Financial Times 09Apr2020

16 ★ FINANCIAL TIMES Thursday9 April 2020

Case for a European

response is obvious

Professor Luigi Zingales is right (“EU

must forge a national sense in this

crisis or it will die”, April 6). This may

be a crucial inflection point for Europe,

and to date the European Commission

and the Council have been woefully

absent.

To be fair, under the treaties the EU

is legally nearly powerless when it

comes to organising a response to a

pandemic, because health systems are

organised and financed along national

lines. The real test will be whether the

EU is able to cobble together an

economic response to the crisis,

starting with a co-ordinated exit from

lockdowns, that rises to the

unprecedented new challenge. This in

turn will largely depend on whether EU

member states manage to escape the

temptation of falling back on

nationalistic impulses, and avoid a

loser’s bet on populism despite the

overwhelming logic of a co-ordinated,

pan-European response.

After all, if southern Europe is

allowed to flounder, the prosperity of

Germany, and for that matter the

“Hanseatic” nation-states, will not

resist for long. One can only hope that,

the case for a European response being

so obvious, “Europe will happen of

itself” (to paraphrase Garibaldi’s

adversary, Cavour).

Antoine Winckler

Brussels, Belgium

Share buybacks: that

other snaky culprit

Further to Robin Wigglesworth’s Inside

Business column “Risk has snaked its

way from the banks to the trading

arena” (April 7): there’s another culprit

in the precipitous decline of liquidity in

the US public equity markets. The

implementation of share repurchases,

the bane of many politicians, has

produced solid returns for investors

since 2010. In 2018 alone, US

corporations bought back more than

$1tn in their stock. What is lost in the

political and public backlash against

buybacks is that while share prices are

driven higher by the policy, publicly

available shares to trade decline,

dragging price discovery down with

them.

Mr Wigglesworth applies a fantastic

analogy of the Cobra Effect to banking

regulation. Bad policies can have good

intentions but produce bad outcomes.

Regulation enacted after the great

financial crisis reduced the role of

banks as intermediaries in secondary

markets. Generally, the fewer the

intermediaries, the greater the chance

for liquidity vacuums. Specific to the

public equities markets, the buyback

effect on liquidity should not go

ignored.

We accept that the policies accelerate

returns to shareholders at the expense

of leveraged balance sheets and

increased volatility for future

stakeholders. Thinner trading of S&P

large-cap shares, a 10-year trend, and

lower corporate credit quality are the

perilous snakes coming out from the

shadows of the public markets.

Brett I Ladendorf

Chicago, IL, US

A new social contract

will meet resistance

I fully agree with your editorial “Virus

lays bare the frailty of the social

contract” (April 4) that the time has

arrived for a new social contract that

benefits everyone; just as one was

entered into after the second world

war. Indeed, a new social contract

needs to be “woven” into the fabric of

all western societies, especially those

that practice a very capital

markets-driven and centred model

of capitalism.

This model of markets-centred

capitalism rewards owners of capital

amply, while rewarding labour

reluctantly and in a miserly fashion.

This model rescues owners of capital

generously during times of crises, yet

leaves breadcrumbs for the labour in

times of prosperity. Labour is not

necessarily the working-class poor; it

also includes the working middle class,

those whose economic wellbeing rise

and fall with the markets; those who

live pay cheque to pay cheque and with

limited access to health insurance,

among others.

However, the challenge in drafting

this new social contract is that, in the

late 1940s and early 1950s, large

corporations had not yet begun to

amass such a degree of capital, nor to

possess deep pockets to influence and

divert social policy.

As a result, for Roosevelt,

Eisenhower, Kennedy, Johnson and

even Nixon, to legislate socially

progressive laws was far easier because

companies were not that powerful

then, nor were their lobbyists. More

specifically, Wall Street was not

unchained till the mid-1970s, when

fixed commissions were removed;

while banks were unchained with the

removal of interstate banking (the

McFadden Act) and separation of

investment banking from commercial

banking (the Glass-Steagall Act).

Incidentally, both these acts were

repealed under a Democrat

administration, one with seemingly

pro-middle-class tendencies.

