cen-
mented, especially since advisory and underwriting fees remain tury have been the industry’s employees, not its shareholders.7
Diplomatic leakage
Woodygate
Britain’s ambassador to Washington has resigned over cables that surprised no one. We have been leaked
the dispatches to Donald Trump from Woody Johnson, America’s ambassador in London
Monday: Today Theresa May came over. Said she wanted a Thursday: Today Jeremy Corbyn came over. He’s the communist
trade deal to cement her legacy before she quits as prime with the beard who vacations in Venezuela. The political coun-
minister in a couple of weeks. I told her Britain would need to ac- sellor tells me that he’s probably going to be pm soon, after the
cept our food standards, and gave her chlorinated chicken to blond one goes down in flames. Nobody likes him, and his party
show her how delicious our traditional American chow is. I got only 14% in the recent elections, but I guess that doesn’t mat-
think she liked it, and she has nice manners: when she clears her ter here. I ordered tea and crumpets but he said he would prefer
throat, she lifts her napkin up to her mouth and coughs straight carrot juice.
into it. She seemed sad so I gave her a couple glasses of bourbon, He lectured me about Labour’s position on the terms of a trade
which may have been a mistake: she put on “I will survive” and deal after Brexit. Sir, I know you said that health-service provi-
started dancing with one of the security guys before collapsing sion should be “on the table” in a deal, but if Corbyn’s state is any-
into a tearful heap. Mrs Johnson put her to bed in a spare room. thing to go by, I don’t think we should touch it. In the middle of a
Tuesday: Today Boris Johnson came over. Remember him? The speech about how the workers, united, would never let America
guy with weird blond hair who makes no sense…never mind. take over their National Health Service, he suddenly collapsed on
Seems he’s taking over from Theresa. You don’t have to get elect- the carpet, clutching at his heart. Turns out there were rumours
ed by the people to be in charge here, just by the Conservative about his health, so he went and did a photo-shoot working out
Party. That’s 160,000 old right-wing men. Inter- in a park with Rihanna’s trainer, and it’s been a
esting system. You might want to look into it. bit much for him. I called a (private) doctor and
I told Johnson that I was struggling to get my put him in another spare room.
head around his position on whether Britain Friday: Today the queen came over. I asked the
was going to leave the European Union with or staff to bring tea and crumpets, but she gave the
without a deal. He muttered something about crumpets to the corgis, waved away the tea and
“having your cake and eating it”, so I ordered tea ordered herself a supersized gin and tonic. We’ll
and crumpets, as the State Department’s British need to get the etiquette handbook updated. She
etiquette handbook recommends. He polished put her feet up on the couch and said that, be-
them off, saying he hadn’t had a square meal in weeks, and asked cause of our special relationship, she felt she could confide in
if I had a spare room. Apparently he’s had woman trouble, so I’ve me: the country was going to the dogs, the Scots would get their
put him up for a few days. I figured you’d sympathise. independence, Northern Ireland would end up joining the folks
Wednesday: Today Mark Carney, the Canadian guy at the Bank of in the South and even the Welsh were restless. She didn’t think
England, came over. I didn’t follow every nuance of his analysis there was any point in being monarch of Britain if it wasn’t Great
of the economic consequences of a no-deal Brexit, but it in- any more.
volved four horsemen and a substantial number of plagues. He is She was kind of wondering whether we could put aside that
a great fan of yours, sir, and said something about ensuring the difficult episode in 1776, and thought that she might get a gig
current expansion was not brought to an overhasty close by inju- with us. I said it could be tricky, what with her being British and
dicious monetary tightening. He also mentioned that he’s look- all, but she’s a very determined woman. She tried the line that
ing to move to a new job in Washington and wondered if you she had a half-American great-grandson, and then said she’s got
might be ready to put in a good word. I ordered some tea and a great place in Scotland you could have. It has room for lots of
crumpets, but he didn’t touch them. I guess he’s too small to car- golf courses and she’d make you a Thane. Now she seems to have
ry any extra weight. He’s kind of hanging around looking hope- dozed off. The etiquette book doesn’t say what to do with mon-
ful, so I’ve put him in the waiting room where I keep old copies of archs who are snoring on your couch. Could you ask Ivanka?
The Economistthat nobody has read. She’s good with awkward social situations.7
18 Letters The EconomistJuly13th2019
thetransitiontoareductionist willbeintheglobalspotlight rather than rising above one’s
ThebankofFacebook medicalmodelwheregpsonly asamajorbattlegroundof level of competence.
YousuggestthatFacebook’s gettoseecomplicatedbiomed- freedomanddemocracy.Itwill peter nash
“LibraReserve”cannotbea icalproblems;sacrificingrich, bealitmustestofhowChina Fairlight, Australia
bank,becauseitholdsdeposits holistic,long-termrelation- upholdsitspromisesand
inprivatebanksandwillnot shipsonthealtarofefficiency. respectforhumanrightsthat
haveaccesstocentral-bank drlukeallen theinternationalcommunity Erik the Green?
