What Do U.S. Curbs on Selling Microchips to China Mean for the Global Economy?

Political

China-U.S. Relations

Summary:

Washington's ban on hi-tech exports to China marks a huge gambit for economic supremacy for the next decades.

The U.S. has taken unprecedented steps to limit the sale of advanced computer chips to China, escalating efforts to contain Beijing's tech and military ambitions.

The moves are designed to cut off supplies of critical technology to China that may be used across sectors including advanced computing and weapons manufacture.

The crackdown marks the most significant action by Washington against Beijing on technology exports in decades, escalating a trade battle between the world's two most powerful economies.

After the export controls, Apple reportedly put on hold plans to use memory chips from China's Yangtze Memory Technologies in its products. The Nikkei newspaper said Apple had planned to use the chips in iPhones sold in China.

What action has the U.S. taken?

On 7 October, the Biden administration imposed a sweeping set of export controls that included measures to cut China off from certain semiconductor chips and chip-making equipment.

Under the rules, U.S. companies must cease supplying Chinese chipmakers with equipment that can produce relatively advanced chips unless they first obtain a licence.

The new regulations also add controls on some semiconductor production items and transactions for specific end-uses of some integrated circuits or chips. The U.S. also wants to increase its export controls to include semiconductor products and software, technology, and other things used to develop and make integrated circuits. In a further restriction, U.S. citizens and green-card holders will also be banned from working on certain technology for Chinese companies and entities.

What products are blocked by the curbs?

The export curbs will include high-end computing chips, such as NVIDIA's A100/H100 and Intel's GPU (Ponte Vecchio), according to Brady Wang, associate director of Counterpoint research in Hong Kong. The rules, some of which go into effect immediately, build on restrictions sent in letters earlier this year to top toolmakers KLA, Lam Research and Applied Materials, requiring them to halt shipments of equipment to wholly Chinese-owned factories producing advanced logic chips.

The U.S. department of commerce said the export controls "restrict [China's] ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors".

How significant are the curbs?

The chip ban was described by the seasoned China analyst Bill Bishop as a "massive escalation" in the rumbling trade and geopolitical tensions between the U.S. and China. "We are all still trying to understand the impacts of the new controls," he said in his Sinocism newsletter, "and frankly I think many underestimate just how significant they are, both for technology supply chains and future developments but more broadly for the U.S.-China relationship".

The international research firm GlobalData said the U.S. announcement "transcends the semiconductor industry" and was about nothing less than the leadership of the world economy. "This is about [artificial intelligence] dominance," said Josep Bori, the firm's thematic research director, "which underpins what many call the fifth indU.S.trial revolution, and, ultimately, about global economic leadership in the next few decades."

Although they have another year to comply with the restrictions, semiconductor manufacturers in Asia such as the market-leading Taiwanese company TSMC, SK Hynix, and Samsung are also threatened by them. S&P Global Ratings credit analyst Clifford Kurz said: "Many of the Asia-Pacific tech issuers that we rate have the financial strength to absorb the blow for at least the next 12 months. But longer term, the rating implications are clearly negative."

Can China use locally made chips instead?

China consumes more than three-quarters of the semiconductors sold globally, but produces only about 15% of global output.

Experts say China's own equipment makers remain four to five years behind their overseas counterparts, making them unsuitable as instant substitutes for equipment lost from U.S. suppliers such as KLA Corp, Applied Materials and Lam Research.

Boston Consulting Group estimated in 2021 that a country would need at least $1tn in incremental upfront investment to build fully "self-sufficient" local chip supply chains.

The new restrictions may spur Chinese chipmakers to try producing advanced chips by using creative engineering solutions with older technologies not subject to the sanctions.

Brady Wang from Counterpoint said: "The most recent U.S. restrictions will greatly slow China's advanced semiconductor industry and derivative technologies, including AI, supercomputers, training in self-driving etc." China may be forced instead to concentrate its manufacturing capacity on "mature technologies and leverage the service outside China".

How has China reacted?

