Britaly? You wish

It’s a fashion of late to compare the UK with Italy. Because yields on their government bonds are at similar levels, commentators have been keen to claim that Britain has became as profligate as the southern pizza, pasta and mafia economy.

But fiscal profligacy is more a reality for the UK than it has been for Italy over the last twenty years.

UK gilt prices dived on the outgoing prime minister’s announcement of large unfunded tax cuts. Drastic U-turns on nearly all the promises, a return to austerity and a record-quick defenestration have stabilised markets but left reputations shredded.

Meanwhile, Italy is waiting for its next finance minister following the election victory last month of Giorgia Meloni’s arch-conservative coalition. Whoever gets the job will be taking control of a government primary budget excluding debt interest payments that has been in surplus for nearly two decades.

This is not the case for the UK, which has recorded a deficit for most of that period. In fact, without interest payments on government debt, Italy has been running a budget surplus similar to that of Germany. It has showed much more frugality than the UK, and of the average of the most industrialised countries.

Today’s UK fiscal similarities would probably be closer with Italy’s fiscal choices in the 1980s, when rapid increases in government spending were not matched by corresponding rises in revenues, resulting in a surge in government debt.

Bar chart of 2020, % of GDP showing Italy has the highest debt interest payment in the OECD

The accumulated government debt still weighs on Italy’s fiscal and economic outlook via the highest payments in the OECD. Coupled with the need for structural reform, Italy’s economy has largely stagnated for the last two decades. This is what is risky about Italy for investors, not recent fiscal profligacy.

Not convinced? Here’s Bert Colijn, senior economist at ING:

The concerns in financial markets about the UK stem from a very accommodative fiscal stance, despite budget deficits already being high and a trade deficit on the back of that,” he said. “This stands in sharp contrast with Italy, which suffers from high legacy debt from the 1980s and 90s, while they have actually delivered primary fiscal surpluses for most of the past two decades.

This means that “Italy has a structural problem of low economic growth and high debt, while the UKs concerns seems mainly related to the very expansionary budget proposals,” said Colijn.

Nicola Nobile, economist at Oxford Economics, agrees. Italy’s problem is “mainly a legacy of the previous accumulated debt as well as a problem stemming from lacklustre growth.”

Even Italians households do not live beyond their means. Italy’s households have one of the lowest debt-to-GDP ratios among all advanced economies, well below that of the UK and even lower that of Germans.

Line chart of Household debt, % of GDP showing Italians have low levels of debt

Like the UK, Italy’s economy is struggling with weak domestic demand. But its businesses are successful exporters running a goods exports surplus for the last decades. The UK is running one of the largest current account deficits among advanced economies adding uncertainties for investors.

In summary, rather too many commentators have preso lucciole per lanterne.

Turkey cuts benchmark interest rate despite rampant inflation

Turkey slashed its benchmark interest rate for the third consecutive month as president Recep Tayyip Erdoğan pushed ahead with a plan to bring down borrowing costs even as the country fights a powerful spell of inflation.

The country’s central bank on Thursday said it was lowering the benchmark one-week repo rate from 12 per cent to 10.5 per cent — a deeper than expected cut — even as Turkey’s official inflation rate exceeded 83 per cent in September.

Turkey’s decision on Thursday starkly contrasts with most other central banks, which have sharply boosted borrowing costs this year as they battle inflation and push back against a surging dollar. The rate cuts highlight Turkey’s approach of pursuing high rates of economic growth even at the cost of price stability.

The country’s real interest rate, an inflation-adjusted measure that is closely watched by investors, is now among the lowest in the world at minus 72 per cent.

Erdoğan, an ideological opponent of high interest rates, has said repeatedly that he wants borrowing costs to drop below 10 per cent in the months ahead.

Speaking earlier this month, he said: “As long as this brother of yours is in this position, interest rates will continue to come down with every passing day, week and month.”