If a social contract were to be

enacted into law, it must be powerful

enough not to be diluted by various

interest groups and their lobbyists. I

have always believed in capitalism, but

just as the west once prodded the

Warsaw Pact to adopt “socialism with a

human face”, now the west must force

upon itself “capitalism with a human

face” before another wave of

cataclysmic natural events befalls us

all.

Nicholas M Gilani

Managing Partner,

Cyal Advisors,

Dubai, UAE

Sucked into a black hole

Space-time continuum

notwithstanding, the UK parliament’s

Easter break has been prolonged, not

elongated (“Parliament has been

missing in action”, April 7).

ohn CahillaneJ

ashington, DC, USW

Eventually, after acurfew mposedi

last month failed to clear Baghdad’s

bustling streets, Iraqi authorities

resorted to tough tactics. The capital’s

Operations Command boasts that

security personnel have now enforced

the closure of precisely 1,303 coffee

shops, 1,260 restaurants, 73 malls and

scores of exercise facilities, including

25 swimming pools.

Syrian authorities had similar

problems convincing citizens to stay

inside. On the first day of a curfew in

late March, 153 people were arrested

for being out after hours, official

media reported. It wasn’t enough. An

entiretown was isolated ast week,l

after a resident diagnosed with Covid-

19 died. According to Syria’s health

minister, the victim had continued

working in her family’s shop.

Both countries have badly corroded

healthcare systems; coronavirus

contagion would push their hospitals

to the brink, experts warn. So why

were so many people ignoring official

entreaties to “stay in your house”?

Partly it is to do with a yawning

trust deficit between the people and

the authorities. Iraq’s corrupt political

classes were the target ofmass

protests ast year; President Bashar al-l

Assad’s regime is autocratic, and the

low number of recorded coronavirus

cases in Syria prompts whispers of a

cover-up.

Then uncomfortably cramped

housing holds several generations of

family and, in the precarious informal

economy, fewcan afford a day without

work. More than 80 per cent of

Syrians live below the poverty line.

Beneath all this, a drumbeat of

disaster, from terrorist attacks to state

persecution tofreak flooding, has

fostered a resigned stoicism, and a

desensitisation to risk. Many have

developed an immunity to danger.

“The rhetoric about, ‘We are not

afraid of death’, is strong,” remarked a

friend in Baghdad last week, before

regaling me with Iraq’s latest

coronavirus jokes (heard the one

about the housebound husband, who

spent so much time talking to his wife

that he confessed his love and asked

her to marry him again?).

For many western countries, Covid-

is the biggest challenge since the

second world war. But if you’ve

survived some 17 years of waxing and

waning chaos in Iraq, or nearly a

decade of fratricidal fighting in Syria,

this virusmay not feel like the biggest

problem. “You know our people have

been through difficult conditions,” a

contact in Damascus remarked drily,

when I asked if signs of panic were

appearing in the city. “The threshold

of fear has risen, unfortunately.”

There are upsides — less inclination

to stockpile, for example. Butit seems

especially hard to motivate people to

stay inside when, for the first time in

months, aceasefire is holdingover

rebel-held idlib province.

Fear tactics do not work in this

context, saidMarco Bardus, assistant

professor at the American University

of Beirut’s health promotion and

community health department.

People are “resilient to death threats”.

Appeals to protect loved ones or the

community, rather than scare tactics,

are probably more effective, added Mr

Bardus, saying trusted local and

religious leaders could help to spread

health messages. In Iraq, after

worshippers continued flocking to

shrines, supreme Shia jurist Ayatollah

Ali al-Sistani called on his millions of

followers tostrictly observemedical

advice about public gatherings.

Across the Middle East, appeals for

intergenerational solidarity helped

turn the tide, reckonsMona Elswah, a

researcher at the computational

propaganda project at the Oxford

Internet Institute. “At the very

beginning... the narrative was all

about yourself,” she said from her

family’s home in Cairo. “Now it is

protect your family, protect others.”

