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    When Will the European Central Bank Start Cutting Rates?

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    Interest rate cuts could start as soon as April, investors say. But the eurozone’s central bank, which held rates steady on Thursday, has said it will probably wait longer.If what goes up must come down, then the urgent question on the minds of many in Europe is when will interest rates begin dropping? For months, rates have been set at the highest in the European Central Bank’s history.Despite the protests of the eurozone’s policymakers, investors have been betting that the central bank will cut rates quite soon — possibly in April. Traders figure rates must come down because inflation has slowed notably — it’s been below 3 percent since October — and the region’s economy is weak. By the end of year, the central bank will have cut rates by more than 1 percentage point, or between five and six quarter-point cuts, trading in financial markets implied.Policymakers, however, are trying to pull market opinion in the other direction and delay the expectations of rate cuts. Many of the central bank’s Governing Council are wary of declaring victory over inflation too soon, lest it settle above the bank’s target of 2 percent.On Thursday, the European Central Bank stuck to this outlook. It held interest rates steady, leaving the deposit rate at 4 percent, where it has been since September. The bank said rates were at levels that, “maintained for a sufficiently long duration, will make a substantial contribution” toward returning inflation to 2 percent in a “timely manner.”Benchmark interest rate in the eurozoneEuropean Central Bank’s deposit facility rate.

    Source: European Central BankBy The New York TimesInflation in the eurozoneYear-over-year change in consumer prices in the eurozone.

    Source: EurostatBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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      Trump’s Indictment and What’s Next