The central bank indicated that it would cut rates one more time before bringing the easing cycle to a halt. 

Erdoğan is seeking to prioritise growth in the run-up to key parliamentary and presidential elections that are scheduled for June 2023. The president believes that low interest rates also play well with his political base, which includes small businesses and construction firms that rely on cheap credit.

Turkish authorities have used a raft of micromanagement tools to limit the damage to the lira. The currency is under pressure due to Turkey’s gaping current account deficit, its large foreign debt burden and a highly dollarised economy, as well as deeply negative real interest rates that deter investors from buying lira-denominated assets.

Those tools include forcing exporters to convert 40 per cent of their revenues into lira and pressuring corporates to limit their purchases of foreign currency. Still, the currency is down around 30 per cent against the dollar this year.

The lira was little changed after Thursday’s decision, at 18.59 to the dollar. 

Haluk Bürümcekçi, an Istanbul-based analyst, said the central bank had once again failed to outline any “concrete policy proposals” to combat inflation.

He said that the central bank would continue to rely on currency interventions and other measures in a bid to steady the lira and limit inflation. “These policies do not seem sustainable, but it seems that the economic management will try to maintain this approach until the elections,” he added.

Enver Erkan, chief economist at Tera Securities in Istanbul, said Turkey was serving as a “case study” for the consequences of unorthodox economic model.

In a note to clients, he said: “So far, the results of the model have been the deterioration of price stability and the worst-performing emerging currency of the year after the Argentinian peso.”

Russian fighter jet released missile near UK spy plane over Black Sea

A Russian fighter plane released a missile near an unarmed British spy plane patrolling international air space over the Black Sea on September 29, UK defence minister Ben Wallace said, in an incident that Russia later blamed on a “technical malfunction”.

Speaking to parliament, Wallace said the UK Rivet Joint electronic surveillance plane was shadowed by two SU-27 aircraft, “which is not unusual” except that this time one of the Russian planes “released a missile in the vicinity of the Rivet Joint, beyond visual range”.

Wallace said he had suspended the patrols and raised the issue with his Russian counterpart Sergei Shoigu, who replied on October 10 that the incident took place in international air space and, following an investigation, that it was due to a malfunction.

The UK patrols have since resumed, except with fighter aircraft escorts, Wallace said, adding that the incident “will not prevent the United Kingdom’s support for Ukraine”.

The incident took place shortly after the mysterious explosion of two Russian gas pipelines in the Baltic Sea.

Liz Truss resigns as UK prime minister

Liz Truss was on Thursday forced to quit as UK prime minister, drawing to a dramatic close 44 days in office that saw her preside over financial turmoil and catastrophic damage to the ruling Conservative party.

Truss was told to quit by senior party figures on Thursday morning, leaving bitterly divided Tory MPs facing the prospect of having to choose a third prime minister in a matter of months.

In a brief statement in Downing Street at 1.35pm, Truss said she had notified King Charles she was standing down as Conservative leader and that a new party leader and prime minister would be chosen next week.

She will go down in history as Britain’s shortest-serving prime minister, her government having collapsed in the wake of its failed “mini” Budget last month, which contained £45bn of unfunded tax cuts and triggered turmoil in the sterling and gilt markets.

Truss said she had been elected Tory leader to deliver a “low tax, high growth” economy, taking advantage of the “freedoms of Brexit”. But she conceded defeat: “Given the situation, I cannot deliver the mandate on which I was elected by the Conservative party.”

Rishi Sunak, former chancellor, and Penny Mordaunt, leader of the House of Commons, are the two frontrunners to replace her, although several other candidates could enter the fray.

Suella Braverman, former home secretary, and Jeremy Hunt, current chancellor, will also be encouraged by supporters to stand.

Truss’s statement throws into further confusion the political and economic situation in Britain.

Hunt is scheduled to deliver a plan to fill a £40bn hole in Britain’s public accounts on October 31, but a new prime minister is expected to be in place by that date and will want to put their stamp on it.