Slowly, many have started heeding

that advice. But it’s hard to forget that

losing freedom of movement mostly

affects men. For so many women in

these patriarchal societies, being

confined is not much of a change.

The global crisis leaves some Iraqis

and Syrians feeling, for once, less

alone in facing doom. A friend in the

Iraqi city of Mosul, governed by Isis

from 2014 to 2017, said the lockdown

reminded her of being trapped at

home while the jihadis ruled.

But this is different. Now, “we can’t

go anywhere to be safe”, she said,

cheerily. “Because the whole planet is

infected!”

[email protected]

Additional reporting by Asmaa al-Osmar

Virus scare

tactics are the

wrong approach

in war zones

Baghdad

Notebook

by Chloe Cornish

In his op-ed “EU must forge a national

sense in this crisis or it will die” (April

6), Luigi Zingales gives an extremely

one-sided view on the EU and the

eurozone.

First, the EU will not die as a result of

a possible failure of the eurozone to

cope with the current crisis. The EU is

not the eurozone. There is no reason to

assume that a collapse of the eurozone

will jeopardise the internal market and

the customs union. Sweden and

Denmark do pretty well without the

euro. So did the UK.

The eurozone problems are of an

entirely different nature. Italy’s

miserable financial situation is not the

result of the coronavirus crisis, but of

its high public debt and a political

system that is not capable or willing to

take steps to combat the large non-

taxpaying black economy. In the

absence of a common eurozone budget

mechanism allowing the monitoring

and enforcement of a reduction in the

public debt of euro member states, the

instrument of eurobonds will

negatively affect the economies of the

countries that did take austerity

measures when the time was right to

do so. Where was Italy’s solidarity

when German workers voluntarily

agreed to temporarily refrain from

salary increases in order to make their

economy sound again?

t looks as if Italy wants to take fullI

advantage of the blessings of the euro

but fiercely rejects compliance with the

rules aimed to sustain the euro. In the

long run this will be detrimental to the

euro as a whole. This has nothing to do

with a lack of solidarity. Italy must be

helped to surmount the medical

consequences of the Covid-

catastrophe. Nobody denies that, and

there is in northern Europe sufficient

willingness to do so. Extinguishing the

fire of the burning house is of the

essence, but there is no justification for

demanding the repayment of Italy’s

mortgage burden.

Professor Zingales’ comparison with

US federal hurricane aid is

inappropriate and misleading. That aid

was given for the relief of a natural

disaster and not for the reduction of

the Louisiana public debt. More

importantly, though, and unlike the

US, eurozone public finances are a

matter of national sovereignty, the

marginal European budget being EU-

and not euro-related. It looks unlikely

that such sovereignty will be

transferred in the near future. Given

that situation, the issuance of

eurobonds would severely undermine

the credibility of the euro.

Dr C Reinoud Bredius

Bloemendaal, The Netherlands

EU will not ‘die’ if single currency fails to cope

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If one thing unites the world, it is the
desire for a quick exit from the corona-
virus pandemic. Donald Trump shares
that goal. But the US president’s reach
is considerably longer than his grasp.
His focus on antimalarial drugs as a
cure for Covid-19 comes increasingly at
the expense of the US government’s
attention to more practical ends.
In Mr Trump’s view, a cocktail of
hydroxychloroquine, the antimalarial
drug, and azithromycin, an antibiotic,
could be “one of the biggest game
changers in the history of medicine”.
His hunch is echoed by a motley crew
of TV commentators, White House
advisers and Rudy Giuliani, his per-
sonal lawyer. What they have in com-
mon is a lack of scientific credentials.
By contrast, Dr Anthony Fauci, the US
government’s most senior immunol-
ogist, describes the theory as a “majes-
tic leap”. Other medical experts are less
polite.
It is possible the cocktail may have
some therapeutic benefits. Trials are
under way. What we do know for sure is
that widespread testing is a prerequi-
site to dilution of the lockdowns. The
US is behind many other nations in
making tests available to its people.
Yet Mr Trump persists in pushing his
“hail Mary” recipe. This is causing sev-
eral problems. The first isa shortage of
hydroxychloroquinefor those who
genuinely need it to treat malaria,
lupus and rheumatoid arthritis. Last
weekend, Mr Trump pressured India’s
prime minister, Narendra Modi, tolift
India’s ban n the export of the drug.o
But this is only exacerbating shortages
in other countries.
Depriving patients of a drug that is of
proven necessity in order to offer a
long-shot bet to people with corona-
virus is bad policy. Mr Trump is also
recommending it as a preventive med-
icine, which is making the scramble
worse. He is even offering the drug to

