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Who will blink first as EU-UK talks near danger zone?



It was always going to come to this, but the EU-UK trade negotiations are now entering the danger zone stage where we get to find out who will wilt under the pressure of a looming “non-negotiated” exit.

This week negotiators managed another round of incremental progress, but fell far short of reaching the headline political deal that Boris Johnson had said he wanted by this week’s EU leaders’ summit. 

Mr Johnson keeps on having phone calls with EU leaders in which he reminds them that an “Australia-style” exit holds “no fear”, even as a succession of government ministers, officials, industry chiefs and Commons select committees hear of the chaos and disruption this would bring.

For some weeks — as last week’s Briefing reported — EU diplomats have been sketching out the scenario of marginal progress up until this week’s European Council, followed by intensified talks over the last two weeks of October, with a deal in early November.

Even that looks ambitious now. The draft EU Council conclusions are chillingly anodyne; the diplomatic equivalent of a hard stare. They restate the EU’s insistence that its top negotiator Michel Barnier sticks to his mandate, while inviting him to “continue” (not even “intensify”) negotiations to reach an agreement that can apply from January 1 2021.

In short, the traditional EU negotiating squeeze is now on. The unspoken expectation in Brussels and EU capitals is that Mr Barnier’s infamous ticking clock will sound ever louder in the ears of British negotiators until the noise becomes so intolerable that David Frost, his UK counterpart, and Mr Johnson concede on most of the key sticking points.

For now the choreography of any concessions seems blocked, with member states pushing Mr Barnier not to give away leverage (particularly on fish) as the space for a deal narrows. EU officials complain that the UK side “does not look like a counterpart that wants a deal” — UK officials, citing the EU clinging to its position of status quo on fishing rights, say exactly the same. For now at least, the record appears to be stuck.

As in October 2019, if concessions come on the difficult outstanding issues — fishing rights, the level playing field and the governance of the deal — the EU will do its best to help Mr Johnson sell them back home, but they expect the British to make most of the running. 

Time will tell whether this is a huge miscalculation on the EU’s part, but the harder they look at Mr Johnson’s political options as Covid-19 closes in again, the more confident they become that he will ultimately give much of the ground they seek.

Some Brexiters will feel that Mr Johnson has learnt the lessons of his predecessor’s failed negotiations by threatening to walk away, getting Brussels to back down on some key areas — notably dynamic alignment with EU state aid policy. 

But this approach has worked only up to a point (the EU was always going to have to move on state aid), which raises the question over whether Mr Johnson should indeed walk away if only to try to break the stalemate. The assumption is he will not.

But if Mr Johnson stays at the table he risks being sucked slowly into an ever-more invidious choice between doing a very skinny trade deal — which will probably come with the offer of some nice easements in the end — and a destructive no deal.

Alternatively, both sides continue with the stand-off, and the entire process simply dribbles away into failure. The risks of this are higher than commonly appreciated, in my view. There are limits — politically, psychologically — to what Mr Johnson can concede. 

All of this has been made harder by Mr Johnson’s decision to threaten to legally override parts of the withdrawal agreement with the internal market bill. The move was intended to inject motion into the negotiations, but it has actually only complicated them on three fronts.

First, if the intention was to force an EU walkout or get the EU to back down, it failed. Brussels didn’t take the bait, but opened long-winded legal proceedings that did not kill the talks, while making clear that any UK-EU agreement would be contingent on the UK dropping the offending clauses.

Effectively Mr Johnson, who thought he had put a “gun on the table”, now finds it pointing back at him: “Drop the weapon, prime minister, or there won’t be a deal.” 

Second, by making such a spectacular show of bad faith over last year’s agreement, Mr Johnson has strengthened the arguments on the EU side (from the French, notably) for a very strict governance mechanism for a deal.

Even if Brussels is overplaying its hand on this front, given the thinness of the market access offer, the internal market bill has given it the perfect excuse to do so. The EU, in trying to protect the unity of the 27, retreats back to a “highest common denominator” negotiating position.

Third, and perhaps most important, the promise to unilaterally rewrite the Northern Ireland protocol in the event of a no deal makes it almost impossible to see how Mr Johnson could ever engineer a soft no deal.

Because of that move, a no-deal outcome is now set to be politically much more destructive than it otherwise needed to be. The Whitehall working assumption, I understand, is that it will take two years to get back to a basic free trade negotiation. 

If Mr Johnson really does want to take the plunge off the no-deal cliff, he just made the drop considerably higher.

This week a defiant UK government source accused the EU of “using the old playbook” of running down the clock in the erroneous belief, the source said, that “the UK would be more willing to compromise the longer the process ran”.

It looks, from the outside, very much like that is exactly what the EU believes. In the not too distant future, we are about to find out if it is right.