Sir Graham Brady, chair of the 1922 committee of backbench Tory MPs, met Truss on Thursday morning amid speculation from senior Conservatives that her premiership was drawing to a close.

Government insiders confirmed that Brady, who is responsible for overseeing Tory leadership contests, met Truss in Downing Street at the prime minister’s request.

The meeting was unscheduled and Truss’s allies said she had requested the meeting with the “shop steward” of Tory MPs to “take the temperature” of the party after days of chaos.

Jake Berry, Tory chair, and Thérèse Coffey, deputy prime minister, were also seen entering Downing Street, adding to a sense that the crisis building around Truss’s premiership was coming to a head.

At least a dozen Tory MPs had called on Truss to resign, including Miriam Cates, who is a member of the 1922 committee executive. “It seems untenable,” she said. “Yes, I do think it’s time for the prime minister to go.”

Truss’s premiership, which began on September 6, has seen her economic strategy crash and burn, the sacking of her chancellor Kwasi Kwarteng and the forced resignation on Wednesday of home secretary Suella Braverman.

After Truss’s resignation, gilts held on to recent gains, having previously rallied on Hunt’s cancellation of her tax-cutting plans. The 10-year yield was 0.09 percentage points lower at 3.78 per cent, reflecting a rise in prices, while sterling also remained higher, trading up 0.5 per cent on the day against the dollar at $1.127.

Additional reporting by Tommy Stubbington

Booker winner Shehan Karunatilaka receives a politically charged reception

Shehan Karunatilaka © Tom Jamieson for FT Weekend

It is hours since he won the Booker Prize and back home in Sri Lanka Shehan Karunatilaka is already the centre of a media frenzy. News of the award for his novel The Seven Moons of Maali Almeida has received a thunderous reception. Messages of congratulations flooded across Twitter, including from the president, the leader of the opposition — and Namal Rajapaksa, son of the country’s scandal-ridden former prime minister and head of state who was forced out of office this year amid widespread civil disturbance and economic turmoil.

As we sit down to talk in the upper reaches of one of those functional office blocks — now rebranded as “creative hubs” — that dot east London, Karunatilaka explains how the intervention of one of the Rajapaksas has set off a wave of protest, with people telling the former ruling family to stop trying to claim the novelist as one of their own. “The Twitter mob piled on, going ‘hands off!’ He’s talking about you in this book, you know’,” he says with a touch of glee, gesticulating with his hands, one of which bears black painted fingernails (all the better for catching the eye when playing bass guitar, he explains).

The politically charged reception to Karunatilaka’s Booker win is inevitable for a novel that seeks to tell the story of Sri Lanka’s violent recent past where many bitter feuds remain unresolved. Set in 1989, a particular grim point in the country’s civil war, The Seven Moons of Maali Almeida tells the story of Maali Almeida — war photographer, gambler and closeted gay man — who has fallen foul of the authorities and ends up dead, his body dismembered. The story is told from the afterlife — “a tax office [where] everyone wants a rebate” — where Maali finds himself with other dead people bearing their fatal wounds, and a challenge.

He has seven days (or, moons) in which to investigate his own death and somehow contact his living friends and guide them towards a cache of shocking photographs that will do “for Lanka’s war what naked napalm girl did for Vietnam”.

The novel blends various genres — from classic crime to magical realism and, in the words of the judges, “afterlife noir” — as readers follow Maali on his quest. Along the way they have guides to the many complexities and domestic and international actors in the vicious conflict that gripped the island for close to four decades.

Karunatilaka says that the decision to tell the story from the afterlife reflected a national conundrum that has existed since the civil war ended — following a final chapter of heightened brutality — in 2009. Tens of thousands had been killed, but there was no real agreement over how many or who was responsible. “So I thought, what if we allow Sri Lanka’s dead to speak? What would they say?” he says. He opted to go back in time “because talking about contemporary politics is not the safest thing to do in Sri Lanka at the moment”.