The China Semiconductor Industry Association said in a statement that it hoped the U.S. government would reverse its decision and return to international trade negotiation processes.

The importance of technological self-sufficiency, already a priority for Xi in the past decade, surfaced as a theme at this year's congress with Xi Jinping emphasising the hostility of foreign rivals. However, experts said that Beijing may have few ways of forcing Washington back to the table.

The ongoing congress meant reaction from Beijing had been muted but Bill Bishop said China's options were limited beyond restricting U.S. access to the important rare earth metals that China controls. "Their options are limited as many seemingly obvious actions, like targeting Apple, would also do a lot of damage to the [Chinese] economy. Boeing would make sense, but they already are being punished. I would not be surprised to see rare earths weaponised.

What will happen next?

Singapore's prime minister, Lee Hsien Loong, warned greater decoupling between the U.S. and China would create a "less stable world".

"The Biden administration's latest move is a very serious one, I'm sure they have considered it carefully. It can have very wide ramifications," he said at a press conference in Australia.

Source: The Guardian

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Thomas

Economic

Forex

The cost of living in Cairo has soared so much that security guard Mustafa Gamal had to send his wife and year-old daughter to live with his parents in a village 70 miles (112km) south of the Egyptian capital to save money.

Gamal, 28, stayed behind, working two jobs, sharing an apartment with other young people and eliminating meat from his diet. "The prices of everything have been doubled," he says. "There was no alternative."

Around the world, people are sharing Gamal's pain and frustration. An auto-parts dealer in Nairobi, Kenya, a seller of baby clothes in Istanbul, Turkey, and a wine importer in Manchester, United Kingdom, have the same complaint: A surging United States dollar makes their local currencies weaker, contributing to skyrocketing prices for everyday goods and services.

This is compounding financial distress at a time when families are already facing food and energy crunches tied to Russia's invasion of Ukraine.

"A strong dollar makes a bad situation worse in the rest of the world," says Eswar Prasad, a professor of trade policy at Cornell University. Many economists worry that the sharp rise of the dollar is increasing the likelihood of a global recession sometime next year.

The dollar is up 18 percent this year and last month hit a 20-year high, according to the benchmark ICE U.S. Dollar Index, which measures the dollar against a basket of key currencies.

The reasons for the dollar's rise are no mystery. To combat soaring U.S. inflation, the Federal Reserve has raised its benchmark short-term interest rate five times this year and is signalling more hikes are likely. That has led to higher rates on a wide range of U.S. government and corporate bonds, luring investors and driving up the U.S. currency.

Most other currencies are much weaker by comparison, especially in poor countries. The Indian rupee has dropped nearly 10 percent this year against the dollar, the Egyptian pound 20 percent and the Turkish lira an astounding 28 percent.

Celal Kaleli, 60, sells infant clothing and diaper bags in Istanbul. Because he needs more lira to buy imported zippers and liners priced in dollars, he has to raise prices for the Turkish customers who struggle to pay him in the much-diminished local currency.

"We're waiting for the new year," he says. "We'll look into our finances, and we'll downsize accordingly. There's nothing else we can do.″

The pound recently flirted with dollar parity after new UK Prime Minister Liz Truss announced huge tax cuts that roiled financial markets and led to the removal of her Treasury secretary.

'Bad news' for the global economy

Ordinarily, countries could get some benefit from falling currencies because it makes their products cheaper and more competitive overseas. But at the moment, any gain from higher exports is muted because economic growth is sputtering almost everywhere.

A rising dollar is causing pain overseas in several ways:

· It makes other countries' imports more expensive, adding to existing inflationary pressures.

· It squeezes companies, consumers and governments that borrowed in dollars. That's because more local currency is needed to convert into dollars when making loan payments.

· It forces central banks in other countries to raise interest rates to try and prop up their currencies and keep money from fleeing their borders. But those higher rates also weaken economic growth and drive up unemployment.