Brexit in numbers

Column chart of Mentions of ‘Brexit’, ‘European Union’, ‘EU’, ‘Europe’, and ‘Brussels’ by the prime minister, chancellor and foreign secretary in their Conservative party conference addresses, 2016-20 showing The B-word

Another reason often given in Westminster as to why Mr Johnson will ultimately have to do a deal with the EU is that the public already think that their vote for Conservatives last December was a vote to Get Brexit Done. And it is already done. 

There are fears in Number 10 that, as the Covid-19 crisis reasserts itself, the distinction between getting the divorce deal done and then failing to complete a free trade agreement would be lost on the vast majority of voters. It would just look like failure to deliver.

One nice illustration of how Brexit has faded into the political background was to be found at the Tory party conference where the “B-word” (as measured by two professors at the UK in a Changing Europe think-tank) was barely even spoken.

“While not entirely banned — the prime minister did, after all, say the B-word four times this year — talk of Brexit and the EU from the conference floor has fallen by a staggering 89 per cent in a year,” they wrote.

Just one more reason to support Brussels’s calculation that Mr Johnson will not dare to thrust Brexit back on to the already crowded political agenda by allowing talks to fail.

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ECB signals rising concern about eurozone bond market sell-off




The European Central Bank has indicated it will increase the pace of its emergency bond purchases to counter the recent sell-off in eurozone sovereign debt markets if borrowing costs for governments, companies and households continue to rise.

Philip Lane, chief economist of the ECB, said on Thursday that the central bank was “closely monitoring the evolution of longer-term nominal bond yields” and its asset purchases “will be conducted to preserve favourable financing conditions over the pandemic period”.

The ECB has pledged to ensure financial conditions encourage investment and spending, helping the eurozone economy to make a swift recovery and lifting inflation towards the central bank objective of just below 2 per cent.

To achieve this, Lane signalled that it would rely on its pandemic emergency purchase programme, under which it plans to spend up to €1.85tn on buying bonds by March 2022. There is just under €1tn of that amount left to spend.

“We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation,” he said.

Eurozone government bonds fell to their lowest levels for almost six months this week, and while Lane’s comments caused a brief rally on Thursday afternoon, prices then resumed their downward path.

Bond yields move inversely to prices, so the sell-off is pushing up the cost of borrowing for governments, which must sell vast amounts of extra debt this year to cover the cost of the coronavirus pandemic and its consequences.

Germany’s 10-year bond yield has risen to its highest level since last March, while the French equivalent returned to a positive yield for the first time since June and Italian sovereign yields hit their highest level since November.

ECB president Christine Lagarde said in a speech on Monday that policymakers were “closely monitoring” the rises. 

Isabel Schnabel, another ECB executive board member, said in an interview with Latvian news agency Leta published on Thursday: “A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery.”

Lane gave more detail of how the ECB defines “favourable” financing conditions, saying it would track the availability and cost of bank lending and market-based funding — in particular, the risk-free overnight index swap curve and the GDP-weighted eurozone sovereign bond yield curve, which have both risen in recent days.

He warned of the need to avoid “a mutually-reinforcing adverse loop” in which banks interpret lower borrowing demand as a negative signal about the economy and companies interpret a tightening of bank lending conditions as a worrying sign about the outlook. 

Eurozone bank lending to the private sector grew by just under €12bn in January, down 75 per cent from the average monthly loan growth last year according to data published on Thursday.

Much of the slowdown was because of a sharp fall in net lending to insurers and pension funds. Lending to non-financial companies also retreated slightly, while lending to households still grew but at its slowest rate since last April.

Krishna Guha, vice-president at Evercore ISI, said “ECB jawboning” was “having little effect” and “the next step — in our view presaged by Lane — is for the ECB to dial up the pace of its [bond] purchases”.

Last week the ECB spent a net €17.3bn on its emergency bond purchase programme, up slightly from the previous week but still well below the levels of last April, during the previous sell-off in government bond markets.

Frederik Ducrozet, strategist at Pictet Wealth Management, said the ECB was likely to wait until it was clear the bond market sell-off was a lasting shift before increasing its emergency bond buying above €20bn per week. But he said that “will bring the risk of disappointment [for investors] — because you have to walk the walk as well as talk the talk as a central bank”.

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Armenia’s prime minister claims military is plotting a coup




Armenia’s prime minister has claimed the country’s military is plotting a “coup,” and taken to the streets with his supporters after senior army figures in the former Soviet republic called on him to resign.

Nikol Pashinyan has faced months of protests demanding he step down after the defeat of Armenian forces in a six-week war with neighbouring Azerbaijan that ended in November.

The army weighed in on Thursday, calling on the prime minister to quit after he fired the first deputy chief of staff for criticising him.

A letter to the prime minister signed by 40 senior officers warned Pashinyan not to use force against demonstrators, but did not say whether the army would act to remove him from power.