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      The fallout will be widespread, with ramifications for the 2024 presidential race, policymaking and more.Donald Trump is likely to turn himself in on Tuesday.Christopher Lee for The New York TimesWhat you need to know about Trump’s indictment A Manhattan grand jury has indicted Donald Trump over his role in paying hush money to a porn star, making him the first former president to face criminal charges. It’s a pivotal moment in U.S. politics — there was an audible on-air gasp when Fox News anchors reported the news on Thursday — with ramifications for the 2024 presidential race, policymaking and more.Here are the most important things to note so far.Mr. Trump is likely to turn himself in on Tuesday, which will see the former president be fingerprinted and photographed in a New York State courthouse. (Prosecutors for the Manhattan district attorney, Alvin Bragg, wanted Trump to surrender on Friday, but were rebuffed by the former president’s lawyers, according to Politico.) Afterward, Mr. Trump would be arraigned and would finally learn the charges against him and be given the chance to enter a plea. The former president has consistently denied all wrongdoing.Mr. Trump and his advisers, who were at his Mar-a-Lago resort in Florida on Thursday, were caught off guard by the announcement, believing some news reports that suggested an indictment wouldn’t come for weeks. The former president blasted the news, describing it in all-caps as “an attack on our country the likes of which has never been seen before” on Truth Social, the social network he founded.The case revolves in part around the Trump family business. Charges by the Manhattan district attorney arise from a five-year investigation into a $130,000 payment by the fixer Michael Cohen to the porn actress Stormy Daniels in 2016, before the presidential election that year.The Trump Organization reimbursed Mr. Cohen — but in internal documents, company executives falsely recorded the payment as a legal expense and invented a bogus legal retainer with Mr. Cohen to justify them. Falsifying business records is a crime in New York. But to make it a felony charge, prosecutors may tie the crime to a second one: violating election law.The fallout will be wide, and unpredictable. Democrats and Republicans alike used the news to underpin a flurry of fund-raising efforts. (Among them, of course, was Mr. Trump’s own presidential campaign.)It’s unclear how the indictment will affect the 2024 race. Mr. Trump, who can run for president despite facing criminal charges, is leading in early polls. Still, his potential opponents for the Republican nomination — including Gov. Ron DeSantis of Florida and Mike Pence, Mr. Trump’s former vice president — harshly criticized the move. House Republicans have also flocked to his defense, potentially increasing the chances of gridlock in Washington.But while the charges may give Mr. Trump a boost in the G.O.P. primary, they could also hurt his standing in the general election against President Biden.HERE’S WHAT’S HAPPENING European inflation remains stubbornly high. Consumer prices rose 6.9 percent on an annualized basis across the eurozone in March, below analysts’ forecasts. But core inflation accelerated, a sign that Europe’s cost-of-living crisis is not easing. In the U.S., investors will be watching for data on personal consumption expenditure inflation, set to be released at 8:30 a.m.A Swiss court convicts bankers of helping a Putin ally hide millions. Four officials from the Swiss office of Gazprombank were accused of failing to conduct due diligence on accounts opened by a concert cellist who has been nicknamed “Putin’s wallet.” The case was seen as a test of Switzerland’s willingness to discipline bankers for wrongdoing.More Gulf nations back Jared Kushner’s investment firm. Sovereign funds in the United Arab Emirates and Qatar have poured hundreds of millions into Affinity Partners, The Times reports. The revelation underscores efforts by Mr. Kushner, Donald Trump’s son-in-law, and others in the Trump orbit to profit from close ties they forged with Middle Eastern powers while in the White House.Lawyers for a woman accusing Leon Black of rape ask to quit the case. A lawyer from the Wigdor firm, who had been representing Guzel Ganieva, told a court on Thursday that the attorney-client relationship had broken down and that Ms. Ganieva wanted to represent herself. It’s the latest twist in the lawsuit by Ms. Ganieva, who has said she had an affair with the private equity mogul that turned abusive; Black has denied wrongdoing.Richard Branson’s satellite-launching company is halting operations. Virgin Orbit said that it failed to raise much-needed capital, and would cease business for now and lay off nearly all of its roughly 660 employees. It signals the potential end of the company after it suffered a failed rocket launch in January.A brutal quarter for dealmaking Bankers and lawyers began the year with modest expectations for M.&A. Rising interest rates, concerns about the economy and costly financing had undercut what had been a booming market for deals.But the first three months of 2023 proved to be even more difficult than most would have guessed, as the volume of transactions fell to its lowest level in a decade.About 11,366 deals worth $550.5 billion were announced in the quarter, according to data from Refinitiv. That’s a 22 percent drop in the number of transactions — and a 45 percent plunge by value. That’s bad news for bankers who had been hoping for any improvement from a dismal second half of 2022. (They’ve already had to grapple with another bit of bad news: Wall Street bonuses were down 26 percent last year, according to New York State’s comptroller.)The outlook for improvement isn’t clear. While the Nasdaq is climbing, there’s enough uncertainty and volatility in the market — particularly given concerns around banks — to deter many