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US Durable Goods Orders up 1.7 Percent in August

Orders for long-lasting manufactured goods rose a modest 1.7 percent in August, reflecting a rebound in the volatile aircraft sector. A gauge of business investment was up for a second month, providing hope that a revival in manufacturing is gaining strength.

 

Last month’s advance in orders for durable goods followed a 6.8 percent plunge in July, the Labor Department reported Wednesday. Both months were heavily influenced by swings in orders for commercial aircraft, which surged 44.8 percent in August after having plunged 71.1 percent in July.

 

A closely watched category that serves as a proxy for business investment posted a 0.9 percent gain in August after a 1.1 percent increase in July. Economists believe that U.S. factory output should continue rising in coming months, reflecting a rebound in the global economy.

 

Manufacturing has been improving since the middle of 2016, following a two-year slump caused by cutbacks in the energy industry and a strong dollar that made U.S. goods costlier overseas. Prospects are brighter now with the dollar weakening in value this year, which makes U.S. exports more competitive on overseas markets, and a rebound in energy drilling.

 

The overall economy, as measured by the gross domestic product, expanded at a solid 3 percent rate in the April-June quarter after a tepid 1.2 percent gain in the first three months of the year. Analysts believe activity in the current July-September quarter will likely slow a bit, in part because of the devastation caused by hurricanes Harvey and Irma.

 

For August, orders excluding transportation were up 0.2 percent after a stronger 0.8 percent rise in July.

 

Demand for machinery rose 0.3 percent while orders for computers and related products fell 2.3 percent. Orders for autos and auto parts rose 1.5 percent after a 2.1 percent drop in July.

 

 

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US Fed Chief Backs Gradual Rise in Rates

Despite concerns about low inflation in the United States, the head of the U.S. central bank says raising interest rates gradually would be the most appropriate policy stance for the Federal Reserve.

“It would be imprudent to keep monetary policy on hold until inflation is back to two percent,” Fed Chair Janet Yellen said Tuesday, while speaking to the National Association for Business Economists (NABE) in Cleveland, Ohio.

Inflation, a sustained increase in the price of goods and services, has remained consistently below the Fed’s target rate of 2 percent. But even with uncertainty about the possible reasons for the low rate of inflation — from misjudging the strength of the labor market to the impact of foreign competition on the global supply chain — Yellen said the Fed “should be wary of moving too gradually.”

The Federal Reserve has kept its benchmark lending rate near record lows since the 2008 financial crisis to stimulate the U.S. economy. It has raised its interest rate three times since last December. The federal funds rate, the interest rate the central bank charges banks on overnight loans, currently sits in a range between one and one-and-one-quarter percent.

Ellen Zentner, chief economist at Morgan Stanley, says her biggest takeaway from the Cleveland speech was Yellen’s confidence that “a strong U.S. labor market would ultimately drive inflation closer to the Fed’s two percent goal over the next few years.”

Equity markets, which have benefited from low borrowing costs, anticipate a fourth rate hike in December, and possibly three more next year. Starting next month, the Fed says it will begin the process of “unwinding,” or selling off, the massive holdings of bonds and securities it has acquired since 2008.

But Yellen’s longer-term goals may be subject to change. Her four-year term as the nation’s top banker ends in February. President Donald Trump has not said whether he plans to re-appoint Yellen or overhaul the central bank’s seven-member board of governors.

Zentner believes there is a 60 percent chance Yellen will be named to serve a second term. “The longer the president waits, the greater the probability that Yellen will be re-appointed,” the bank economist said.  

Yellen spoke in Cleveland as the Conference Board released a survey that showed consumer confidence declined in September. The global business research group reported consumers’ views about the strength of the U.S. labor market have weakened and home sales have dropped to an eight-month low due to Hurricanes Harvey and Irma in the states of Texas and Florida. 

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Mexico Tallying Economic Cost of Big Earthquake

Mexican officials are tallying up the economic losses of the magnitude 7.1 earthquake that caused widespread damage in the capital, as the number of buildings that may need to be pulled down or need major repairs rose to 500.

 

The death toll in the quake rose to 333, with 194 of those deaths in Mexico City. Authorities pledged a return to normality, but many streets in the capital were still blocked by construction equipment and recovery teams looking to extract the last remaining bodies from the rubble. Mayor Miguel Angel Mancera said 40 to 50 people are still considered missing.