Put simply, "The dollar's appreciation is bad news for the global economy", says Capital Economics' Ariane Curtis. "It is another reason why we expect the global economy to fall into recession next year.''

In a gritty neighbourhood of Nairobi known for fixing cars and selling auto parts, businesses are struggling and customers unhappy. With the Kenyan shilling down 6 percent this year, the cost of fuel and imported spare parts is soaring so much some people are choosing to ditch their cars and take public transportation.

"This has been the worst," says Michael Gachie, purchasing manager with Shamas Auto Parts. "Customers are complaining a lot."

2022 is uniquely painful

Gyrating currencies have caused economic pain around the world many times before. During the Asian financial crisis of the late 1990s, for instance, Indonesian companies borrowed heavily in dollars during boom times, then were wiped out when the Indonesian rupiah crashed against the dollar.

A few years earlier, a plunging peso delivered similar pain to Mexican businesses and consumers.

The soaring dollar in 2022 is uniquely painful, however. It is adding to global inflationary pressures at a time when prices have already been soaring. Disruptions to energy and agriculture markets caused by the war in Ukraine magnified supply constraints stemming from the COVID-19 recession and recovery.

In Manila, Raymond Manaog, 29, who drives the colourful Philippine mini-bus known as a jeepney, complains that inflation — and especially the rising price of diesel — is forcing him to work more to get by.

"What we have to do to earn enough for our daily expenses," he says. "If before we travelled our routes five times, now we do it six times."

In the Indian capital New Delhi, Ravindra Mehta has thrived for decades as a broker for American almond and pistachio exporters. But a record drop in the rupee — on top of higher raw material and shipping costs — has made the nuts much costlier for Indian consumers.

In August, India imported 400 containers of almonds, down from 1,250 containers a year earlier, Mehta says.

"If the consumer is not buying, it affects the entire supply chain, including people like me," he says.

Kingsland Drinks, one of the United Kingdom's biggest wine bottlers, was already getting squeezed by higher costs for shipping containers, bottles, caps and energy. Now, the rocketing dollar is driving up the price of the wine it buys from vineyards in the U.S. — and even from Chile and Argentina, which like many countries rely on the dollar for global trade.

Kingsland has offset some of its currency costs by taking out contracts to buy dollars at a fixed price. But at some point, "those hedges run out and you have to reflect the reality of a weaker sterling against the U.S. dollar," says Ed Baker, the company's managing director.

Source: AP

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Samantha Luan

Forex

Year-end is always a stress point in financial markets, as investors seek to build up dollar cash buffers and collateral to minimize risk and exposure over the illiquid holiday period.

Nowhere is this more apparent than "cross-currency basis swaps", a measure of demand for dollar funding often seen as a proxy for wider market stress. This year there's an added twist: the Swiss franc basis has blown out to levels not seen for years.

This seems unusual because the Swiss franc is considered one of the safest, strongest and most stable assets. Even though Swiss franc cross-currency basis does move in times of market stress, it usually does so less than its peers.

Of course, this year has turned investors' assumptions upside down, thanks to the biggest wave of inflation and borrowing costs in 40 years. The Swiss National Bank (SNB) has even reversed years of massive franc-selling intervention to wade into the currency market buying francs.

Three-month euro, yen, sterling, and franc all went deeply negative at the end of September, reflecting strong demand for dollars as one might expect given that the contracts' time horizon covers the year end. With the exception of sterling, they remain deeply negative.

The Swiss franc basis stands out - it is notably wider than the others, and significantly wider than it usually is. The Japanese yen, traditionally the franc's rival "safe haven" currency, usually boasts a deeper negative basis. Not now. Rare Swiss Franc Stress Reflects Deeper Market Strains_1

Rare Swiss Franc Stress Reflects Deeper Market Strains_1

Rare Swiss Franc Stress Reflects Deeper Market Strains_2

Huw Roberts, head of analytics at Quant Insight in London, reckons the problems at Credit Suisse are behind the surge in Swiss demand for dollars. He notes that the SNB last week drew $6.3 billion from the U.S. Fed's currency swap line facility, roughly double the amount drawn a week earlier.