“The current government’s ineffective management and serious mistakes in foreign policy have put the country on the brink of collapse,” the officers wrote on Facebook.

Pashinyan later fired the chief of the general staff, Onik Gasparyan, ordered police to secure government buildings in Yerevan and told his supporters in the capital’s Republic Square to avoid violent clashes.

Demonstrators at an opposition rally in Yerevan demand the resignation of Nikol Pashinyan. They cheered as a fighter jet flew overhead © Artem Mikryukov/Reuters

Describing the situation as “manageable” the prime minister denied he was planning to flee the country and said the army’s statement was an “emotional reaction” to a dispute over the defeat in the Nagorno-Karabakh conflict.

“We have no enemies in Armenia. I am calling for calm,” Pashinyan said, according to Russian news agency Interfax. “Of course, the situation is tense, but we need dialogue, not confrontation.”

He later took to the streets with several thousand supporters and a megaphone — an echo of the 2018 “velvet revolution” that swept him to power following a march across the country that galvanised popular support. A few thousand opposition supporters gathered at a different square and cheered as a fighter jet flew overhead.

Pashinyan has fought off calls for his resignation since signing a Moscow-brokered peace deal in November that cemented territorial gains for Azerbaijan in Nagorno-Karabakh. The mountainous enclave in the South Caucasus is internationally recognised as part of Azerbaijan, but is populated by ethnic Armenians who seized control after a war that broke out in the dying days of the Soviet Union.

Azerbaijan, a mostly Muslim country and a close ally of Turkey, launched an offensive in September with the aim of retaking the entire enclave. Armenia’s army was ill prepared for oil-rich Azerbaijan’s modern drone fleet and significant backing from Ankara.

More than 3,300 Armenian soldiers died in the conflict, with a further 9,000 wounded. Thousands of civilians were displaced, including some who set their own homes on fire as they fled land now under control of Azerbaijan.

Russia, the traditional regional power broker and Armenia’s most important ally, remained neutral even as several previous ceasefires failed and has deployed 2,000 peacekeepers to secure the region.

Pashinyan admitted the terms were “unbelievably painful for me and my people” but argued the concessions were necessary to prevent further losses.

The devastating defeat sparked fury among Armenians who stormed the country’s parliament and attacked its speaker, demanding the prime minister’s resignation.

Pashinyan backtracked on a pledge to step down after snap elections earlier this month and remained in office in the face of opposition from Armenia’s ceremonial president, three parliamentary opposition parties, and key church leaders.

The Kremlin said on Thursday it was “following events in Armenia with caution” but considered them “exclusively Armenia’s internal matter”.

Dmitry Peskov, President Vladimir Putin’s spokesman, told reporters Russia was “calling on everyone to be calm” and said “the situation should remain within constitutional limits,” according to Interfax.

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German accounting watchdog chief to step down in wake of Wirecard




The head of Germany’s accounting watchdog is to step down following mounting political pressure over corporate governance shortcomings exposed by the Wirecard fraud.

Edgar Ernst, the president of the Financial Reporting Enforcement Panel (FREP), said on Wednesday he would depart by the end of this year. He is the third head of a regulatory body to lose his job in the wake of one of Germany’s biggest postwar accounting scandals.

The collapse of Wirecard, which last summer filed for insolvency after uncovering a €1.9bn cash hole, triggered an earthquake in Germany’s financial and political establishment.

Felix Hufeld, president of BaFin, the financial regulatory authority, and his deputy Elisabeth Roegele were pushed out by the German government in January for failing to act on early red flags suggesting misconduct at Wirecard. Ralf Bose, the head of Germany’s auditors supervisor Apas, was fired after disclosing he traded Wirecard shares while this authority was investigating the company’s auditor, EY. The German government is also working to revamp the country’s accounting supervision and financial oversight.

Meanwhile, criminal prosecutors in Frankfurt are evaluating a potential criminal investigation into BaFin’s inner workings and on Wednesday asked the market authority to hand over comprehensive documents, the prosecutors office told the FT, confirming an earlier report by Handelsblatt. The potential scope of any investigation as well as the individuals who might be targeted is still unclear. BaFin declined to comment.

Ernst came under pressure as the parliamentary inquiry commission uncovered that he joined the supervisory board of German wholesaler Metro AG in an apparent violation of internal governance rules, which from 2016 banned FREP staff from taking on new supervisory board roles.

Last week, the former chief financial officer of Deutsche Post filed a legal opinion to parliament defending his move. He argued that his employment contract was older than the 2016 ban on board seats and hence trumped the tightened governance regulations.

The German government had subsequently threatened to ditch the private-sector body which currently has quasi-official powers.

In a statement published on Wednesday evening, FREP said that Ernst wants to open the door for a “fresh start” that would be untainted by the discussions around his supervisory board mandates. “FREP is losing a well-versed expert in capital markets,” the body said.

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