 

The city government announced a plan of reconstruction loans and aid for apartment dwellers who lost their homes or who may lose them as teetering buildings are pulled down.

 

But for city businesses like the downtown restaurant Guapa Papa, the result is already all too clear.

 

Sitting in the entrance of his restaurant Monday, surrounded by caution tape, Antonio Luna said: “This is a bust. It’s already closed due to structural damage to the building.”

 

He had to let go the three dozen employees at the 1950s-themed restaurant and is just trying to salvage whatever furniture and equipment wasn’t damaged.

 

“In the end the company let everyone go because it couldn’t continue having expenses,” Luna said.

 

Mancera said that the city, in alliance with private developers, would handle repairs on buildings that needed touch-ups or minor structural work to be habitable. He offered low-interest loans to apartment owners whose buildings would have to be demolished and rebuilt.

However, it is unclear to what extent the city can force owners to demolish buildings. Some that were damaged in the 1985 are still standing, in part because court challenges can stretch on for years.

 

Moody’s Investors Service said in a report Monday that the Sept. 19 earthquake that caused damage and deaths in the capital and nearby states “has the potential to be one of Mexico’s costliest natural catastrophes.”

 

Alfredo Coutino, Latin America director for Moody’s Analytics, said they were still collecting data on losses, but a preliminary estimate was that the earthquake could knock 0.1 to 0.3 percentage point off growth in Mexico’s gross domestic product in the third and fourth quarters.

 

For the full year, the impact on gross domestic product should be about 0.1 percentage point. “The impact on the year’s growth will be small, particularly considering that the reconstruction work will compensate for some of the total loss in activity during the fourth quarter,” Coutino said.

 

Money is expected to pour into the economy as Mexico City and the federal government tap their disaster funds. As of June, the city’s disaster fund stood at 9.4 billion pesos (more than $500 million), making it slightly larger than the national fund, according to a Moody’s Investors Services report.

 

Of course, the national fund also has to deal with recovery from the even stronger Sept. 7 quake that has been blamed for nearly 100 deaths, mostly in the southern states of Oaxaca and Chiapas.

 

There will be months of work ahead from demolition to repairs and reconstruction.

 

Mexico City Mayor Miguel Angel Mancera said that 500 “red level” buildings would either have to be demolished or receive major structural reinforcement. An additional 1,300 are reparable, and about 10,000 buildings inspected so far were found to be habitable.

At least 38 buildings, including apartments and office buildings, collapsed during the earthquake.

 

Mexico’s education ministry also has 1.8 million pesos (about $100,000) to spend on school repairs. In Mexico City alone, only 676 of the city’s 9,000 schools had been inspected and cleared to resume classes, Education Secretary Aurelio Nuno said Monday.

 

AIR Worldwide, a Boston-based catastrophe modeling consultant, provided a wide range for industry-insured losses, but noted they would be only a small part of the total economic losses. It put the insured losses at between 13 billion pesos ($725 million) and 36.7 billion pesos ($2 billion).

 

A graceful traffic roundabout encircled by restaurants, cafes and shops is now a sprawling expanse of medical tents, piles of food and other relief supplies, and stacks of building materials. While relief work went on outside Monday, men were busily wrapping furniture in foam and plastic inside the Antiguo Arte Europeo store.

 

Stone panels on the building’s facade appeared cracked or were altogether missing. Saleswoman Luisa Zuniga said the owners were waiting for civil defense inspectors to certify there was no structural damage to the building before reopening to the public.

 

Meanwhile, they were moving furniture that could still be sold to their other branches.

 

“Then we’ll see how long it takes to fix everything,” she said. “It is important to get back to work.”

 

Edgar Novoa, a fitness trainer, went back to his job Monday after working as a volunteer following the earthquake. Around midday, he stopped his bicycle at a cleared foundation where a building of several stories had stood near his home.

 

He knelt and prayed while others left flowers and candles at the site.

 

The government has said that nine foreigners, including five from Taiwan, died in the quake. One of the buildings that collapsed in the quake housed a business listed as Asia Jenny Importaciones, SA de CV. A South Korean man was also confirmed dead.

 

A Panamanian woman died, as did one man from Spain and one from Argentina.

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Sponges, Urban Forests and Air Corridors: How Nature Can Cool Cities

As China battles the twin challenges of rapid city growth and extreme weather, it is adopting a new tactic: turning its cities into giant sponges.