would-be acquirers from doing risky deals. Then again, three months ago some dealmakers told DealBook that they expected their business to pick up in the middle of 2023.Here’s how the league tables look: JPMorgan Chase, Goldman Sachs and the boutique Centerview Partners led investment banks, with a combined 58 percent of the market. And Sullivan & Cromwell, Wachtell Lipton and Goodwin Procter were the big winners among law firms, with 46 percent market share.Biden wants new rules for lenders The Biden administration on Thursday called on regulators to toughen oversight of America’s midsize banks in the wake of the crisis triggered by the collapse of Silicon Valley Bank, as policymakers shift from containing the turmoil to figuring out how to prevent it from happening again.Much of the focus was on reviving measures included in the Dodd-Frank law passed in the aftermath of the 2008 financial crisis. These include reapplying stress tests and capital requirements used for the nation’s systemically important banks to midsize lenders, after they were rolled back in 2018 during the Trump administration.Here are the new rules the White House wants to see imposed:Tougher capital requirements and oversight of lenders. At the top of the list is the reinstatement of liquidity requirements (and stress tests on that liquidity) for lenders with $100 billion to $250 billion in assets like SVB and Signature Bank, which also collapsed.Plans for managing a bank failure and annual capital stress tests. The administration sees the need for more rigorous capital-testing measures designed to see if banks “can withstand high interest rates and other stresses.”It appears the White House will go it alone on these proposals. “There’s no need for congressional action in order to authorize the agencies to take any of these steps,” an administration official told journalists.Lobbyists are already pushing back, saying more oversight would drive up costs and hurt the economy. “It would be unfortunate if the response to bad management and delinquent supervision at SVB were additional regulation on all banks,” Greg Baer, the president and C.E.O. of the Bank Policy Institute, said in a statement.Elsewhere in banking:In the hours after Silicon Valley Bank’s failure on March 10, Jamie Dimon, C.E.O. of JPMorgan Chase, expressed his reluctance to get involved in another banking rescue effort. Dimon changed his position four days later as he and Janet Yellen, the Treasury secretary, spearheaded a plan for the country’s biggest banks to inject $30 billion in deposits into smaller ailing ones. “If my government asks me to help, I’ll help,” Mr. Dimon, 67, told The Times.“We are definitely working with technology which is going to be incredibly beneficial, but clearly has the potential to cause harm in a deep way.” — Sundar Pichai, C.E.O. of Google, on the need for the tech industry to responsibly develop artificial intelligence tools, like chatbots, before rolling them out commercially.Carl Icahn and Jesus Illumina, the DNA sequencing company, stepped up its fight with the activist investor Carl Icahn on Thursday, pushing back against his efforts to secure three board seats and force it to spin off Grail, a maker of cancer-detection tests that it bought for $8 billion. But it is a reference to Jesus that the company says he made that is garnering much attention.The company said that it had nearly reached a settlement with Mr. Icahn before their fight went public, in a preliminary proxy statement. It added that he had no plan for the company beyond putting his nominees on the board.But Illumina also said Mr. Icahn told its executives that he “would not even support Jesus Christ” as an independent candidate over one of his own nominees because “my guys answer to me.”Experts say Mr. Icahn’s comments could be used against him in future fights. Board members are supposed to act as stewards of a company, not agents for a single investor. “If any disputes along these lines arise for public companies where Icahn has nominees on the board, shareholders are going to use this as exhibit A for allegations that the directors followed Icahn rather than their own judgment,” said Ann Lipton, a professor of law at Tulane University.Mr. Icahn doesn’t seem to care. He said the comments were “taken out of context” and the company broke an agreement to keep negotiations private.“It was a very poor choice of words and he is usually much smarter than that,” said John Coffee, a corporate governance professor at Columbia Law School. “But he can always say that he was misinterpreted and recognizes that directors owe their duties to all the shareholders.”THE SPEED READ DealsBed Bath & Beyond ended a deal to take money from the hedge fund Hudson Bay Capital after reporting another quarter of declining sales, and will instead try to raise $300 million by selling new stock. (WSJ)Apollo Global Management reportedly plans to bid nearly $2.8 billion for the aerospace parts maker Arconic. (Bloomberg)Marshall, the maker of guitar amps favored by Jimi Hendrix and Eric Clapton, will sell itself to Zound, a Swedish speaker maker that it had partnered with. (The Verge)PolicyFinland cleared its last hurdle to joining NATO after Turkey approved its entry into the security alliance. (NYT)The F.T.C. is reportedly investigating America’s largest alcohol distributor over how wine and liquor are priced across the U.S. (Politico)“Lobbyists Begin Chipping Away at Biden’s $80 Billion I.R.S. Overhaul” (NYT)Best of the restNetflix revamped its film division, as the streaming giant prepares to make fewer movies to cut costs. (Bloomberg)“A.I., Brain Scans and Cameras: The Spread of Police Surveillance Tech” (NYT)A jury cleared Gwyneth Paltrow of fault in a 2016 ski crash and awarded her the $1 she had requested in damages. (NYT)“Do We Know How Many People Are Working From Home?” (NYT)We’d like your feedback! Please email thoughts and suggestions to dealbook@nytimes.com. More

