🌌 Reshaped #10

EU Coronabonds, Isolation as a Luxury (IaaL), neoliberal solutionism, Big Tech reputation and much more.

Apr 18, 2020

Welcome to a new issue of Reshaped, a newsletter for those who do not want to miss a thing about the huge transformations of our time.

In this issue, I will dive into the hot topic in Europe right now: Eurobonds. I am curious to read your comments on the concept of solutionism as framed by Evgeny Morozov, which you can find in the Alternative perspective section. It is an inspiring read, especially for those working in startups or innovation-related functions.

Starting from the next issue, I will make some changes to the structure of this newsletter — stay tuned!

In the meanwhile, please share Reshaped with potentially interested people in your network!

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News

Business and Finance

💻 Verizon has reached an agreement to acquire BlueJeans Network for less than $500 million. BlueJeans is one of Zoom’s main competitors in the business segment, with more than 15,000 customers worldwide (The Verge). Thanks to Verizon’s network, the company can take full advantage of the positive trend in its sector to gain market shares and exploit the privacy issues that are troubling Zoom.

🗽 After an internal investigation, the Pentagon has found no evidence of pressures from the White House in awarding the cloud-computing JEDI contract to Microsoft, which means Amazon has few chances to win the trial (The Wall Street Journal).

💵 Donald Trump wants the US to stop contributing to the World Health Organization, accused of being close to the Chinese government (The New York Times). The US is the biggest financier of the WHO, followed by the Bill & Melinda Gates Foundation (Financial Times).

💳 Payments unicorn Stripe has raised $600 million in an extension of its Series G round (closed on $250 million) and is now valued at $36 billion (Business Insider). The company has strongly benefited from the increase in digital payments during the lockdown and is now expected to go public within 2021.

💱 The Libra Association has updated its original plan: instead of releasing a global stablecoin, Libra will release several ones backed by a specific currency. This is a relevant concession to regulators, who feared Libra could become a privately-controlled currency, especially in countries with high inflation rates (TechCrunch).

💰 The British Competition and Markets Authority approved a $575 million cash injection from Amazon to Deliveroo, which would have collapsed otherwise (The Telegraph).

📦 Amazon will suspend its operations in France for some days after a court ruled that the company should limit its deliveries to essential goods (The New York Times). Amazon is under scrutiny both in Europe and the US due to the supposed lack of adequate measures to keep workplaces safe for employees. In the end, the company might not emerge from the pandemic as dominant as initially thought (The American Prospect). However, Amazon is formidably expanding its financial services business (see picture below), which could turn out to be a vital strategy to keep operations alive in a recession, especially in low-income areas (CB Insights).

Science and Technology

🚀 NASA announced that two astronauts will be sent to the International Space Station on May 27th on a Space X Crew Dragon spacecraft, the first mission to launch from American soil since 2011 (Space).

🌌 Neutrinos might explain why, after the Big Band, matter prevailed over antimatter, overcoming initial balance between the two (Nature).

☁️ The decrease in pollution derived from COVID-19 shutdowns might help to understand how aerosols impact climate change (Scientific American).

💶 Is it really time for Eurobonds?

In the EU, the debate about the creation of Eurobonds is back stronger than ever. Put it simply, Eurobonds correspond to a joint issuance of government bonds guaranteed by all EU member states. In other words, it is a form of debt mutualization. In an article published in The Washington Post, Bloomberg’s reporter John Ainger defines Eurobonds as

a shared debt instrument to finance borrowing, where the money can be directed to the countries that need it most.

Southern European countries like Spain and Italy, both heavily hit by the coronavirus, would benefit from lower interest rates on public debt, thanks to the guarantee of other EU countries with lower credit risk. Of course, those countries would have to pay a higher interest rate on their borrowing, due to the aggregated credit risk of all the EU members. This is one of the main reasons why countries like Germany, Austria, Finland, Estonia, and the Netherlands are contrary to that measure. Germany even has a negative interest rate on government bonds (see the graph below from Bloomberg), meaning that it gets paid to borrow. In a recent article, economists Andrea Boitani and Roberto Tamborini argue that the negative yield is basically a tax on savers — a sort of monopoly rent that Eurobonds would contribute to abolishing.