Thirty pilot cities in the country are trying to trap and hold more water to deal with such problems as flooding, drought, extreme heat and pollution.

The effort, launched by Chinese President Xi Jinping, relies on a range of innovations, such as green roofs on buildings and more urban wetlands. It is already being hailed as a bold step to solve some of the environmental problems plaguing the world’s most populous country.

“It’s a timely reminder that dealing with urban climate challenges requires a holistic approach,” said Sunandan Tiwari, a sustainable urban development expert at ICLEI (Local Governments for Sustainability), a global network of 1,500 cities, towns and regions.

People and water

Like many other large urban areas, Chinese cities are grappling with both rapid urbanization — more than half of the country’s population lives in urban areas — and extreme weather, such as severe floods, water shortages and heat waves.

Both problems can leave more people at risk,but the sponge city effort, launched in 2015, aims to reduce the threats.

The pilot cities have been charged with finding ways to absorb, store, filter and purify rainwater, retain it within their boundaries, and release it for reuse when needed instead of channeling it away through sewers and tunnels.

The cities, including Beijing, Shenzhen and Shanghai, receive funds and practical help to redesign their urban areas in a water-sensitive way, with the aim of turning 80 percent of China’s urban areas into sponges by 2030.

Flood control and water conservation, among other issues, are at the heart of the ambitious push.

But sponge cities have another benefit that looks set to become a major plus as urban areas in China and around the world get hotter: They can reduce the impact of heat waves, which are more pronounced in built-up areas, where concrete and asphalt trap heat.

Trees and other plants absorb water and then release it through evaporation. That creates a cooling effect, in the same way that sweat evaporating from skin cools people.

“Cooling is largely seen as a co-benefit of sponge cities. But with record temperatures in China and many parts of the world, it is becoming a key element in planning for climate-resilient cities,” said Boping Chen, China director at the Hamburg-based World Future Council, a think tank.

Getting hotter

Shanghai, China’s most populous city with 24 million people, baked under a record high temperature of 40.9 degrees Celsius (105 degrees Fahrenheit) last July, even as southern China was hit by torrential rain and floods.

Efforts to build sponge cities aim to deal with both problems, and improve life for city residents.

“It’s not just about limiting the damage of flooding, it’s also about coping with rising temperatures, improving urban biodiversity, better public health and quality of life,” Tiwari, of ICLEI, told the Thomson Reuters Foundation.

Measures taken in sponge cities include covering buildings with green roofs and facades and creating urban wetlands and trenches to filter runoff water that can be used to replenish aquifers, irrigate gardens and urban farms, flush toilets and clean homes.

The government has allocated each pilot city between 400 million yuan and 600 million yuan ($60 million to $90 million) each year for three consecutive years, and cities are encouraged to raise matching funds through public-private partnerships and other financial ventures, according to a 2017 study in the journal Water.

Lingang, in Shanghai’s Pudong district, has invested 800 million yuan in a 79-square-kilometer (30-square-mile) area it hopes will become China’s largest sponge city — one that experts say could be a model for other cities lacking modern water infrastructure.

Lingang aims to cover rooftops with plants, create wetlands for rainwater storage, and create permeable pavements that store runoff water, allowing it to evaporate to moderate temperatures.

Shanghai also announced last year the construction of 400,000 square meters of rooftop gardens, alongside other measures to green the city.

“Many of the sponge cities have done really well, but it is a long-term task that needs to be done in a systematic way,” said the World Future Council’s Chen.

Forest cities

While China faces formidable financial and logistical challenges to creating sponge cities, Italian architect Stefano Boeri has plans to make “forest cities” in the country.

Boeri, who made headlines when he covered two residential tower blocks in Milan with 800 trees, 4,500 shrubs and 15,000 other plants, has won planning approval to build a forest city in Liuzhou in southern China.

Conceived as a green metropolis, the city will house 30,000 people, and all its buildings will be covered entirely with plants and trees, said Boeri, who declined to give a cost estimate for the project.

In total, Liuzhou’s forest city aims to host 40,000 trees and almost 1 million plants from more than 100 species, planted over buildings to improve air quality, decrease temperatures and contribute to biodiversity, Boeri said.

The city is expected to absorb almost 10,000 tons of carbon dioxide — the equivalent emissions of 2,000 passenger cars driven for a year — and 57 tons of pollutants per year. The greenery will also produce 900 tons of oxygen every year, Boeri said.