Severe stress at one of Europe's largest banks is bound to have ripple effects domestically and beyond, for example stoking concerns about counterparty risk.

"Year-end pressures can clearly act as a catalyst for the basis widening, but you have to think the broad tightening of financial conditions is starting to have an impact too," he said.

Dollar Shortage

Global financial conditions have tightened rapidly and broadly, and liquidity across a range of markets is drying up. It's a dangerous cocktail. The International Monetary Fund last week warned that global financial stability risks are rising, and cross-currency basis is among them.

"Typically around the year end there's a bit of balance sheet stress as some trades are taken off or reshuffled, but the magnitude of the (moves) is quite unusual," said Tobias Adrian, director at the IMF's Monetary and Capital Markets Department, specifically highlighted.

"There are dollar funding shortages."

Cross-currency basis is effectively the premium investors or corporates pay to swap currencies into dollars. A widening basis going deeper into negative territory reflects rising demand for dollar funding.

Switzerland has also been rocked by the deepening crisis at Credit Suisse. The bank is seeking a capital injection from the Middle East after being battered by losses and scandals, and investors have dumped its stocks and bonds.

This helps explain the Swiss FX basis widening. At the same time, Swiss financial conditions have tightened more than most others in the developed world, even though the SNB has not been particularly aggressive in raising interest rates.

Goldman Sachs' Swiss financial conditions index rose to an 11-year high above 107 bps late last month, up more than 300 bps so far this year. That's a much bigger increase than every developed economy Goldman tracks except the United States.

Rare Swiss Franc Stress Reflects Deeper Market Strains_3

Fabio Bassi, rates strategist at JP Morgan, is more sanguine - markets are "not yet in a massive flight to quality period," and some of the Swiss franc basis move can be explained by technical factors around the SNB's tiered system for remunerating bank reserves.

He also reckons there may be a simpler explanation for the current stress being exhibited in cross-currency markets.

"The Fed is tightening and delivering QT (quantitative tightening) faster than other central banks, which is going to create a relative scarcity of dollars. So the year-end effects are maybe appearing earlier this year," Bassi said.

The dollar is up 17% this year on an index basis, up almost 30% to a 32-year peak against the yen but has appreciated "only" 9% against the Swiss franc.

Source: Reuters

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Cohen

Economic

Stocks

Forex

The global economy is facing challenges, and geopolitics have become more complex with signs of fragmentation, making the need for multilateral policies even greater, an International Monetary Fund official said on Tuesday.

"There are these global public goods — climate is one; fighting pandemics is another; making sure that the debt issues are resolved, especially in many low-income countries — all of these are things that really require multilateral action," IMF deputy director of research Petya Koeva Brooks told China Daily.

Koeva Brooks said the global outlook is "quite challenging", however, "in a technical sense, it is not what one considers a global recession".

"What we are seeing and what we're expecting is that about one-third of the countries, in terms of global GDP, are going to be faced with output with the real activity that is declining for at least two quarters either this year or next. Which is why we're saying that, in many parts of the world, it will feel like a recession," she said.

She pointed out there are downside risks of lower growth, a one-in-four chance of growth below 2 percent and a one-in-seven or one-in-10 chance of less than 1 percent.

The latter scenario would mean, "essentially, a stagnant output at the global level" and "a necessary condition of a real recession", she said.

In the latest World Economic Outlook report released on Oct 11, the IMF predicted global growth will slow from 6 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. That is the weakest growth profile since 2001, except for the 2008 global financial crisis and the acute phase of the COVID-19 pandemic.

"Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades," said the report.

The report forecast global inflation will increase from 4.7 percent in 2021 to 8.8 percent in 2022 but will decline to 6.5 percent in 2023 and to 4.1 percent by 2024.

"Again, we have upgraded our inflation forecasts, and this is because these pressures that we saw before have become much broader based and longer lasting," said Koeva Brooks.