Moving to the realm of ghosts also brought an added twist. “Whenever there have been tragedies, massacres, there are ghost stories,” he says. Anthropologists have documented that when villages are destroyed and youth disappear, there are often lots of cases of apparitions apparently being sighted in forests.

Maali’s story has certainly had many lives. Originally Karunatilaka set out to write a “slasher novel” drawing on the story of a busload of aid workers who were murdered in the closing stages of the civil war. He completed a draft, called “Devil’s Dance”, a horror story of the passengers dying off one by one in the presence of a spirit fellow traveller. It was, he says, “weird stuff” that he ended up binning — a “heartbreaking” moment — as he felt it was overloaded with too many ideas. After a break spent working on other projects he returned to it and salvaged one character: the ghost on the bus, the character with “the most interesting back story”, the dead journalist Maali Almeida.

The fictional character also has roots in real world victims of the mayhem of 1989. In particular, Karunatilaka singles out Richard de Zoysa, an activist and writer who was abducted and killed and whose body was dumped in a lake, like Maali’s.

Maali’s first outing between book covers was in Chats with the Dead, a novel published in India — often the first destination for aspiring Sri Lankan writers. There it was spotted by Karunatilaka’s UK publishers, the small independent Sort of Books, who set about reworking the book into what is now The Seven Moons of Maali Almeida.

Karunatilaka is unstinting in his praise for his editor Natania Jansz, who was “so valuable because she made sure all the instruments weren’t playing at once and she really looked at pacing”. Like all good editors, she was also “quite, quite brutal” and quick to tell him that scenes he enjoyed didn’t add much — and had to go. For Karunatilaka the result was a busy pandemic lockdown ending in a novel that is “a lot smoother”.

Given this back story, it’s tempting to speculate whether there will be further iterations of Maali’s adventures. No chance, says Karunatilaka: “I don’t want to write this book again.” Besides, he has form in changing subject and genre. His celebrated debut Chinaman: The Legend of Pradeep Mathew (2010) brought together the worlds of cricket and arrack. When this led to his being acclaimed as an authority on cricket — “which I’m not” — he decided to scout out different terrain in the realm of ghosts. Now his eye is set on a new horizon, a book that he started this year while on a writers’ residency in Iowa. He’s reluctant to divulge too much other than to say that while it is about Sri Lanka it will be “a little less heavy, a little political”.

He had hoped to finish a draft by the end of the year. The Booker win — the second for a Sri Lankan author following Michael Ondaatje’s 1992 award for The English Patient — and all its attendant media attention has put paid to that. Karunatilaka says that he also “suspects” that he might also take a break from advertising copywriting, a job that has taken him around the world and through which he met his wife.

Prizes also often bring much talk about the necessity of literature and its ability to inform change. Karunatilaka strikes a note of caution — “I’m a bit jaded and cynical” — but says that he does believe that literature, the business of telling stories and listening to others, can help change things.

The situation in Sri Lanka remains volatile. The civil war saw Karunatilaka, who is now 46, spend part of his schooling and university years in New Zealand where his family sought refuge. “It’s happening again today,” he reflects. “Everyone is trying to flee, looking abroad for opportunities.”

He would “like to see the silos between the three languages” — Sinhalese, Tamil and English — broken down, with more translations between them reaching wider audiences. He is, however, aware of the possible risks of crossing cultural lines, saying he would “think twice or thrice” about writing about religious groups. That said, he challenges the assumption that in order to avoid “cultural appropriation” writers should restrict themselves to their own direct experience. For him this would mean he could only write “Sinhalese, Buddhist male stories” which would make for a boring writer’s life.

“I would like to write from a Tamil woman’s point of view. I mean, that would be calling in a lot of grief if I get it wrong. But I think that’s the key to it. If you do it with respect and you do your research,” he says. With The Seven Moonsof Maali Almeida and its gay hero, he made sure gay friends read it and gave their opinion.