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      in World Politics

      Algeria Is a Reliable Gas Partner for Crisis-Facing Europe

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      The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media. More

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      in World Politics

      The EU Faces Major Challenges This Autumn

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      The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media. More

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      in World Politics

      The AfD’s Duplicitous Attempt to Target Germany’s National Minorities

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      The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media. More

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      in World Politics

      Alarm in Ireland About Natural Gas Supplies Next Winter

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      The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media. More

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      in Elections

      Macron to Face Le Pen for President as French Gravitate Toward Extremes

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      President Emmanuel Macron and the hard-right leader Marine Le Pen will compete for a second time in a runoff on April 24.PARIS — President Emmanuel Macron will face Marine Le Pen, the French far-right leader, in the runoff of France’s presidential elections.With 92 percent of the ballots cast on Sunday counted, Mr. Macron, a centrist, was leading with about 27.4 percent of the vote to Ms. Le Pen’s 24.3 percent. Ms. Le Pen benefited from a late surge that reflected widespread disaffection over rising prices, security and immigration.With war raging in Ukraine and Western unity likely to be tested as the fighting continues, Ms. Le Pen’s strong performance demonstrated the enduring appeal of nationalist and xenophobic currents in Europe. Extreme parties of the right and left took some 51 percent of the vote, a clear sign of the extent of French anger and frustration.An anti-NATO and more pro-Russia France in the event of an ultimate Le Pen victory would cause deep concern in allied capitals, and could fracture the united trans-Atlantic response to the Russian invasion of Ukraine.But Mr. Macron, after a lackluster campaign, will go into the second round as the slight favorite, having fared a little better than the latest opinion polls suggested. Some had shown him leading Ms. Le Pen by just two points.Marine Le Pen speaking after the first-round results were announced on Sunday.Andrea Mantovani for The New York TimesThe principled French rejection of Ms. Le Pen’s brand of anti-immigrant nationalism has frayed as illiberal politics have spread in both Europe and the United States. She has successfully softened her packaging, if not her fierce conviction that French people must be privileged over foreigners and that the curtain must be drawn on France as a “land of immigration.”Ms. Le Pen’s ties to President Vladimir V. Putin of Russia are close, although she has scrambled in recent weeks to play them down. This month, she was quick to congratulate Viktor Orban, Hungary’s nationalist and anti-immigrant leader, on his fourth consecutive victory in parliamentary elections.“I will restore France to order in five years,” Ms. Le Pen declared to cheering supporters, appealing to all French people to join her in what she called “a choice of civilization” in which the “legitimate preponderance of French language and culture” would be guaranteed and full “sovereignty reestablished in all domains.”The choice confronting French people on April 24 was between “division, injustice and disorder” on the one hand, and the “rallying of French people around social justice and protection,” she said.Mr. Macron told flag-waving supporters: “I want a France in a strong Europe that maintains its alliances with the big democracies in order to defend itself, not a France that, outside Europe, would have as its only allies the populist and xenophobic International. That is not us.”He added: “Don’t deceive ourselves, nothing is decided, and the debate we will have in the next 15 days is decisive for our country and for Europe.”A polling station in Pontoise on Sunday.Andrea Mantovani for The New York TimesLast week, in an interview in the daily Le Parisien newspaper, Mr. Macron called Ms. Le Pen “a racist” of “great brutality.” Ms. Le Pen hit back, saying that the president’s remarks were “outrageous and aggressive.” She called favoring French people over foreigners “the only moral, legal and admissible policy.”The gloves will be off as they confront each other over the future of France, at a time when Britain’s exit from the European Union and the end of Angela Merkel’s long chancellorship in Germany have placed a particular onus on French leadership.Mr. Macron wants to transform Europe into a credible military power with “strategic autonomy.” Ms. Le Pen, whose party has received funding from a Russian and, more recently, a Hungarian bank, has other priorities.The runoff, on April 24, will be a repeat of the last election, in 2017, when Mr. Macron, then a relative newcomer to politics intent on shattering old divisions between left and right, trounced Ms. Le Pen with 66.9 percent of the vote to her 33.1 percent.The final result this time will almost certainly be much closer than five years ago. Polls taken before Sunday’s vote indicated Mr. Macron winning by just 52 percent to 48 percent against Ms. Le Pen in the second round. That could shift in the coming two weeks, when the candidates will debate for the first time in the campaign.Reflecting France’s drift to the right in recent years, no left-of-center candidate qualified for the runoff. The Socialist Party, long a pillar of postwar French politics, collapsed, leaving Jean-Luc Mélenchon, the far-left anti-NATO candidate with his France Unbowed movement, to take third place with about 21 percent.Supporters of Mr. Macron in Paris on Sunday.James Hill for The New York TimesMs. Le Pen, who leads the National Rally, formerly the National Front, was helped by the candidacy of Éric Zemmour, a fiercely xenophobic TV pundit turned politician, who