French President Emmanuel Macron, interviewed by the Financial Times, said that

we are at a moment of truth, which is to decide whether the European Union is a political project or just a market project.

To me, this means that the difference in government bond yields should not be taken into account in a moment of emergency caused by an asymmetric, exogenous shock. The principle of solidarity that Macron invokes would easily include a yield convergence. Not to mention that EU countries already share de facto this risk: to save the Eurozone, the European Commission and the European Central Bank would do “whatever it takes” to avoid the default of a member state. Let me also notice that the diffused opinion that Southern countries are spendthrift while Northern countries are virtuous is more than a simplification.

However, Eurobonds have an inner complexity: they do not exist yet. This means that EU leaders would require time review treaties and to design and implement a proper debt mutualization plan. There are at least five critical questions to answer in order to issue Eurobonds.

Which institution will be in charge of issuing the Eurobonds? In their original form (which dates back to the 1990s, at least) an independent EU agency would have taken care of this. More realistically, the ECB would in charge of the issuance during the coronavirus pandemic while providing the guarantee for each member state.
Which forms of fiscal integration and centralization of the economic policies will be applied to overcome risks and fears of moral hazard by European countries? Proponent countries (Belgium, Cyprus, France, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Portugal, Slovakia, Slovenia, and Spain) should accept EU interference in the way money is allocated to face the emergency.
How much debt would be issued? Apparently, as reported by John Ainger in the abovementioned article, the amount issued would be equal to €1.5 trillion. Ideally, the amount would not exceed 20% of the national GDP.
How will the money raised be redistributed? Typical indicators are population and GDP. Andrea Boitani and Roberto Tamborini have proposed to redistribute money using as a parameter the adult population of each country — in turn, each European adult would contribute with a €50 annual “citizen contribution”.
Which yield will the Eurobonds pay and in what time horizon? It mainly depends on which factor will prevail: the fear of a future default of some members of the Eurozone or the optimism generated by the participation of more virtuous countries. However, some think that there would be no negative effect on the yield of Northern countries: in a recent blog post, economist Matthias Weber explains why the effect could even be positive.

While negotiations continue, the most realistic option seems to be the activation of the European Stability Mechanism (ESM) with lower conditionality — especially because it is already designed and would be implemented faster. However, the ESM presents three main drawbacks, as illustrated by economists Grégory Claeys and Guntram B. Wolff in a recent article published on Bruegel: small firepower of the mechanism, scarce or negative effect on yields, and strong national resistance.

The first problem would be the relatively small firepower of the ESM (€410 billion currently, and the Eurogroup proposal mentions an even smaller 2% of GDP, around €240 billion, dedicated to the PCS for the moment). This would drastically limit its capacity to reduce the debt service of euro-area countries on a significant scale. The second issue is that resorting to the ESM might not even reduce the funding costs of many countries. At current yields, and taking into account the minimum fees charged by the ESM, an ESM loan could be financially beneficial only for Greece (given its yield stands at 2.4% at the time of writing), Cyprus (1.6%), Italy (1.5%) and, maybe, Portugal (0.9%) and Spain (0.7%). The third, and probably the most important problem, is that the mere mention of the ESM, of an MoU or of conditionality (which are both requested in an ECCL and thus probably in a PCS credit line) are politically toxic in most of these countries.

In a recent article on VoxEU, Economist Daniel Gros argues that neither ESM or Eurobonds will be helpful since they would dangerously increase the amount of national debt. Alternatively, countries hit the hardest should benefit from an exemption from contributions to the EU for the period 2012-2027. Whatever the measure adopted, Emmanuel Macron is right: this crisis will show if the EU is a political endeavor or a market project. The market without a strong political commitment could not survive the pandemic, though.

🏠 Isolation as a Luxury (IaaL)

The chart below is a brilliant representation by Visual Capitalist of the risk of infection associated with some of the most relevant jobs in the US, according to the US Department of Labor. The graph links together four factors: the type of labor (healthcare-related or not), the annual pay, the number of people currently in occupation, and especially the risk to be infected. The latter is calculated as a function of physical proximity, exposure to disease and infections, and contact with others.