He is working with botanists and engineers to create a high-nutrient soil mixture able to retain water while still keeping weight to a minimum.

“Bringing forests into the city is one of the most radical and efficient ways to deal with climate change,” Boeri told the Thomson Reuters Foundation.

“We sometimes joke and say we’re building houses for trees,” he said.

To increase energy self-sufficiency, solar panels on the roofs will collect renewable energy to power the buildings, while geothermal energy — heat and cooling drawn from constant temperatures underground — will power air conditioning, adding to the project’s green appeal.

Boeri also aims to build vertical forests, similar to the one in Milan, in Nanjing, Shanghai and Shenzhen in China and in other parts of the world.

Nature at work

While China’s sponge city program is the most ambitious of its kind, urban planners have embraced nature-based solutions to heat and water worries in other parts of the world, too.

The sponge city initiative takes inspiration from the North American concept of low-impact development, sustainable urban drainage systems in Europe and water-sensitive urban design in Australia and New Zealand, all of which mimic nature’s water cycle.

The southern German city of Stuttgart, prone to high summer temperatures and air pollution, also has been a pioneer of using nature to adapt to climate change.

Officials there published a climate adaptation plan in 2012, but planners have been thinking about the valley city’s microclimate as far back as 1938, according to Hans-Wolf Zirkwitz, head of Stuttgart’s Office for Environmental Protection.

“Even before we knew about climate change, our planning has been optimized with regards to the climate and improving air quality, because of our local climate conditions,” Zirkwitz told the Thomson Reuters Foundation in emailed comments.

City officials, for instance, have created green ventilation corridors to enable fresh air to sweep down from the city’s surrounding hills and building regulations that aim to keep these corridors free from new construction.

Thanks to a combination of mandatory building requirements and subsidies, the city of about 600,000 people also is a European green roof pioneer, with more than 60 percent of its area covered by greenery to absorb pollutants and reduce heat.

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India Unveils $2.5B Plan to Electrify All Households by End of 2018

India’s Prime Minister Narendra Modi on Monday launched a $2.5 billion project to electrify all of the country’s households by the end of 2018.

More than 40 million households – about a quarter of all in the country – are yet to be electrified and about 300 million of India’s 1.3 billion people are still not hooked up to the grid.

The states will need to complete the electrification by December 2018 and the government will identify those eligible for free electricity connections across the country.

“No fee will be charged for electricity connection in households of poor citizens,” Modi said at an event where he launched the project.

The project, which will be mostly funded by the federal government and run by the state-run Rural Electrification Corp. Ltd., also aims to cut use of kerosene, the government said.

The pledge to provide power could face challenges as it remains difficult to provide electricity in remote towns and villages. The government said it would distribute solar power packs with a battery bank to un-electrified households in such areas.

Another challenge will be to fix finances of debt-laden power distribution companies in states that struggle to buy and supply electricity to consumers.

Ashok Khurana, director general of industry body Association of Power Producers, said the government must take steps to improve the financial health of such companies if the new program is to be a success.

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Turkey’s Erdogan Threatens to Cut Off Oil From Iraq’s Kurdish Area Over Referendum

President Tayyip Erdogan warned on Monday that Turkey could cut off the pipeline that carries oil from northern Iraq to the outside world, intensifying pressure on the Kurdish autonomous region over its independence referendum.

Erdogan spoke shortly after Prime Minister Binali Yildirim said Ankara could take punitive measures involving borders and air space against the Kurdistan Regional Government (KRG) over the referendum and would not recognize the outcome.

Voting began on Monday despite strong opposition from Iraq’s central government and neighboring Turkey and Iran – both with significant Kurdish populations – as well as Western warnings the move could aggravate Middle East instability.

Erdogan, grappling with a long-standing Kurdish insurgency in Turkey’s southeast, which borders on northern Iraq, said the “separatist” referendum was unacceptable and economic, trade and security counter-measures would be taken.

He stopped short of saying Turkey had decided to close off the oil flow. Hundreds of thousands of barrels of oil a day come through the pipeline in Turkey from northern Iraq, but he made clear the option was on the table.

“After this, let’s see through which channels the northern Iraqi regional government will send its oil, or where it will sell it,” he said in a speech. “We have the tap. The moment we close the tap, then it’s done.”

Yildirim said Ankara would decide on punitive measures against the KRG after talks with Iraq’s central government.