money(“Libralisedfinance”, gpAcademicClinicalFellow shouldcloselymonitor. Your assertion that Green-
June22nd).Ifso,WalterBage- UniversityofOxford alexyeung land’s misleading name is the
hotwouldhavedisagreed. Vancouver,Canada result of a marketing campaign
Duringhiseditorshipof by Erik the Red reflects a rather
yournewspaper,hundredsof Perpetualdivision widespread myth (“Greenland
countrybanksinEnglandheld Banyantypifieswhatsocial Beware the curse of overwork is melting”, June 22nd). Erik’s
noaccountsattheBankof commentaryhasdevolvedto I couldn’t agree more with success in attracting settlers
England.Instead,theyheld inthesocial-mediaage(“Them Bartleby’s perspective on the was first and foremost due to
deposits,intheformofso- veveryone”,June29th).By promotion curse (June 22nd); it the quality of his merchandise.
called“nostroaccounts”,in hastilyindictinggroupsof is a particularly pernicious Furthermore, when you claim
theprivatelyheldCityofLon- “others”asothering,youper- issue in the world of manage- that “Greenland may not be
donclearingbanks. petuatetheveryphenomenon ment consultancy. My col- green yet, but it is far less icy
Onlythelatterhadaccessto thatyouseektocondemn.Sri leagues and I all worked for than in Erik’s time”, you are
central-bankmoneythrough LankaisintolerantandIndiais many years in the traditional simply wrong.
theirreserveaccountsatthe “addicted”toitshabitofoth- environment of big consulting In fact, Greenland in the
BankofEngland. eringothers.SouthAsians firms and saw first-hand how tenth century had a far warmer
anttijokinen possessanaffinitytodivideby counter-productive the ladder- climate than today, which
Kongsvinger,Norway religionorcasteandthisarti- ing promotions structure made it possible to sustain
clehasinadvertentlypeddled within these firms is. thriving and viable agrarian
itsownstereotypes. Promotions are often based communities for centuries.
The importance of a gp Ihavenogripewiththe on consultants’ ability to sell That came to an end with the
“What’s up, doc” (June 29th) substanceofthearticle:Ijoin more work rather than their onset of the Little Ice Age be-
detailed a number of world- TheEconomistinlamentingthe consulting skills and the in- tween 1300 and 1870 which
class general-practice reforms cocktailofviolenceandpreju- ternal admin involved in per- eventually led to the Norse
that could help the nhsto dicepercolatingthroughSouth formance management, espe- communities in Greenland
meet therising health-care Asia.Still,Banyanavoidsa cially when working towards a gradually becoming extinct.
demand. Employing additional discussionofthesocialcondi- promotion, is so arduous that odd gunnar skagestad
team members, merging back- tionsthattriggerreligiousor it can take up to 40% of a con- Oslo, Norway
room operations and working ethnicinsecurity.Surelythere sultant’s time.
more proactively to prevent aresomeforcesatplaythatare For this very reason we offer
illness in local communities notjustendemictothisarea. our consultants no promo- Fearing the wurst
are vital means of improving Justlookatthevigourof“us tions, sales targets or bonuses. I fear that your hankering for
efficiency. However, your versusthem”politicsinDo- Removing the distraction of European Union linguistic
article failed to mention a naldTrump’sAmerica. promotion and all the politics purity may suffer the same fate
serious counter-intuitive abirvarma and competition that comes as porcine aviation (“Silly
downside to all this sharing— NewYork with it has allowed our consul- sausages”, June 29th).
the issue of fragmentation. tants to focus on doing the best Indeed, it seems to me that,
Whereas other medical job they can for the client, conformably with the sage
specialties are defined by body People on the streets while developing the skills that advice (not a herb or culinary
parts and diseases, family The protests in Hong Kong actually attracted them to the flavour enhancer) given to
medicine is concerned with against the bill that would profession in the first place. James Hacker, by his principal
managing the problems of allow extraditions to mainland hadley baldwin private secretary, Bernard
real-life people in glorious China are mounting chal- Partner Woolley in “Yes, Prime Min-
psychological, cultural, and lenges to the authority of Xi The Berkeley Partnership ister”, only a cognitively chal-
social technicolour. We are Jinping as China’s leader (Cha- London lenged emulsified high-fat
also set apart by the life-long guan, June 29th). offal tube will do if we are to
relationships we build with Frustrated activists have Bartleby’s update of the Peter avoid the lanolin-encased
our patients. adopted extreme protest tac- principle should be read by all. naturally ovine fibres being
Long-termrelationships tics including storming the Not many of us have the ability pulled in front of our ocular
are highly valued by doctors Legislative Council of Hong to become presidents, prime enabling mechanisms.
and patients alike, and have Kongand the police head- ministers and captains of mark cohen
been found to improve health quarters. Protesters also industry and neither should Waterloo, Australia
outcomes. Sadly, these rela- worked with Hong Kongers we wish to.
tionships are being irrevocably overseas to call for inter- It is far better for both the
eroded by demographic, national pressure on the organisations for which we Lettersarewelcomeandshouldbe
economic, and epidemio- government. work and ourselves if we can addressedtotheEditorat
TheEconomist,TheAdelphiBuilding,
logical forces. Mr Xi and protesters are enjoy what we do and work on
1-11JohnAdamStreet,LondonWC2N6HT
Increased team working is both unlikely to make conces- tasks at which we are good in Email:[email protected]
often fantastic, but we need to sions. Given more repression return for sufficient remunera- Morelettersareavailableat:
Economist.com/letters
acknowledge that it expedites and confrontation Hong Kong tion to lead a comfortable life