It is easy to imagine why healthcare workers fill the right side of the chart. They are the category exposed the most to infections and, despite the lockdown, their workload has heavily increased during the last weeks. So let us concentrate on the blue bubbles: an incredibly large amount of non-healthcare workers earn far less than $50,000 per year and share an occupational risk ranging between 20 and 40. Most of them work in retail and offices — thus at risk of being laid off. Some others have a risk score between 50 and 70 and work for essential services (grocery, transportation, and security). Finally, we could identify a less homogeneous cluster composed of all those professionals working from home with very low risk, ranging from accounting staff to CEOs.

Is there a relationship between class and the risk of infection? According to Olga Khazan, staff writer at The Atlantic and the author of Weird: The Power of Being an Outsider in an Insider World, this relationship exists. The coronavirus has brought into evidence an asymmetry between white-collars, who can work from home without relevant infection risks, and blue-collars, who are either forced to work without adequate protections or laid off. In that sense, self-isolation can be seen as a luxury for a category of workers that reality has not awarded as essential. On the other hand, essential workers find it hard to receive even the most basic safeguards, like face masks and other hygienic measures.

Put this way, the pandemic could end up bolstering a schism already in place between those who can work from home and those two cannot. Looking at how other pandemics have influenced labor dynamics in the past, Olga Khazan admits there is a chance that working conditions will improve for blue-collar workers: being essential, they will be rewarded with better salaries and other benefits that will be hard to remove after the end of the emergency period. However, in the short term, the risk is an uncontrolled rise of populism.

This could take place in two opposite ways. On one hand, low-income workers may adhere to left-populist movements, which see the rich (that is not the middle class) as the threat to social justice and the public good. On the other, they may be attracted by conservative populism, which counterposes a coalition of the poor and the rich, white Americans against foreigners — with a special focus on the Chinese minority. While the former has no home at the moment, after the end of Bernie Sander’s race for the nomination as Democratic candidate to the White House, the latter is perfectly represented by President Donald Trump.

Olga Khazan believes that two main factors will determine if this contrast will generate a true schism in the near future: the elections in November and the death toll for service workers. Much can be done by businesses to prevent the latter from being a healthcare disaster through adequate safety measures. To some extent, white-collars still have the chance to preserve their luxury position if only they share some of it with the weakest classes.

Alternative Perspectives

💡 On The Guardian, Evgeny Morozov analyzes how, over the last decades, solutionism has emerged as the perfect companion to neoliberalism: while the latter weakens society through privatization and a smaller role for governments, the former fills the gap with digital remedies of various kind that eventually end up keeping neoliberalism alive.

If neoliberalism is a proactive ideology, solutionism is a reactive one: it disarms, disables and discards any political alternatives. Neoliberalism shrinks public budgets; solutionism shrinks public imagination. The solutionist mandate is to convince the public that the only legitimate use of digital technologies is to disrupt and revolutionise everything but the central institution of modern life – the market.

In such a way, solutionism makes people innovate within boundaries that prevent any kind of broad social progress. Preventive neoliberalism sets the stage (and decides who will be rewarded), while reactive solutionism solves small-scale problems that may emerge. The risk is that COVID-19 will further exacerbate these dynamics, making solutionism the standard approach to policymaking.

One function of the solutionist state is to discourage software developers, hackers and aspiring entrepreneurs from experimenting with alternative forms of social organisation. That the future belongs to start-ups is not a fact of nature but a policy outcome. As a result, more subversive tech-driven endeavours that could boost non-market, solidarity-based economies die off at the prototype stage. There’s a reason why we haven’t seen another Wikipedia in two decades now.

🔗 In a recent article on The New Yorker, Kate Brown explains why the COVID-19 pandemic cannot be seen only as a healthcare crisis, but also as an ecological one. In particular, there is an unavoidable link between individuals — something that self-isolation has finally made evident.

The history of civilization has hinged on the building and demolition of boundaries between species. Early agriculture disregarded most of the natural world in order to cultivate only the most productive plants and animals; this allowed populations to grow and cities to flourish. But crops and livestock, once they were concentrated in one place and cultivated in monocultures, became vulnerable to disease. As cities and farm operations grew, people and animals crowded closer together. The result was a new epidemiological order, in which zoonotic diseases—ones that could jump from animal to human—thrived. At first, these diseases remained confined to the places where they originated. Then globalization arrived.

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