Britain’s prime minister, Boris Johnson,

who isin intensive care ith the virus.w

He has been so insistent on the drug

that some have suggested the US pres-

ident and his family are motivated by

an indirect financial interest in its

maker, the French pharmaceuticals

company Sanofi. There is, however, no

evidence of that.

Mr Trump’s likelier motive is a gam-

bler’s instinct for a lucky bet. Rolling

back the disease requires diligent lead-

ership, teamwork and consistent mes-

saging. The president is scoring poorly

on all fronts. Perhaps Mr Trump is

driven by concern that it will take more

than a year to produce a Covid-19 vac-

cine and a lasting solution is likely to

come only after the US election in

November. Yet by fixating on an

unproven treatment, he may be divert-

ing energy from more urgent tasks.

Mr Trump continues to ignore Dr

Fauci’s advice to call for a nationwide

lockdown. More than a quarter of

Americans are going about their lives

as normal. Many of the remaining

three-quarters are only under a very

light “shelter-in-place” regime. The

president has shown similar resistance

to taking federal control of scarce

resources, such as ventilators, and

directing them to where they are most

needed. Though this is not entirely

the fault of the White House, testing

for the virus remains a huge weakness.

On a per capita basis, the US has tested

less than half the ratio of countries

such as Germany, which have far lower

fatality rates.

The irony is that Mr Trump’s magic

bullet approach is harming his own

prospects. To maximise his re-election

chances, he should follow the advice

scientists are repeatedly giving him.

The sooner America makes tests avail-

able to all and implements other steps

backed by solid evidence, the quicker it

can get its economy over the worst.

US president’s focus on anti-malaria drugs is no cure for pandemic

Trump’s risky fixation

on unproven therapies

After 14 hours of laboured discussions
failed to produce agreement,eurozone
finance ministers will regroup by
teleconferencetoday to find a common
response to the coronavirus pandemic.
For the survival of the eurozone and
the entire post-1945 project of Euro-
pean unity, it is of paramount impor-
tance that ministers do not waste their
second bite at the cherry. The issues at
stake are politically divisive, at
national and European level, and they
raise genuine matters of principle for
many governments. However, a second
signal of high-level disagreement in
less than a week would sow serious
doubts in financial markets and
around the world about Europe’s
ability to get its act together.
The pandemic’simpact on the euro-
zone’s economyand public finances is
so devastating that a common effort,
with the united firepower of the Euro-
pean Central Bank, the EU institutions
and national governments, is the only
sensible way forward. The collapse of
economic output in the second quarter
of this year will be the biggest in mod-
ern history. Some governments can be
expected to arrive at the year’s end
with budget deficits of as much as 20
per cent of gross domestic product.
Restoring employment, reviving
stricken sectors and keeping public
debts at manageable levels may prove
to be beyond the power of certain
governments without mutual support.
The two chief areas of dispute con-
cern common debt issuance, known in
this emergency as “coronabonds”, and
the deployment of the European Stabil-
ity Mechanism, the EU’s crisis-fighting
instrument. Opposition to jointly
issued debt is so entrenched in Ger-
many, the Netherlands and like-
minded northern European countries
that a breakthrough appears impossi-
ble. However, the case for issuing com-
mon debt is gathering support as the

full consequences of the pandemic

unfold. Should resisters prevail, it is

unclear what crisis will ever be big

enough to transform the eurozone

from its condition as a half-built, per-

manently vulnerable currency union.