"And the higher commodity prices have been one aspect of it. But just the strength of the domestic economy, in many cases, is also playing a role. And labor markets are also getting tighter in many parts of the world."

She also said the IMF expects inflation to subside after this year because of "lower commodity prices going ahead" and "the monetary tightening that central banks are doing in order to tackle inflation".

However, there are further shocks to energy prices, and inflation expectations are "de-anchoring" to make the process more difficult to control, she said.

Koeva Brooks said the sharp interest rate hikes undertaken by the US Federal Reserve are part of this process of normalizing monetary policy, given there is a whole debate about the risk of over-tightening as opposed to under-tightening. The US Fed's actions are "appropriate" while having "consequences".

"And part of that is now the stronger dollar," she said. "The stronger dollar has been mostly against advanced economies but also against emerging market currencies. So far, the adjustment has been fairly orderly. We have not seen a flight to safety or panic, or anything like that."

According to US Bureau of Labor Statistics data released on Thursday, consumer prices increased 0.4 percent in September and were up 8.2 percent on a yearly basis. Excluding food and energy, the core consumer price index rose by 6.6 percent over a year ago, which was the highest since August 1982. Markets expect the Fed to raise interest rates by 0.75 percentage points consecutively in November and December.

Koeva Brooks described China as "an outlier" in terms of inflation. The IMF report said China's inflation forecast for this and next year is 2.2 percent. Koeva Brooks said China has its own set of domestic issues to resolve.

"We always talk about rebalancing the sources of growth within China and the importance of moving from export infrastructure-heavy growth to one that depends more on private consumption. So, that rebalancing was always something that we had encouraged, and we thought that it was an important thing to do. And that rebalancing was going to come with lower growth."

She also suggested further developing a safety net and domestic sources of growth.

Koeva Brooks said the IMF does not have an explicit assumption about the Russia-Ukraine conflict's duration, so the "World Economic Outlook" is written as if it will continue for the foreseeable future. She said she is concerned about the downside risks of further escalation and the negative impact on energy markets and the global economy.

The researcher has repeatedly emphasized multilateralism as a solution to all of these challenges and problems.

"In our report, we have a very strong message to remind people that, if we don't have that, the outcomes would be just so much worse. And it would be bad not only for the large economies but also for the most vulnerable economies as well, a lot of them being low-income countries," she said.

"So, instead of a win-win situation, it would be a lose-lose situation for everyone."

Source: China Daily Global

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FastBull Featured

Daily News

[Quick Facts]

1. The BOE confirms that it will conduct its first government bond sale operation on November 1.

2. Denmark's preliminary investigations: Nord Stream leaks were caused by powerful explosions.

3. U.S. factory output rose steadily in September.

4. The U.S. government will announce the release of 10 million to 15 million barrels from oil reserves.

5. Nationwide strikes break out in France.

[News Details]

The BOE confirms that it will conduct its first government bond sale operation on November 1

The Bank of England (BOE) said that given the British government's fiscal announcement scheduled for October 31, the first government bond sale operation would take place on November 1. The BOE now expects to conduct government bond sale operations under the Asset Purchase Facility (APF) in the fourth quarter of 2022, at a similar size and frequency as had been previously announced, with any shortfall as a result of the earlier postponement relative to its previous sales plan incorporated into sales in subsequent quarters.

Denmark's preliminary investigations: Nord Stream leaks were caused by powerful explosions

The underwater images of the Nord Stream pipelines after the explosion came to light for the first time. Denmark's Copenhagen Police said in a statement on October 18 that according to the preliminary investigations of the Nord Stream-1 and Nord Stream-2 leaks located in the waters off Denmark, the pipeline leaks were caused by strong explosions.

U.S. factory output rose steadily in September

U.S. factory output rose steadily in September but builder sentiment continued to fall, as the impact of the Fed's interest rate hike was uneven. U.S. factory output rose 0.4% in September from the previous month, driven by growth in durable and non-durable goods production. But U.S. builder sentiment fell for the 10th consecutive month in October. This suggests that the Fed's rate hike policy has had an uneven impact on the economy so far.