“Is it appropriating different voices or is it imagining or seeing the world through different eyes?,” he says. “That’s what novelists are supposed to do.”

Frederick Studemann is the FT’s literary editor

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Starmer calls Tory upheaval ‘new chaotic low’ and pushes for election

Sir Keir Starmer on Thursday called for a general election as he confirmed that a Labour government would repeal legislation that makes it harder for workers to take strike action.

Starmer demanded an election, speaking at the Trades Union Congress in Brighton, in response to deepening chaos at Westminster as prime minister Liz Truss faced fresh calls to resign from within the Tory party.

The Labour leader said he would “tear up” the 2016 Trade Union Act under which unions are required to secure a 50 per cent turnout in a vote of a company’s workers for a strike vote to be valid.

Starmer also said he would reverse any legislation pushed through by the current government. “If they bring forward further anti-union laws we will oppose and we will repeal,” Starmer said to cheers from union delegates.

Truss has today published draft changes to the law that would force transport unions to maintain “minimum service levels” during industrial action to keep trains or buses running.

The Labour leader’s pledges carry political risks as the widespread disruption to public services this summer due to strikes across the rail network has split public opinion.

Polling data suggested that Britons have been divided over whether to support striking rail workers, with older people — who are more likely to vote — more critical of the industrial action.

In recent months Starmer has been accused of sitting on the fence over his position on the strikes. In June, he banned frontbenchers from attending RMT picket lines and later sacked Sam Tarry, a junior transport spokesperson, for doing so.

Despite this, the ruling Conservative party has repeatedly attacked Labour for receiving financial donations from most of the unions, though not the RMT. On Wednesday, Truss accused Starmer of refusing to “condemn” striking workers.

“We are bringing forward policies that will make sure our railways are protected and that people going to work are protected. He backs the strikers; we back the strivers,” she said during prime minister’s questions in the House of Commons.

Labour said the policy of ripping up the 2016 Trade Union Act was first announced last year in a party green paper.

Starmer hit back that Truss was “out of touch” with Britain’s economic realities. He said the prime minister believed in “discredited” ideas that making rich people richer would lead to greater economic prosperity to the benefit of everyone.

“She thinks workers’ rights and collective bargaining are a barrier to growth,” he said. “Our real problem is that we create too many jobs that are low-paid and insecure.”

Meanwhile, Starmer demanded that a general election be called urgently, arguing that “Britain deserves better” than the current political upheaval in Westminster.

The Labour leader described the turbulence in the House of Commons on Wednesday, referring to reports of MPs being “manhandled” during a contentious vote on fracking hours after home secretary Suella Braverman quit office, as “a new chaotic low”.

Starmer added that the Tory party was focusing on “their own pathetic squabbles” rather than the issues facing the general public. “Britain cannot afford the chaos of the Conservatives any more. We need a general election now,” he said. “All the failures of the last 12 years have now come to a boil.”

Blackstone profits hit by rising rates and stock market sell-off

Blackstone Group’s profits declined as tightening financial conditions and plunging stock market valuations caused the world’s largest alternative asset manager to dramatically slow its sale of investments.

In third-quarter results released on Thursday, Blackstone sold just $15bn in assets, half the amount the company sold in the previous quarter, cutting into the earnings it generated from selling investments for a profit.

As a result of the slowing asset sales, Blackstone’s distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — fell 16 per cent from this time a year ago to $1.4bn, or $1.06 a share. The results, however, beat analyst forecasts polled by Bloomberg.

The New York-based group also marked down the value of its sprawling investment portfolio as it adjusts valuations to reflect a sharp decline in global equity prices because of rising interest rates and a slowing economy.

Blackstone marked down the value of its flagship corporate private equity and real estate funds, cutting into the overall value of its unsold investments. Its private equity funds shed 0.3 per cent while its real estate and “secondaries” — funds designed to buy interests in existing private capital funds — declined 0.6 per cent and 2.3 per cent, respectively.