“Our energy, interior and customs ministries are working on [measures]. We are evaluating steps regarding border gates and air space. We will take these steps quickly,” Yildirim told Turkish broadcasters.

Iraqi soldiers arrived in Turkey on Monday night to join a drill on the Turkish side of the border near the Habur area in the southeast, Turkey’s military said in a statement. Iraq’s defense ministry said the two armies started “major maneuvers” at the border area.

Habur Gate

Local media said Turkey had blocked access to the KRG via the Habur border crossing with Iraq. Ankara’s customs minister denied this, saying Habur remained open but with tight controls on traffic, according to the state-run Anadolu agency.

However, Erdogan later said traffic was only being allowed to cross from the Turkish side of the border into Iraq. Maruf Ari, a 50-year-old truck driver, was one of those who had crossed back into Turkey early on Monday morning. He said a closure of the gate would ruin his livelihood.

“If the border is closed it will harm all of us. I’m doing this job for 20 years. I’m not making a lot of money. Around 1,000 lira ($285) a month. But if the gate is closed, we will go hungry.”

The United States and other Western powers also urged authorities in the KRG to cancel the vote, saying it would distract from the fight against Islamic State.

“We will continue to take determined steps and the Kurdistan Regional Government must take a step back. It is an absolute must,” Erdogan said.

Shares of Turkish Airlines, which has direct flights to northern Iraq, tumbled 6.5 percent, underperforming a 1.78 percent decline in the BIST 100 index. Turkey’s currency, the lira, also weakened.

Turkey took the Kurdish television channel Rudaw off its satellite service TurkSat, a Turkish broadcasting official told Reuters.  

Turkey has long been northern Iraq’s main link to the outside world, but sees the referendum as a grave matter for its own national security. Turkey has the region’s largest Kurdish population and has been fighting a three-decade insurgency in its mainly Kurdish southeast.

Parliament vote

On Saturday, Turkey’s parliament voted to extend by a year a mandate authorising the deployment of troops in Iraq and Syria.

Still, Turkey is unlikely to make rash moves when it comes to sanctions against the KRG, said Nihat Ali Ozcan, a professor of political science and international relations at TOBB University of Economics and Technology.

“Closing the border gate, cancelling international flights and, at the final step, cutting the pipeline can be discussed,” he said. “Military pressure can be used directly or indirectly.”

The Turkish army launched military exercises involving tanks and armored vehicles near the Habur border crossing a week ago and they are expected to continue until at least Sept. 26. Additional units joined the exercises as they entered their second stage.

Turkey’s military said in its statement that the third phase of the drill would be held on Sept. 26, and that Iraqi soldiers who arrived on Monday night would join.

The military has also in recent days carried out daily airstrikes against Kurdistan Workers Party (PKK) targets in northern Iraq, where the group’s commanders are based.

The PKK launched its separatist insurgency in 1984, and more than 40,000 people have been killed since. It is designated a terrorist group by Turkey, the United States and European Union.

In a travel warning, Turkey strongly recommended its citizens in the Iraqi Kurdish provinces of Dohuk, Erbil and Sulaimaniya leave as soon as possible if they are not obliged to stay.

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Brazil to Reinstate Protection for Amazon Reserve

Brazil will reinstate a mining ban in a vast area of the Amazon rainforest, the government announced on Monday, in an about-face that is a victory for environmentalists who feared deforestation.

The Mines and Energy Ministry said in a statement that President Michel Temer’s administration had decided to revoke an August decree abolishing the National Reserve of Copper and Associates (Renca), an area of roughly 17,800 square miles (46,100 square kilometers) or slightly larger than Denmark.

The decision will be published in the Official Gazette on Tuesday, officials said.

The reserve in the northern states of Amapá and Pará was established in 1984 to protect what are thought to be significant deposits of gold, copper, iron ore and other minerals from the perceived threat of foreign miners at the time.

The reserve covers a section of the Amazon, the world’s largest rainforest, the preservation of which is seen as essential to soaking up carbon emissions responsible for global warming.

The government said it would revisit the issue in the future in a wider debate on the issue. “Brazil needs to grow and create jobs, attract mining investment and even tap the economic potential of the region,” the ministry statement said.

The government had argued that lifting the ban would be a boon to the economy and would allow better oversight of the area estimated to have 1,000 people illegally mining there.