The U.S. government will announce the release of 10 million to 15 million barrels from oil reserves

It is reported that the U.S. government will announce the release of 10 million to 15 million barrels of oil reserves to balance the market and prevent further escalation in gas prices. This reserve release will be the latest part of a 180 million barrel plan that began in the spring.

Sources said U.S. Energy Department and White House officials have been secretly holding meetings this week with executives from oil giants such as ExxonMobil and ConocoPhillips to inform them of possible recent changes in conditions and ask them to ramp up gasoline and diesel production. In addition, U.S. President Joe Biden will deliver a speech on gasoline prices on Wednesday. The Biden administration will also provide details this week on plans to replenish emergency reserves.

Nationwide strikes break out in France

Under the influence of geopolitics, Europe is caught in an energy crisis with no end in sight. A series of problems such as the cut-off and leakage of the Nord Stream pipelines, successive record-high prices, and electricity prices all affect European citizens.

As the second largest economy in the euro area, France is in crisis. Nationwide strikes broke out, disrupting many industries. The nationwide strikes in France this time were first launched by French oil refinery workers, followed by many French labor unions. They demanded higher wages for workers to cope with the inflation caused by the European energy crisis. The strikes have affected the maintenance of almost one-third of France's nuclear reactors, while the refinery workers' strikes have led to "oil shortages" in many parts of France.

[Today's Focus]

14:00 U.K. CPI MoM (Sept)

U.K. Retail Price Index MoM (Sept)

17:00 Eurozone CPI MoM (Sept)

22:30 U.S. EIA Crude Oil Stocks for the Week Ended October 14

23:00 Bank of England monetary policy member Mann delivers a speech

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Devin

Forex

Political

Turkish President Recep Tayyip Erdogan's election-focused economic policies have attracted criticism even from his longtime allies in the business community, the Independent Industrialists and Businessmen's Association (MUSIAD).

In a rare public disapproval of Ankara's ways, MUSIAD chair Mahmut Asmali grumbled last week about economic uncertainty, including the central bank's policy rate, though he backed Erdogan's push to lower the rate to single digits by the end of the year. A series of unorthodox cuts have brought the rate down to 12% from 19% over a year despite inflation topping 80%.

"We, too, are tired of talking about interest rates and rate cuts," Asmali told the financial daily Dunya, suggesting that the rate should be cut to 9% in October or November with an assurance that it would not be touched again in the short run. "Let's stop talking about rates and look ahead," he said. "Industrialists and producers are averse to uncertainty. Let's achieve stability and move ahead."

The MUSIAD head also complained that private banks, in particular, "should open the loan taps to those who produce and create jobs. And the central bank's financing here should be longer-term, not weekly," he said.

Heeding pressure from Erdogan, who holds the unconventional view that high interest rates cause high inflation, Turkey's central bank began to cut its 19% policy rate in September 2021, when inflation stood at about 20%. Four cuts in as many months brought the rate to 14% in December. The controversial policy fueled a rush for dollars, with the Turkish lira slumping about 50% against the greenback in the same period. To stop the collapse of the currency, Ankara introduced a special deposit scheme at the expense of straining public finances. Under the scheme, the treasury and the central bank compensate lira depositors for any losses they incur from the depreciation of the currency.

The fall of the lira, coupled with global inflationary pressures, continued to stoke prices, with consumer inflation hitting 83% in September. Still, the central bank delivered two fresh cuts in August and September to bring its policy rate to 12%, going against a global monetary tightening cycle. This has led to an unprecedented gap of 71 percentage points between the bank's benchmark rate and consumer inflation. But Erdogan remains determined to avoid economic contraction or recession ahead of elections next year and insists on further rate cuts.

With the central bank widely expected to comply, observers now wonder whether it will gradually reduce the rate to 9% by year-end or go for a single big cut, as MUSIAD suggests. The answer might come on Oct. 20, at the next meeting of the bank's monetary policy committee.