As for the ESM, the Dutch and Italian

governments share blame foryester-

day’s failure to find a compromise

allowing the bailout fund to release

loans or set up credit lines with only

mild conditionality. The impression

persists that the Dutch — and, behind

them, other northerners — want to

hold potential borrowers such as Italy

accountable for past episodes of fiscal

irresponsibility rather than to fight

present or future battles together. Still,

Italy’s rejection of any form of condi-

tionality reflects the poisonous influ-

ence of domestic politics as much as

sincere concern that the terms of

assistance may be tightened after the

worst of the emergency is over.

Activating the ESM is a useful step,

because it will permit expanded ECB

operations to protect Italy and others

burdened with large and rising stocks

of sovereign debt. However, the stark

reality is that, if governments want

their 21-year-old monetary union to

survive intact and without a cata-

strophic debt default, the ECB will

probably have to take on a vastly bigger

role in any case — as the Federal

Reserve is doing in the US.

Barring the improbable event that

eurozone leaders establish a common

treasury, or that Germany, the Nether-

lands and their allies support Italy and

others with bilateral measures, the ECB

is the most credible defender of the

eurozone. It will have to be ready to buy

government bonds in as large quanti-

ties as necessary to hold together the

currency union. Europe’s leaders need

to ask themselves whether, over time,

such lopsided reliance on the ECB will

be politically sustainable.

The ECB is the most credible protector of the currency union

Eurozone ministers must

strike coronavirus deal

When Italy’s populists

ask for solidarity, what

they mean is money

Ana Botin’s op-ed “The EU’s shared

purpose requires shared financing”

(FT.com, April 7) picks up where your

Big Read “The risk of losing Italy”

leaves off by repeating the same call for

some form of joint EU debt instrument

to fund Italy and Spain.

Regardless of the euphemisms used

whenever this subject comes up, what

is being asked for are fiscal transfers

from countries with a greater capacity

to borrow to those with less. Leave

aside for a moment whether this is or is

not the right course of action. What is

certain is that it will not happen

without clarity and conditionality.

Take Italy — the Italian economy has

underperformed on almost every

metric for decades, due in large part to

structural inefficiencies that Italians

acknowledge but simply refuse to

address. I can buy a skyscraper in

London or New York without a notary

while Italians make appointments,

photocopy reams of paper, lick and

place government stamps on them and

pay exorbitant fees to countless

notaries to sell a one-bedroom flat.

Ever wondered why Italy has no

pharmacy chains? There are rules,

including the requirement to hold a

degree in pharmacology to own — not

to operate — a pharmacy, that prevent

the ownership of more than one.

Foreign investors or foreigners who

have ever had to deal with any part of

the judicial system run and never

return. The fiscal authorities misuse

their draconian powers to extort tax

settlements in the full knowledge that

recourse to the courts takes years.

About 60m tourists travel to Italy

every year and we have a large

emigrant population across the world

— and yet Alitalia has never been

solvent. Every government has seen

the electoral advantage of favouring

the oldest population outside Japan

with unaffordable pension rights. The

young and educated emigrate. This and

much else, before the world had ever

heard of Covid-19, explains Italy’s debt-

to-gross domestic product ratio of 135

per cent.

Matteo Salvini and Italy’s other

populists ask for “solidarity” when

they mean money and then swing into

perverse arrogance by suggesting that

unless Germans pay up there will be no

one to buy BMWs. The notion that

German taxpayers should support

Italian spending so that German

workers can work their full shifts while

Italians buy BMWs with the money

Germans have just sent is (someone

should tell Mr Salvini) unlikely to be

persuasive. The endless insults based

on the cliché of German historical

stereotype serve no purpose other than

to embarrass us.

The Covid-19 crisis may present an

important opportunity out of this

mess. Italian politicians should stand

aside and ask Mario Draghi to negotiate

the restructuring of Italy’s sovereign

debt. This can be achieved in an

orderly manner, with EU “solidarity”,

by a concurrent fiscal transfer from the

EU and a one-off tax on Italian

domestic savings. Far from fearing any

conditionality, Italians must hope that

the conditions attached — riveted — to

any such solution will prevent a repeat

of the past decades.

Alessandro Ciravegna

New College Capital,

London SW1, UK

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