Here is our take on the articles summarized below: 

To understand the forces moving the world today, we take a lesson from Newton’s second law of motion: a sudden shift in direction (acceleration) in a large system like the financial markets will exert a tremendous amount of force on the world, usually sparking volatility. The world was reminded of this with the announcement of the near insolvency of China’s second-largest property developer, sending the markets reeling from an already poor week. We explore the dynamics and implications of this fact in our first summary, before shifting focus to Germany’s fast-approaching election and the end of the Merkel era. Tarrying in Europe, we will examine how inflation in natural gas prices has destabilized Europe’s energy markets and prompted renewed interest in more secure renewable energy, before diving into the UN secretary general’s comments on our urgent need for cooperation.

Chinese Property Developer’s Liquidity Crisis Sparks Fears

Evergrande Liquidity Crisis: Why the Property Developer Faces Risk of Default – Thomas Hale and Hudson Lockett, Financial Times

Why China Could Seek “Controlled Detonation” for Troubled Developer Evergrande – Craig Mellow, Barron’s

A Debt-Ridden Property Developer Could Threaten China’s Economy – Rachel Cheung, World Politics Review

China’s second-largest property developer, the Shenzhen-based Evergrande Group, alarmed investors last week when it announced it would likely default on its debt payments should its circumstances not improve. With $89B in debt, over $300B in liabilities, and only $13B in cash, Evergrande’s credit rating has taken a massive hit, with its bonds being discounted by as much as 70%. This trend mirrors a general increase in riskiness across the Chinese bond market as regulators crack down on financing. With Evergrande’s access to capital constrained by far-reaching corporate finance reforms, the property developer found itself unable to obtain enough new financing to cover its old debts from founder Xu Jiayin’s speculative ventures. Evergrande has attempted to sell off assets to generate the cash needed to meet this year’s $850M in current debt obligations but has had little success finding buyers; there are suspicions that some contractors have even been compensated with property rights from Evergrande’s holdings. The pressure that the very potential of default has already placed on the sector leads many to think the Chinese government will intervene to prevent a meltdown similar to the 2008 Lehman Brothers collapse. Barron’s suggests China’s strategy will likely be one of a “controlled detonation,” where the group will be split up between other developers. While such a move would prevent widespread hardship (the group employs 163,000 employees and manages 1,300 projects), government intervention at this stage would also provide tacit support for the kind of risky borrowing that distressed Evergrande in the first place. As Xi Jinping continues to push China’s large firms towards a “common prosperity” mindset, the increased regulatory scrutiny is likely to expose other firms with shaky financial foundations. With much of China’s development dependent on the property sector, Evergrande’s future will likely prove to be a bellwether of the evolving relationship between the Chinese Communist Party and the markets.

German Elections: What Could Scholzism Mean for Germany and the Future of Europe?

The Fateful Chancellor: What the End of the Merkel Era Means for the World – Jeremy Cliffe, The New Statesman

 How Olaf Scholz and the SPD Could Lead Germany’s Next Government – Jeremy Cliffe, The New Statesman 

Germany’s Election Could Upend European Politics – Dave Keating, World Politics Review

German Chancellor Angela Merkel is one of the most recognizable global politicians and considered by Jeremy Cliffe and others to be “the pre-eminent European leader of the post-1989 era.” Her 16 years as chancellor have been characterized by strategic inoffensiveness, tactical movements over grand strategy plays, and patience. She will go down in history as a pragmatic crisis manager that steered Germany and Europe through several crises, all the while showing humility before the events of history. On the other hand, Merkel has lacked a strategic vision for Germany and for Europe. The Christian Democratic Union’s (CDU) struggle to attract voters for this weekend’s upcoming election is a result of this lack of vision. There is a “time gap” of missed opportunities to remake the party and prepare it to face the global challenges of the 2020s. This gap has created an opening for the Social Democratic Party (SPD) to step in and possibly govern with a new three-party coalition. However, would Olaf Scholz and the Social Democratic Party (if elected), be ready to usher the country into a new era of German leadership? Scholz is similar to Merkel in several ways; he is pragmatic, cautious, and “Merkelishly ponderous” at times, but he won’t succeed by being too much like Merkel. Germany’s new chancellor will be expected to reinvigorate German politics and tackle looming domestic and geopolitical challenges with decisiveness. Scholz and the SPD party have built their campaign on three pillars which aim to do just that. The first pillar is to restore democracy as a bridge between the middle-class progressives, the old working class, and the emergent precariat to bring about a new form of social justice that guarantees “the chance to live a decent life, the respect and dignity that a good job provides,” as Scholz put it. The second pillar is to create “wedge policies” that find common ground between Germany’s inter-factional government. Finally, the third pillar is a strong, activist executive who gets things done. If Sunday’s election goes the way of the SPD, as is expected, the three pillars of “Scholzism” will be put to the test and we will see whether Scholz can lead Germany into a new era or if he will perpetuate “Merkelism.” 