Like other business people, MUSIAD members also worry that a too-generous hike of the minimum wage in December would aggravate employers' costs. Though they have not spoken out publicly on the issue, they are reportedly cautioning Ankara. Nearly half of the country's wage-earning employees are paid the minimum wage or slightly higher salaries.

The government has already shown it will not shy away from populist spending to woo voters despite spiraling inflation. Scrambling to boost its sagging popular support ahead of elections in June 2023 at the latest, the government is reportedly readying to raise the minimum wage, public salaries and pensions at rates above the official inflation figure.

Labor and Social Security Minister Vedat Bilgin pledged last week the minimum wage hike would "wipe away the damage that inflation has inflicted on laborers."

Anticipation has built that the minimum wage — raised to 5,500 liras (about $300) in July — could jump to between 8,000 and 9,000 liras in December, well above the roughly 7,000 liras that the official inflation rate would require. Some speculate the government might go even for 10,000 liras to win over voters.

Employers, however, are uneasy about the extra burden they would have to shoulder. The current 5,500-lira minimum wage costs 7,603 liras to employers, when social security premiums and other fees are included. The business community is apprehensive also that such hikes could further stoke inflation.

Source: Al-Monitor

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Devin

Political

French President Emmanuel Macron is considering postponing a meeting of the French and German governments planned for next week because of concerns over a lack of progress in areas of supposed cooperation such as energy and defense, according to several French government officials.

Macron and German Chancellor Olaf Scholz, as well as their Cabinets, are scheduled to meet in Fontainebleau south of Paris next Wednesday for their yearly Franco-German ministerial council — the first such meeting since Scholz's three-party coalition took office at the end of last year. The leaders are planning to sign a joint declaration to promote bilateral cooperation and European integration in various areas, but less than one week ahead of the meeting, both sides are still wrangling over key passages of the text.

Postponing the planned high-level meeting would be read as a sign of significant strain on the partnership, at a time when Berlin and Paris are already at loggerheads over various issues such as how to combat the energy crisis and whether to build the Midcat pipeline project running from the Iberian Peninsula to northern Europe.

One French government official cited energy and defense cooperation — on joint projects including the Future Combat Air System (FCAS) fighter jet and the Main Ground Combat System (MGCS) tank — as areas where progress has been found wanting.

"There isn't enough progress on topics [of discussion], so it's possible the council will be postponed to give us more time to work on them," said a French government official.

"There are complexities, France and Germany don't always agree," the official said, adding that Scholz and Macron could also decide to go ahead with the planned meeting but only agree on general principles, without signing a declaration.

Two officials in Berlin acknowledged that talks with France on the text of the joint declaration were ongoing, also citing defense and energy as two areas of ongoing discussions. However, the officials said they were not aware of plans to postpone the ministerial council. A German government spokesperson could not be reached for comment.

The Franco-German government meetings have been taking place since 2003 and at least once a year, but were canceled in 2020 and only held via videoconference in 2021 due to the coronavirus pandemic. Expectations for this year's meeting are particularly high as it would be the first in-person meeting of both governments for three years, and as both sides have expressed strong interest in boosting cooperation, especially in the area of defense where Europe's lack of autonomy has been laid bare by the war in Ukraine.

In floating a rescheduling of the meeting, France might be trying to accelerate negotiations in the final stretch.

Most recently, Macron and Scholz have publicly disagreed over the Midcat pipeline project. At pains to wean itself off of Russian gas, Germany wants to push through building the pipeline, which could transport gas and later green hydrogen, while France wants to prioritize nuclear power — one of France's key energy assets, which could also be used for the production of hydrogen.

Another French official sought to downplay a possible rescheduling, arguing that France and Germany are nevertheless in constant conversation and that defense cooperation had its "ups and downs."

The two countries have struggled to breathe life into their military partnerships despite Germany's decision to massively invest in defense in the wake of the Ukraine war. The FCAS fighter jet project, for example, has been dogged by delays and disagreements over leadership.