The Economist - USA (2020-05-16)

66 Finance & economics The EconomistMay 16th 2020

2 A forcefulattackwouldalsohaveunin-

tendedeffects.ItwouldpreventAmerican

investorsfromearninggood returns on

fast-growing Chinese stocks. Delisting

firmsinhastecouldmeansaverslose,if

sharepricestumble.DiscouragingChinese

companiesfromlistinginAmericawould

havecosts too.WallStreetbankswould

losethefatfeestheymakehelpingChinese

companieslist,says HaoZhouof Com-

merzbank,a Germanlender.

Therearegoodreasonstodemandmore

scrutinyof ChinesefirmslistedinNew

York:someareexemptedfromthesame

levelofreportingasAmericanpeers.(This

weekLuckinCoffee,a Chinesefirmlisted

in New York through a vie, sacked its

bossesamidanaccountingscandal).But

thebestwaytouncover,ifnotdeter,fraud

maybetokeepfirmsinthesystem,rather

than driving them away, says Matthew

Doullof WedbushSecurities, aninvest-

mentfirm.

Washingtonhasmadeitsfirstmovebut

itmaybeunwillingtodomuchmore.The

Securities and Exchange Commission,

America’smarketswatchdog,wantsbetter

disclosurebutmaybelesskeenonoutright

financialwarfare.JayClayton,itsbossand

aformercapital-marketslawyer,advised

AlibabaonitsviewhenitlistedinNew

Yorkin2014. 7

Award:AliceFulwood,ourWallStreet

correspondent,hasbeennamedYoungJournalistof

theYearattheWincottAwards,anannualsetof

prizesforBritishjournalists.HenryCurr,our

economicseditor,washighlycommendedinthe

JournalismoftheYearcategory.

W

hen philip lanejoined the Euro-

pean Central Bank (ecb) nearly a year

ago, he hardly expected to be fighting off

the economic effects of a pandemic. The

bank’s preoccupations back then seem

quaint now. The euro area’s economy was

sputtering and the ecbwas forecasting a

growth rate of 1.4% for 2020. Now Mr Lane,

the bank’s chief economist, speculates that

gdpmight fall by 5-12% this year.

Like other central banks, the ecbhas

cooked up an alphabet soup of schemes—

including the Pandemic Emergency Pur-

chase Programme (pepp), which will buy

bonds worth €750bn ($815bn). Unlike other

rich-world banks, though, the ecb must

fend off suspicions that it cannot act freely.

On May 5th Germany’s constitutional court

ruled that the Bundesbank would have to

stop participating in the ecb’s five-year-old

quantitative-easing scheme unless it is

shown to be “proportionate”. Some fear the

peppcould face a legal challenge next.

Christine Lagarde, the bank’s president,

has vowed that it is “undeterred” by the rul-

ing. It could probably pass the court’s test,

but may not wish to accede to a national

court. The row makes its credibility with

investors paramount. Ms Lagarde is nei-

ther an economist nor an experienced cen-

tral banker, so it falls to Mr Lane to provide

the technical underpinning for that credi-

bility. He puts forward policies and devel-

ops theecb’s intellectual framework.

The Irishman has all the credentials he

needs. As an academic in America and Ire-

land, the Harvard-trained economist stud-

ied cross-border capital flows, which were

at the root of the euro area’s sovereign-debt

crisis in 2010-12. He was part of a circle of

wonks proposing ways to fix flaws in the

euro’s architecture. As governor of Ire-

land’s central bank from 2015 to 2019, he

made policy too. His experience and his

understated style, say colleagues, give his

arguments greater force. (It might help that

his accent has become familiar over time.)

The job of central banks in the crisis is

to ensure that the conditions for a recovery

are in place, and to stabilise panicking mar-

kets. Mr Lane identifies an extra role for the

ecb, as the central bank of a monetary un-

ion: to avoid an “unwarranted” tightening

in financial conditions resulting from in-

vestors dumping riskier (eg, Italian) gov-

ernment debt for safer (eg, German) bonds.

The flight to safety, first analysed by Mr

Lane and others during the debt crisis, is

what the pepp now tries to tackle. It makes

purchases “flexibly”, rather than in rough

proportion to each member country’s gdp,

as the ecb’s other schemes do.

A flight to bunds would also be averted

if debt were jointly backed by member

states. In 2018 a group of advisers, led by Mr

Lane, recommended the use of sovereign-

bond-backed securities to the European

Commission. Joint issuance is back on the

table as members discuss how to fund the

recovery. But with northern states still re-

luctant to share risks, it seems unlikely. So

it falls to the ecbto avert panic.

When Ms Lagarde said in March that it

was not the ecb’s job to close spreads, in-

vestors took fright. But Mr Lane defends

the sentiment. Eliminating spreads is not

the aim: “Market discipline operates in the

euro area.” It is a point of satisfaction that

the ecb’s bond-buying over the years has

pushed down risk-free rates, but that dif-

ferentiation between members remains.

Modest levels of spreads may be desir-

able, but not huge gaps. Debt-laden Italy

and Spain have been hit hard by the virus,

but have spent relatively little on stimulus.

What if they lose access to markets? If

countries face solvency trouble, says Mr

Lane, other tools must kick in—eg, the euro

area’s bail-out fund. That could help to un-

lock unlimited bond purchases by the ecb.

Higher public debt will be a feature of

the post-pandemic landscape. Cautious

households will probably save more, pro-

viding demand for that debt. The rich

world will start to resemble Japan. Low in-

flation may not persist, though. In the near

term, Mr Lane says, the pandemic is “surely

disinflationary”. But he reserves judgment

on the long term. Shorter supply chains

could push up inflation. Lots of firms could

go bust, handing survivors pricing power.

For now, the incentives of monetary

and fiscal authorities align neatly. With

policy rates at or below zero, central banks

are devising new ways to lower borrowing

costs. That suits governments, which are

issuing vast quantities of debt to fund

stimulus. Expect a clash, though, when

central banks decide raise interest rates.

You could imagine politicians in America

or Britain appointing a pliable central-

bank head. That is less likely in the euro

area, argues Mr Lane, where “19 sovereigns

watch each other”. But, as Germany’s

judges have revealed, the institutional en-

vironment in which theecboperates is all

too messy. It is just as well that Ms Lagarde

is a former politician and a lawyer. Eco-

nomics will only get you so far.^7

The bank’s chief economist on how to fight a crisis in a monetary union

European Central Bank

Lane speaking