became the go-to politician for anti-immigrant provocation, which made her look more mainstream and innocuous. In the end, Mr. Zemmour’s campaign faded, and he took about 7 percent of the vote.Mr. Zemmour immediately called on his supporters to back Ms. Le Pen in the second round. “Opposing Ms. Le Pen there is a man who allowed 2 million immigrants to enter France,” Mr. Zemmour declared.The threatening scenario for Mr. Macron is that Mr. Zemmour’s vote will go to Ms. Le Pen, and that she will be further bolstered by the wide section of the left that feels betrayed or just viscerally hostile toward the president, as well as by some center-right voters for whom immigration is the core issue.More than half of French people — supporters of Ms. Le Pen, Mr. Zemmour and Mr. Mélenchon — now appear to favor parties that are broadly anti-NATO, anti-American and hostile to the European Union. By contrast, the broad center — Mr. Macron’s La République en Marche party, the Socialist Party, the center right Republicans and the Green Party — took a combined total of about 40 percent.These were numbers that revealed the extent of anxiety in France, and perhaps also the extent of distrust of its democracy. They will be more comforting to Ms. Le Pen than to Mr. Macron, even if Mr. Mélenchon said his supporters should not give “a single vote” to Ms. Le Pen.He declined, however, to endorse Mr. Macron.At Ms. Le Pen’s headquarters, Frederic Sarmiento, an activist, said, “She will benefit from a big transfer of votes,” pointing to supporters of Mr. Zemmour, but also some on the left who, according to polls, will support Ms. Le Pen in the second round.Immigrant families awaiting emergency accommodation outside the Paris city hall last April.Andrea Mantovani for The New York Times“I am very worried, it will be a very close runoff,” said Nicolas Tenzer, an author who teaches political science at Sciences Po university. “Many on the left will abstain rather than vote Macron.”Mr. Macron gained the immediate support for the second round of the defeated Socialist, Communist, Green and center-right candidates, but between them they amounted to no more than 15 percent of the first-round vote. He may also benefit from a late surge in support of the Republic in a country with bitter wartime experience of extreme-right rule.In the end, the election on Sunday came down to Mr. Macron against the extreme right and left of the political spectrum, a sign of his effective dismantlement of the old political order. Now built essentially around a personality — the restless president — French democracy does not appear to have arrived at any sustainable alternative structure.If the two runoff qualifiers are the same as in 2017, they have been changed by circumstances. Where Mr. Macron represented reformist hope in 2017, he is now widely seen as a leader who drifted to the right and a top-down, highly personalized style of government. The sheen is off him.On the place of Islam in France, on immigration controls and on police powers, Mr. Macron has taken a hard line, judging that the election would be won or lost to his right.Addressing his supporters after the vote Sunday, he said he wants a France that “fights resolutely against Islamist separatism” — a term he uses to describe conservative or radical Muslims who reject French values like gender equality — but also a France that allows all believers to practice their faiths.A polling place at the Versailles town hall.Andrea Mantovani for The New York TimesHis rightward shift had a cost. The center-left, once the core of his support, felt betrayed. To what extent the left will vote for him in the second round will be a main source of concern, as already reflected in Mr. Macron’s abrupt recent catch-up paeans to “fraternity,” “solidarity” and equality of opportunity.Throughout the campaign, Mr. Macron appeared disengaged, taken up with countless telephone calls to Mr. Putin that proved ineffectual.A comfortable lead in polls disappeared in recent weeks as resentment grew over the president’s detachment. He had struggled during the five years of his presidency to overcome an image of aloofness, learning to reach out to more people, only to suffer an apparent relapse in the past several weeks.Still, Mr. Macron steered the country through the long coronavirus crisis, brought unemployment to its lowest level in a decade and lifted economic growth. Doing so, he has convinced many French people that he has what it takes to lead and to represent France with dignity on the world stage.Ms. Le Pen, who would be France’s first woman president, is also seen differently. Now in her third attempt to become president — Jacques Chirac won in 1995 after twice failing — she bowed to reason (and popular opinion) on two significant fronts: dropping her prior vows to take France out of the European Union and the eurozone. Still, many of her proposals — like barring E.U. citizens from some of the same social benefits as French citizens — would infringe fundamental European treaties.The leader of the National Rally, formerly the National Front, toned down her language to look more “presidential.” She smiled a lot, opening up about her personal struggles, and she gave the impression of being closer to the day-to-day concerns of French people, especially with regard to sharply rising gas prices and inflation.But many things did not change. Her program includes a plan to hold a referendum that would lead to a change in the Constitution that would ban any policies that lead to “the installation on national territory of a number of foreigners so large that it would change the composition and identity of the French people.”She also wants to bar Muslim women from wearing head scarves and fine them if they do.Polling booths in Trappes on Sunday. The first round of voting saw the highest abstention rate in decades.Andrea Mantovani for The New York TimesThe abstention rate Sunday, at between about 26 and 28 percent, was several points above the last election. Not since 2002 has it been so high.This appeared to reflect disillusionment with politics as a change agent, the ripple effect of the war in Ukraine and lost faith in democracy. It was part of the same anger that pushed so many French people toward political extremes.Aurelien Breeden More