Mining and Energy Minister Fernando Coelho Filho and other officials have maintained that the reserve merely applied to mining and that other protections for conservation areas and indigenous land inside Renca would remain.

But environmentalists argued that merely building roads or infrastructure in the area would bring deforestation and threaten biodiversity, with Brazilian supermodel Gisele Bundchen tweeting against the decree.

“If carried out, the cancellation of the decree shows that, no matter how bad, there is no leader absolutely immune to public pressures,” Marcio Astrini, coordinator of public policy for environmental group Greenpeace, said in a statement.

“It is a victory of society over those who want to destroy and sell our forest.”

The government had steadily backtracked in the face of the criticism, legal action and efforts to overturn the decree in Congress. A judge also granted an injunction blocking the decree.

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Iraqi Government Asks Foreign Countries to Stop Oil Trade With Kurdistan

Iraq on Sunday urged foreign countries to stop importing crude directly from its autonomous Kurdistan region and to restrict oil trading to the central government.

The call, published in statement from Prime Minister Haider al-Abadi’s office, came in retaliation for the Kurdistan Regional Government’s plan to hold a referendum on independence on Monday.

The central government’s statement seems to be directed primarily at Turkey, the transit country for all the crude produced in Kurdistan. The crude is taken by pipeline to the Turkish Mediterranean coast for export.

Baghdad “asks the neighboring countries and the countries of the world to deal exclusively with the federal government of Iraq in regards to entry posts and oil,” the statement said.

The Iraqi government has always opposed independent sales of crude by the KRG, and tried on many occasions to block Kurdish oil shipments.

Long-standing disputes over land and oil resources are among the main reasons cited by the KRG to ask for independence.

Iraqi Kurdistan produces around 650,000 barrels per day of crude from its fields, including around 150,000 from the disputed areas of Kirkuk.

The region’s production volumes represent 15 percent of total Iraqi output and around 0.7 percent of global oil production. The KRG aspires to raise production to over 1 million barrels per day by the end of this decade.

Kurdish oil production has been dominated by mid-sized oil companies such as Genel, DNO, Gulf Keystone and Dana Gas. Major oil companies such as Chevron, Exxon Mobil and Rosneft also have projects in Kurdistan but they are mostly at an exploration stage.

However, Rosneft, Russia’s state oil major, has lent over $1 billion to the KRG guaranteed by oil sales and committed a total of $4 billion to various projects in Kurdistan.

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Swiss Voters Reject Raising Women’s Retirement Age

Swiss voters rejected raising women’s retirement age to 65 in a referendum on Sunday on shoring up the wealthy nation’s pension system as a wave of Baby Boomers stops working.

Authorities pushing the first serious reform of the pension system in two decades had warned that old-age benefits were increasingly at risk as life expectancy rises and interest rates remain exceptionally low, cutting investment yields.

But it fell by a margin of 53-47 percent, sending the government back to the drawing board on the thorny social issue.

The package turned down under the Swiss system of direct democracy included making retirement between the ages of 62 and 70 more flexible and raising the standard value-added tax (VAT) rate from 2021 to help finance the stretched pension system.

It sought to secure the level of pensions through 2030 by cutting costs and raising additional revenue.

Minimum pay-out rates would have gradually fallen and workers’ contributions would rise, while public pensions for all new recipients would go up by 70 Swiss francs ($72.25) a month.

The retirement age for women would have gradually risen by a year to 65, the same as for men.

“That is no life,” complained one 49-year-old kiosk cashier, who identified herself only as Angie. “You go straight from work to the graveyard.”

Some critics had complained that the higher retirement age for women and higher VAT rates were unfair, while others opposed expanding public benefits and said the reforms only postponed for a decade rather than solved the system’s financial woes.

Opinion polls had shown the reforms just squeaking by, but support had been waning.

The standard VAT rate would have gone up by 0.3 point from 2021 to 8.3 percent — helping generate 2.1 billion francs a year for pensions by 2030 — but the rejection means the standard VAT rate will now fall to 7.7 percent next year as a levy earmarked for disability insurance ends.

A 2014 OECD survey found Switzerland, where a worker earns over $91,000 on average, spends a relatively low 6.6 percent of economic output on public pensions. Life expectancy at birth was 82.5 years. More than 18 percent of the population was older than 65.

($1 = 0.9690 Swiss francs)

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After German Vote, Europe Can Turn to Patching Euro’s Flaws

Sunday’s national election in Germany will sound the starting gun for a renewed debate on fixing flaws in Europe’s shared currency to prevent future crises.