Blackstone’s financial results were buoyed by rising management fees because of continued inflows of new assets to many of its largest strategies, including private equity as well as large credit and real estate funds it has created for wealthy investors.

Fee-related earnings, a proxy for the cash Blackstone earns from base management fees, rose 51 per cent in the quarter to a record $1.2bn, surpassing analyst estimates polled by Bloomberg.

Blackstone reported a $2.3mn net profit, which accounted for unrealised investment losses attributable to its stockholders stemming from the markdowns.

“We protected client capital during a period of extreme market turbulence as we have through many challenging cycles in our history,” said Stephen Schwarzman, chief executive of Blackstone, in a press release.

A total of $45bn in new investor money flowed into the New York-based investment group, putting its assets under management at a record $951bn, a 30 per cent increase from this time a year ago.

Earlier in October, Blackstone struck a strategic partnership with Bermuda-based insurer Resolution Life to manage up to $60bn in credit, real estate and asset-backed assets on behalf of its life insurance and annuity policyholders.

The biggest source of Blackstone’s asset growth in recent years has come from wealthy investors who have piled into private real estate and credit-oriented investment funds built by the company to generate yield.

Those retail investor flows continued for Blackstone as it drew more than $30bn in net new money from wealthy investors who bought into the group’s perpetual funds — funds without a maturity or end date.

However, existing investors redeemed more than $10bn from those funds during the quarter, a record figure that in recent quarters has alarmed analysts.

Blackstone is in the process of raising money for a new flagship private equity fund, which the company expects will exceed $30bn in commitments. During the quarter, it raised $14.5bn in new private equity fund commitments.

Though money continues to pour into Blackstone, investors are closely scrutinising whether the flood of money will slow.

Blackstone shares have fallen more than 30 per cent this year amid concerns that falling equity markets will slow new investor commitments to its funds.

BoE deputy casts doubt on market interest rate expectations

The Bank of England’s deputy governor for monetary policy has cast doubt on financial market projections that UK interest rates need to rise to more than 5 per cent to bring down inflation.

Speaking to an audience at Imperial College, London, on Thursday Ben Broadbent revealed tentative internal BoE modelling that suggested interest rates needed to rise from the current 2.25 per cent rate by much less than predicted by markets.

His words rapidly lowered financial market expectations of the peak interest rate by 0.2 percentage points. That will be helpful for the government, since it will help reduce the projected costs of servicing public debt in the coming medium term fiscal plan, due to be announced on October 31.

Lower market rates would also bring down mortgage costs, now averaging more than 6 per cent for a two-year fixed deal, according to research this week from Moneyfacts, a financial information company.

Broadbent stressed that the UK had to accept it was poorer following the sharp increase in energy prices over the past year and that efforts to offset this — whether through government support, battles for higher wages or price increases to protect profit margins — would all be inflationary and force the BoE to raise rates further.

But he expressed some doubt over the futures market, which predicted the central bank would need to raise the official interest rate to a peak of 5.25 per cent by next May. After he spoke this fell to 5 per cent.

“Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen,” Broadbent said.

The deputy governor’s remarks are unusual because the central bank rarely comments directly on whether financial markets are correctly interpreting its internal thinking.

In this speech, however, Broadbent went even further and published internal BoE modelling of the “optimal” interest rate response to reduce inflation from 10.1 per cent in September to its 2 per cent target. It looked at the rate rises required to offset the inflationary effects of the government’s energy price guarantee and sterling’s recent depreciation.

The calculations showed that since the BoE’s August forecasts, these government measures — excluding the unfunded tax cuts in the “mini” Budget — would require additional interest rate rises peaking at 0.75 percentage points.

Broadbent compared that increase with the market’s expected increase of 2.25 percentage points.