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      in World Politics

      What Does the Future Success of the Euro Depend On?

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      The first euro banknotes and coins came into circulation 20 years ago. Although the exchange rates of almost all participating countries had already been fixed two years earlier, only the introduction of the euro marked Europe’s irreversible economic integration. For after the creation of the single monetary policy and the introduction of hundreds of tons of euro cash, a return to national currencies would have ended in disaster for the European Union and its member states.

      The global financial crisis and the euro crisis have shown that the single market would not function without the common currency, the euro — one reason being exchange rate differences. Even though the euro has not displaced the dollar from first place in the global monetary system, it protects the European economies from external shocks, that is, negative impacts from the global economy.

      Are You Ready for Collapse?

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      Moreover, monetary integration has shown its advantages during the COVID-19 pandemic. Without the euro, some member states would not only face a demand and supply crisis, but also a sharp weakening of their currency, which could even lead to a currency crisis. This would make it extremely difficult to fight the pandemic and support jobs with public money.

      The citizens of the EU seem to appreciate the stabilizing effect of the common currency. According to the May 2021 Eurobarometer survey, 80% of respondents believe that the euro is good for the EU; 70% believe that the euro is good for their own country.

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      Moreover, joining the euro area is seen as attractive: Croatia will most likely join the euro area in 2023. Bulgaria also aspires to join. Due to dwindling confidence in the currencies of Poland and Hungary, the introduction of the euro could become a realistic scenario in the event of a change of governments in these countries.

      A Long List of Reforms

      Despite these developments, many of the euro area’s problems remain unresolved 20 years after the currency changeover. The fundamental dilemma is between risk-sharing versus risk elimination. It is a question of how many more structural reforms individual member states need to undertake before deeper integration of the euro area, which implies greater risk-sharing among member states, can take place. In the banking sector, for example, the issue is to improve the financial health of banks — that is, among other measures to increase their capitalization and reduce the level of non-performing loans before a common deposit insurance scheme can be created.

      A second problem is the relationship between monetary and fiscal policy. Currently, the European Central Bank is the main stabilizer of the euro area public debt, which increased significantly as a result of the pandemic, and it will remain so by reinvesting its holdings of government bonds at least until 2024. However, an alternative solution is needed to stabilize the euro area debt market.

      Joint debt guarantees, as recently proposed by France and Italy, must be combined with incentives to modernize the economies, especially of the southern euro are countries. In this context, it is important to keep in mind the limits of fiscal policy, which is currently too often seen as the magic cure for all economic policy problems. Linked to fiscal policy are the questions of how many rules and how much flexibility are needed in the euro area.

      Heated discussions are to be expected this year on the corresponding changes to the fiscal rules. This is because there is a great deal of mistrust between the countries in the north and south of the euro area, which is mainly due to the different performance levels of the economies and the different views on economic policy. The persistent inflation and the problems with the implementation of the NextGenerationEU stimulus package, which is supposed to cushion coronavirus-related damage to the economy and society, could exacerbate the disparities in economic performance and thus also the disagreements within the euro area.