 

France’s new president Emmanuel Macron has made it clear he is willing to push for change to strengthen the euro and is expected to make proposals in a major speech Tuesday. He is pushing for, among other things, a finance minister for the eurozone to oversee a central fiscal pot of money that could even out recessions in individual members.

 

Even pro-euro policymakers concede their 19-nation currency union contains weaknesses that fed its debt crisis — and leave it exposed to new trouble. But action on fixes has slowed.

 

Macron’s ideas are not new but several of them have faced resistance from Germany, always allergic to the idea of being handed the bill for other members’ troubles. For example, German Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, have pushed back against the idea of EU-wide insurance on bank deposits meant to keep bank troubles from hitting government finances.

 

Now there are signs that after its own elections are out of the way, Germany might be more open to change or at a minimum speeding up steps — like the deposit insurance idea — that have stalled. Polls suggest Merkel will win a fourth term. What’s not clear is which party her center right Christian Democratic Union will form a coalition.

 

“In several ways, the coming 12-18 months represent an exceptional opportunity for European reform,” says Nicolas Veron, senior fellow at the Bruegel think tank in Brussels and at the Peterson Institute for International Economics in Washington. Reasons for that, he said, include:

The two biggest EU countries, France and Germany, will now have new governments with fresh mandates from voters.
Europe’s banks are in better shape and the economy is growing, meaning leaders are not preoccupied with fighting a crisis.
 Anti-euro populists have been turned back at the polls this year in France and the Netherlands, giving pro-EU forces a fresh shot of confidence.
 Memories of the debt crisis that threatened to break up the eurozone at its peak in 2011-2012 may still be vivid enough to overcome complacency. 

Merkel has expressed cautious openness to tweaking the setup of the euro.

“I have made clear that I don’t have anything against the title of a European finance minister per se — we would just have to clear up, and we are not yet that far along in talks with France — what this finance minister could do,” she said in August.

 

“I could imagine an economy and finance minister … so that we achieve a higher degree of harmonization of competitiveness.”

 

The euro, currently worth about $1.20, was created in 1999, and 19 of the 28 EU members use it.

 

European officials concede that the debt crisis, which exploded when Greece revealed in October 2009 that it was bankrupt, exposed serious flaws. Once financial trouble hit, member countries such as Greece, Ireland and Portugal lacked typical crisis safety valves such as letting their national currency devalue, which can help a country’s exports and attract investment. Without their own currencies, this was no longer possible. The countries wound up needing bailouts from the other member countries led by Germany and from the International Monetary Fund.

 

Additionally, the cost of rescuing failing banks threatened to bankrupt entire eurozone governments. And the euro lacks a central fiscal budget that could even out recessions in member countries by investing more in economies in need.

 

German resistance will likely remain strong to the bolder ideas, such as a well-stocked central fiscal pot worth several percentage points of EU gross domestic product. Currently, the EU’s budget is 1 percent of GDP, spent on things like support for farmers and infrastructure to help development in the poorest members.

 

More modest, politically realistic steps could include:

Pushing ahead with EU-wide deposit insurance, to be implemented over a period of years.
Regulations limiting the widespread practice of European banks buying their own governments’ bonds. That would increase pressure on governments to shape up their economies and finances.
 A modest additional pot of money that could be used as targeted stimulus for eurozone countries that fall into serious recessions, with the condition that they implement economic reforms.

EU governments led by Germany, the bloc’s most influential member, have already taken some significant steps since the crisis days. They created a fund that can give bailout loans to states in need. They tightened banking oversight by moving it to the EU level at the European Central Bank, and they took steps to stick bank creditors — not taxpayers — with any losses in case of a rescue.

 

The new system proved its mettle in June, when the ECB pulled the plug on Spain’s troubled Banco Popular, the country’s sixth-largest bank, and then orchestrated a sale to Banco Santander for one euro. Shareholders and junior bondholders took the losses, while taxpayers and depositors were spared. It’s a step away from crisis times when the financial burden of rescuing banks drove Ireland and Spain to seek bailout help.

 

Carsten Brzeski, chief economist at ING Germany, says that reforms like a small central fund and deposit insurance are feasible.

 

“The opportunity in 2018 would be more a natural evolution of the process that has been ongoing now for the past couple of years, rather than being a revolution,” he said.