While acknowledging everyone should take this comparison with a “heavy dose of salt”, and that the market had also moved in response to inflationary wage and price data, the deputy governor used the example to question whether market predictions were too high.

“The graph does serve to illustrate quite how significant the moves in markets have been in the past couple of months or so,” he said, adding that raising rates to over 5 per cent would imply a large contraction in the UK economy. That would be more than the BoE thinks is necessary to bring inflation down to its 2 per cent target.

However, Broadbent stressed that no one in the UK could avoid the pain of higher oil and, particularly, gas prices. “Import prices have risen significantly compared with the price of UK output. This has unavoidably depressed real incomes,” he said.

Finally, he warned that if people and companies tried to resist the consequences of soaring energy costs, no one would be better off because inflation would stay high for longer and interest rates would have to rise further.

“It’s understandable that employees and firms should want compensation for these losses, by raising wages and domestic prices,” Broadbent said. “Unfortunately, and at least collectively, these efforts will not make us better off. The effect is to raise domestic inflation with no ultimate impact on average real incomes.”

Additional reporting by Tommy Stubbington

Germany challenges ‘political’ gas cap plan ahead of EU energy summit

Germany’s chancellor has challenged EU proposals for a ceiling on gas prices before a summit in Brussels during which member states are expected to clash over how to curb punishing increases in energy costs.

Olaf Scholz told the Bundestag that a “politically set price cap” on gas would risk diverting gas to other countries that offer a higher price, undermining European efforts to shore up supplies as Russia cuts exports to the bloc following the invasion of Ukraine.

The chancellor said Berlin was looking closely at the commission’s proposed emergency price cap mechanism, but he said it was critical that the EU co-operates closely with allies on gas deals. He appealed to big gas producers, including the US, to help ensure energy in Europe does not become unaffordable.

Scholz was speaking hours ahead of a two-day summit where leaders of the EU’s 27 member states will wrestle with a host of proposals aimed at alleviating an energy crunch that threatens to drive Europe into recession this winter.

While Scholz has changed position on ideas that his government opposed only a few months ago, such as greater co-operation on joint purchases of gas, the gas price cap is still a red line for Berlin.

Germany is not alone in being deeply sceptical on price caps. Countries such as the Netherlands and Hungary as well as Scandinavian and Baltic nations are also wary of the move.

However, member states, including France, Italy, Belgium and Spain, have been lobbying for interventions to curb energy prices for months, but their solutions differ. While Spain, Portugal and France have argued in favour of a ceiling on the price of gas used to generate electricity, other states are wary of the idea given the risk that it ends up subsiding electricity exported from the block and incentivising consumption.

The European Commission this week instead proposed an emergency price cap mechanism, which would limit surges in prices on the Dutch Title Transfer Facility, the EU’s main gas price benchmark. Many of the details of how this would work, including pricing levels, still need to be worked out.

Officials backing the idea think they could garner sufficient votes in the European Council to push it on to the legislative agenda, but even if it gains momentum at the summit it is unlikely to become law until late this year.

“It is mainly a question for Scholz, if he will agree to have this gas cap included,” said a senior EU diplomat who was confident that proponents of the emergency price camp mechanism have enough support to push the measure through. “Legislation will be adopted . . . there is no possibility for Germany to veto,” the person added. “The mathematics give us a lot of pleasure.”

A senior German official said Berlin was open to further discussions, but that the current proposals were “premature” and could not be endorsed by his government as they stood. “We are ready to talk more about them, but the devil is in the details . . . security of supply is decisive.”

Leaders are also set to debate a push for fresh common borrowing to help fund investments aimed at strengthening the EU’s energy independence, particularly in renewable energy, but also gas interconnectors and new liquefied natural gas terminals.

Many northern capitals, including Germany, argue that the priority should be tapping existing EU funding first.

However, this week Ursula von der Leyen, the commission president, this week called for a “boost” to the firepower of the REPowerEU programme, which aims to wean the bloc off Russian energy, saying this was needed to “give every member state the same opportunity to prepare for the future”.