      Unique Insights from 2,500+ Contributors in 90+ Countries

      The euro crisis has shown that turbulence in one member state can have fatal consequences for the entire currency area. In the coming years, however, the biggest challenge for the euro area will not be the situation in small member states such as Greece, but in the largest of them. The economies of Italy, France, and Germany, which account for almost 65% of the eurozone’s gross domestic product, are difficult to reform with their complex territorial structures and increasing political fragmentation. At the same time, these economies lack real convergence.

      A decisive factor for the further development of the euro currency project will be whether the transformation of their economic models succeeds under the influence of the digital revolution, the climate crisis, and demographic change.

      *[This article was originally published by the German Institute for International and Security Affairs (SWP), which advises the German government and Bundestag on all questions relating to foreign and security policy.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      in World Politics

      A New European Financial Landscape Is Emerging

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      The United Kingdom’s exit from the European single market on January 1 has sent trade in goods plummeting amid much confusion. By contrast, Brexit was carried out in an orderly manner in the financial sector, despite significant movement of trading in shares and derivatives away from the City of London.

      The Brexit Deal Presents Opportunities for a New Partnership

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      After five years of radical uncertainty, it has become clear that the European Union and the United Kingdom will be taking separate paths on financial regulations — a financial “decoupling” that means a significant loss of business for the City. Whether the EU financial sector can gain much of what London loses will depend on the EU’s willingness to embrace further financial market integration.

      Smart Sequencing Ensured an Orderly Brexit

      As with the Y2K problem, the Brexit transition could have gone worse. It took more than luck to avoid financial instability along the way.

      First, financial firms on both sides of the English Channel (and of the Irish Sea) worked hard and were able to preempt most of the operational challenges.

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      Second, despite all the recurring high-stakes drama between the UK government and the European Commission, the technical cooperation between the authorities actually in charge of financial stability, primarily the Bank of England and the European Central Bank (ECB), appears to have run smoothly.

      Third, the negotiators phased the process in a smart way. The Brexit Withdrawal Agreement of January 2020 helped reduce uncertainty by ensuring that the UK government would meet its financial obligations to the EU, avoiding what would have been akin to selective default. That agreement kept the United Kingdom in the single market during the transition period beyond the country’s formal exit from the European Union on January 31, 2020. It also set a late-June deadline for the British government to extend the transition period beyond December 31, 2020. As London decided not to do so, that left six months of effective preparation.

      To be sure, whether an EU-UK Trade and Cooperation Agreement (TCA) would be concluded remained unknown until late December. But that mattered comparatively little for financial services, since trade agreements typically do not cover them much. By one count, the 1,259-page TCA (which is still unratified by the European Union) contains only six pages relevant for the financial sector.

      The resulting legal environment for financial services between the European Union and the United Kingdom is unlikely to change much any time soon. Contrary to occasional portrayals in the United Kingdom, no bilateral negotiations on financial services are going on, except for a memorandum of understanding expected this month that is not expected to bind the parties on substance.

      From the EU perspective, the United Kingdom is now a “third country,” in other words an offshore financial center, following decades of onshore status. UK-registered financial firms have lost the right, or “passport,” to offer their services seamlessly anywhere in the EU single market. From a regulatory standpoint, they have no better access to that market than their peers in other third nations such as Japan, Singapore or the United States.

      Equivalence Status for UK Financial Market Segments

      Some segments of the financial sector in these other third countries actually have better single market access than British ones, because they are covered by a category in EU law allowing direct service provision by firms under a regulatory framework deemed “equivalent” to that in the European Union. The equivalence decision is at the European Commission’s discretion, even though it is based on a technical assessment. As a privilege and not a right, equivalence can be revoked on short notice.

      So far, the European Commission has not granted the UK any such segment-specific equivalence, except in a time-limited manner for securities depositories until mid-2021 and clearing services until mid-2022. For the moment, the commission appears to be leaning against making the latter permanent. In most other market segments, the commission will not likely grant equivalence to the United Kingdom in the foreseeable future. This may appear inconsistent with the fact that almost all current UK regulations stem from the existing EU body of law. But the UK authorities (including the Bank of England) have declined to commit to keeping that alignment intact.