The outcome of Germany’s election will have major implications for European politics. Merkel’s CDU party and its sister party the Christian Social Union (CSU) have been critical members of the European People’s Party (EPP), the center-right political family of the European Union that has dominated European politics in the 21st century. The EPP has had a considerable impact on Europe’s handling of crises over the last two decades, including the response to the 2008 financial crisis when austerity measures were imposed across the bloc. The German SPD party is a member of the Party of the European Socialists (PED), a center-left party that has largely opposed the years of “belt-tightening” and other major policies pushed through by the EPP. Even if the German elections result in a leftist coalition, the left won’t necessarily become the new leaders of the European Council. There will be no dominant political group for the time being, but the situation could change based on the national elections for France and Italy next year. Regardless, if the EPP loses Germany, the country with the most votes on the European Council due to its population size, it will lose its influence, allowing a major shift in the balance of power to occur within the bloc.

European Natural Gas Prices Skyrocket Amid Energy Supply Volatility

 Hard Choices Loom for Europe as the Gas Crisis Bites – Helen Thompson, Financial Times 

CO2 Crisis Set to Spread to Europe, Big Distributor Warns – Harry Dempsey and Emiko Terazono, Financial Times 

As Europe has transitioned away from high-carbon-cost fossil fuels like coal towards energy sources with smaller carbon footprints, energy security has become a significant issue. While not itself a zero-carbon energy source, natural gas is used as an energy source throughout Europe when more renewable options are unavailable or unreliable.  With natural gas prices spiking due to widespread supply chain issues, Europe has found itself once again at the mercy of energy suppliers. Natural gas import prices are up over 400% from last year, and with the weather shifting towards winter the demand is only expected to increase. Considering that much of Europe’s natural gas is imported from Russia, several leaders have expressed concern over dependence on the good graces of Vladimir Putin and state gas monopoly Gazprom. To weaken Russia’s hold on European energy, the underlying issues of renewable energy (storage and stability) must be solved quickly. That said, the natural gas price inflation has disrupted more than the energy sector. Industries from soft drinks to fertilizer to meat production have been hit by shortages in materials derived from natural gas (especially CO2), with some distributors closing their doors altogether. Such shortages are sure to have follow-on effects further down the supply chain, amplifying volatility in commodities prices. As the world attempts to recover from the economic effects of the coronavirus, a supply crisis could be catastrophic to the recovery process. With no easy solution in sight, Europe’s leaders will have their work cut out for them.

Antonio Guterres’ Ambitious Plan to Overhaul the Multilateral System

Stewart M. Patrick, World Politics Review

Read the full article here 

United Nations Secretary General Antonio Guterres has released his ambitious vision of a new multilateral system in the report “Our Common Agenda.” The report declares that an erosion of social trust has undermined the world’s ability to tackle global crises together; “In the absence of solidarity, we have arrived at a critical paradox: international cooperation is more needed than ever but also harder to achieve.” The report highlights that young people and future generations will be the key to reforming the multilateral system and achieving international cooperation. To prioritize the involvement of today’s youth, Guterres will appoint a new U.N. Special Envoy for Future Generations, create a U.N. “Futures Lab” staffed by experts in “foresight,” and push U.N. member states to issue a Declaration on Future Generations. The report also calls for a new deal to deliver global public goods and defines seven such goods: “global public health”, “a global economy that works for all”, “a healthy planet”, “a new agenda for peace”, “a peaceful, secure, and sustainable outer space”, an open and secure “digital commons”, and “international cooperation guided by international law.” To ensure that all nations benefit from these global public goods, the report proposes practical reforms such as increased funding for the World Health Organization, expanded efforts to crack down on tax evasion and illicit financial flows, and accelerated emissions reduction targets, among other measures in each of the seven areas. While “Our Common Agenda” is an impressive visionary document that lays the groundwork for the much-needed reform of our global multilateral institutions, nothing will change unless the UN’s member nations buy in and choose international cooperation over competition.