Brussels is examining the need for fresh EU funding to be ploughed into energy investments, with a particular emphasis on cross-border infrastructure, but it has yet to make any formal proposals on the topic.

America must be serious about cross-border challenges

The writer is chief executive of the New America think-tank and an FT contributing editor

The Biden administration released its National Security Strategy last week, after six months of delay due to the outbreak of the war in Ukraine and consequent revisions. The document is thoughtful and clear.

Most important, the new strategy elevates global threats like climate change and pandemics to an equal footing with geopolitical competition and conflict with China, Russia and other autocracies. The US faces “two strategic challenges”, it says. The first is a competition “between the major powers to shape what comes next” after the end of the post-cold war era. The second is a cluster of “shared challenges that cross borders”, including “climate change, food insecurity, communicable diseases, terrorism, energy shortages, or inflation”. 

The language is unequivocal and historic. “These shared challenges are not marginal issues that are secondary to geopolitics. They are at the very core of national and international security and must be treated as such.”

Meeting both sets of threats is a tall but necessary order. Pushing back naked interstate aggression, intended to conquer and annex territory, while avoiding nuclear war is an urgent and enormous task. The Biden administration is doing a remarkable job thus far. True to its strategy of never going it alone, it is also working intensively with allies and strategic partners around the world, many of whom it has marshalled into a range of new economic, military, and political groupings.

Yet, if we accept that “transnational challenges” are every bit as important as matters of war and peace, then climate change, global health, food security, and other issues should be getting equal time, funding and attention alongside traditional geopolitical threats. The proposed implementation of the Biden strategy should focus on ensuring that government departments responsible for tackling these challenges have funding, authority and prestige comparable to the Pentagon’s.

In the State Department, the bureaus that address issues such as climate change and food security should be given budgets comparable to the regional bureaus that control the embassies around the world. Moreover, given that the strategy rightly recognises that transnational challenges require intensive government co-operation to solve, we should see a significant upgrading of the US capacity to engage with international and regional organisations. The current State Department Bureau of International Organization Affairs has long been a backwater; that should change. We should also expect as much attention to be paid to working with other nations on climate and other global issues as on security issues.

Finally, many of these transnational challenges are deeply rooted in underdevelopment around the world. Biden writes movingly in his opening letter: “If parents cannot feed their children, nothing else matters.” USAID should therefore be transformed from an agency intended to distribute foreign aid into a full government department for development, on a par with State and the Department of Defense.

Instead, the administration’s implementation plan focuses on three “lines of effort”. These include investing in the underlying sources of US power and influence at home, including a transition to green energy and modernising and strengthening the military. The final set of efforts does focus on global co-operation “to solve shared challenges”, but only indirectly. The immediate goal is to “build the strongest possible coalition of nations”, presumably led by the US, that can then undertake these tasks.

Similarly, when the NSS outlines “what success looks like”, it envisages extensive diplomatic coalition building. Yet when we look at what this deepened co-operation is actually supposed to achieve, the height of the administration’s ambition is to have “laid the foundation to increase co-operation on strategic challenges” and to make “meaningful progress on issues like climate change, global health, and food security”. These are the kind of vague phrases that diplomats use to avoid committing to anything specific and measurable.

It is hard to avoid the conclusion that the administration’s focus on shared transnational challenges is less about meeting and defeating them than about leading the global response to them. Why? If different groups of nations acting without American leadership and participation could meaningfully reduce carbon emissions or increase food security, shouldn’t we applaud? Isn’t it the result that matters?

Successfully addressing shared global challenges requires a planetary perspective, one focused on all human beings, regardless of the countries they live in, and their relationships to one another and to the planet. The Biden administration understands that keeping Americans safe in the 21st century requires a critical doctrinal shift. But a shift in money, mindset and metrics must follow suit.