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      The commission’s inclination to reduce EU dependence on the City of London is understandable. No comparable dependence on an offshore financial center has existed anywhere in recent financial history. Such dependence entails financial stability risk. In a crisis, UK authorities would not necessarily respond in a way that preserves vital EU interests. Think of the Icelandic crisis of 2008, when Reykjavik protected the failing banks’ domestic depositors but not foreign ones. It is hardly absurd for the European Union to try to reduce such a risk, even if — as appears to happen with derivatives — some of the activity migrates from the United Kingdom to the United States or other third countries as a consequence, and not to the European Union.

      At the same time, the argument that keeping EU liquidity pooled in London is more efficient than any alternative is unpersuasive given the European Union’s own vast size. In addition, the European Commission also follows mercantilist impulses to lure activity away from London, even though these generally do not make economic sense. Added up, these factors provide little incentive for the commission to grant equivalence status to more UK financial market segments, unless some other high-level political motives come into play. None are apparent right now.

      The UK Is Unlikely to Regain Lost Advantage

      How the European Union and the United Kingdom will decouple will not be uniform across all parts of the financial system. Regulatory competition between them may become a “race to the bottom” or “to the top,” depending on market segments and the circumstances of the moment, without a uniform pattern. In any case, such labels are more a matter of judgment in financial regulation than in, say, tax competition.

      In some areas, the European Union will be laxer, while in others, it will be the United Kingdom, as is presently the case between the EU and the US. For example, the European Union is more demanding than the United States on curbing bankers’ compensation but easier when it comes to enforcing securities laws or setting capital requirements for banks. At least some forthcoming UK financial regulatory decisions may be aimed at keeping or attracting financial institutions in London, but they are still not likely to offset the loss of passport to the EU single market.

      All these permutations suggest that the medium-term outlook for the City of London is unpromising, although the COVID-19 situation makes all quantitative observations more difficult to interpret. Once an onshore financial center for the entire EU single market, and a competitive offshore center for the rest of the world, the City has been reduced to an onshore center for the United Kingdom only and has become offshore for the European Union. That implies a different, in all likelihood less powerful, set of synergies across the City of London’s financial activities.

      The few relevant quantitative data points available reinforce this bleak view. Job offerings in British finance, as tracked by consultancy Morgan McKinley, have declined alarmingly since the 2016 Brexit referendum. The ECB (as bank supervisor) and national securities regulators coordinated by the European Securities and Markets Authority are tightening requirements for key personnel to reside mainly on EU territory rather than in the United Kingdom.

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      As noted by Financial Times columnist Simon Kuper, many financial firms’ Brexit policy until this year had been to “sit tight and do nothing until post-Brexit arrangements for finance forced [their] hand.” That phase has ended. Firms that drag their feet face regulatory disruption, as happened to broker TP ICAP in late January. Tussles between regulators and regulated entities, rather than between the European Commission and the UK government, are where most of the financial-sector Brexit action is likely to be in 2021. These disputes typically happen behind closed doors, and the regulators typically hold most of the cards.

      For all the optimistic talk in London of “Big Bang 2.0 or whatever,” the United Kingdom’s comparative advantage as the best location for financial business in the European time zone is unlikely to recover to its pre-Brexit level. The macroeconomic losses could be moderated or offset by cheaper currency and less expensive real estate in London, making the city a more attractive place to do nonfinancial business. Even so, a gap will likely remain for the UK government, which has for years depended heavily on financial sector–related tax revenue.

      The European Union stands to gain financial activity as a consequence of Brexit. How much and where is not clear yet. As some analysts had predicted, Amsterdam, Dublin, Frankfurt, Luxembourg and Paris are the leaders for the relocation of international (non-EU) firms. Dublin and Luxembourg specialize in asset management, Frankfurt in investment banking and Amsterdam in trading. But EU success in terms of financial services competitiveness and stability will depend on further market integration, the pace of which remains hard to predict.

      The European banking union is still only half-built because it lacks a consistent framework for bank crisis management and deposit insurance. The grand EU rhetoric on “capital markets union” has yielded little actual reform since its start in 2014. Events like the still-unfolding Wirecard saga may force additional steps toward market integration, even though a proactive approach would be preferable.

      The one near certainty is that London’s position in the European financial sector will be less than it used to be.

      *[This article was originally published by Bruegel and the Peterson Institute.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More