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Can Angela Merkel defuse the EU’s east-west budget spat?

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After weeks of threats, Hungary and Poland have finally made good on their promise to block ratification of the EU’s €1.8tn Covid-19 recovery package over the vexed subject of the rule of law.

On Monday afternoon, EU ambassadors representing Budapest and Warsaw opposed a decision for the EU27 to raise the so-called “own resources” ceiling that would empower Brussels to borrow hundreds of billions of euros to fund the recovery effort.

In doing so, they put the brakes on a crucial legal process that requires the unanimity of all member states. During the meeting, which officials say was “matter of fact” and lacking in animus, a senior EU diplomat warned this new delay during the resurgence of coronavirus cases risked throwing the union into a “serious crisis”. 

The events were the culmination of months of talks to fill in the gaps of a deal struck by EU leaders in July that had left the details of the rule of law mechanism deliberately vague. 

Since September, the German presidency of the EU has tried to assuage the concerns of Budapest and its allies that they would be the “victims” of a conditionality tool, while also addressing accusations by the European parliament and northern capitals that illiberal governments would be rewarded for riding roughshod over EU values with billions in taxpayer money.

Earlier this month, member states and the parliament struck a preliminary deal on the workings of the rule of law mechanism and the details of the EU’s €1.1tn, seven-year budget. But the grand compromise did not have a buy in from Poland and Hungary. 

So what happens next? If EU leaders are to find a way out of the impasse, Hungary’s premier Viktor Orban will have to spell out exactly what his demands are. Budapest’s claim that the July deal did not authorise the creation of a rule of law mechanism is a non-starter for most member states and MEPs, who will not countenance the reopening of the rule of law legislation. 

Of the available options, the least dramatic would be some reassuring language from the EU to bring Hungary and Poland on board without redrawing any of the legal text. “We can give them comforting words but nothing that changes the text,” said one diplomat. Plenty expect that even Mr Orban will not sacrifice tens of billions in aid for Hungary over the matter, which is likely to be raised at a videoconference of EU leaders on Thursday.

German chancellor Angela Merkel will play a crucial role in de-escalating the spat. Ms Merkel has spent the last decade trying to “manage” Mr Orban inside her centre-right political family, sometimes with little success. But of the EU’s senior figures, she has been the most willing to show Poland and Hungary that she is sensitive to their concerns about losing vital funds over respect for EU values.

Not everyone is in the mood for conciliation. A group of smaller countries — including the Dutch and the Nordics — are losing patience with Budapest and Warsaw. Dutch prime minister Mark Rutte earlier this year went as far as to theorise about a “European Union without Hungary and Poland”.

Some observers think the EU can and should call Mr Orban’s bluff by threatening to create a separate treaty allowing for the creation of the €750bn recovery fund — and excluding Poland and Hungary. Such creative thinking is not part of the conversation among policymakers in Brussels and is politically inconceivable for the German chancellor. 

“It will now be up to the chancellor to enter into a dialogue with Hungary and Poland and come up with a formula they can accept,” said Detlef Seif, deputy spokesman for EU affairs of the CDU/CSU parliamentary group. “I’m worried we could drift into a situation where the EU’s cohesion is at risk. But if anyone has the negotiating skill to find a solution to this, it’s Merkel.”

Additional reporting by Guy Chazan in Berlin

Chart du jour: UK’s sky-high public spending

Bar chart of Change since Q4 2019 (%) showing The UK is the only country to have seen a massive increase in public consumption in cash terms

The Financial Times has published a detailed analysis of the UK’s economic woes, which shows that public spending has exploded in nominal terms compared with the fourth quarter of 2019. (chart above via FT)

The jump in UK public consumption in cash terms dwarfs increases in France and Spain for the same period. The disparity has raised questions in Westminster, with MPs questioning the Treasury’s blank cheque approach.

Europe news round-up

A leaked European Commission draft outlines big ambitions for offshore wind power © AFP/Getty Images
  • The EU wants to drastically increase the amount of power generated by offshore wind energy. According to a leaked European Commission draft, the bloc hopes to move from the current 23GW generated by offshore wind to 300GW by 2050. The plan to increase offshore capacity is estimated to cost €789bn and could create up to 62,000 jobs. (Euractiv)

  • Moldova is set to elect Maia Sandu, a former World Bank economist, as its next president. Ms Sandu has promised to tackle corruption and heal divisions in the ex-Soviet state. Russian-backed challenger Igor Dodon has “provisionally” conceded to Ms Sandu, but claimed that there had been voting irregularities in Sunday’s poll. (FT)

  • Apple is set for another legal battle over alleged breaches of the privacy of its users in Europe. The claim, by superstar privacy activist Max Schrems, was filed to German and Spanish data authorities to avoid involvement by the EU and sidestep “endless procedures” that have encumbered claims against Apple in Ireland. The complaint claims that the unique tracking code generated by each iPhone allows advertisers to track users between apps without their consent. Apple has denied it is breaking EU law and has branded Mr Schrems’ complaint “factually inaccurate”. (FT)

  • Emmanuel Macron doesn’t think the new Joe Biden administration will reverse US disengagement in Europe — and the French president argues that it’s time for Europe to think more independently. In a wide-ranging interview with Le Grand Continent, Mr Macron also hit back at claims by German defence minister Annegret Kramp-Karrenbauer that Europeans would not be able to “replace America’s crucial role as a security provider”. Mr Macron responded that the era of American defence protection is over, and said Europe would only be respected if it was “earnest” with the US.

  • The EU may need to portray policy with more emotion — or risk having others spin the story for them. Dr Julia De Clerck-Sachsse of the European Council on Foreign Relations argues that the union should cast off the image of the dull bureaucrat and inject some passion into its policy, or it will lose touch with citizens seduced by populists with more emotive narratives.

Coming up today

Europe ministers log in for a marathon teleconference this morning to discuss the stalled budget negotiations and a new wrinkle in accession talks with Albania and North Macedonia. Bulgaria looks set to block the process because of a difference in view with Skopje about North Macedonia’s history and language, writes Valerie Hopkins in Budapest.

The country changed its name last year after a 27-year dispute with Greece, a breakthrough that opened the way to the start of EU accession talks. Allowing Sofia to block them now would be a blow to the bloc’s enlargement process — and would send signals to other western Balkan leaders that hard reforms will not be rewarded. 

mehreen.khan@ft.com; @MehreenKhn
sam.fleming@ft.com; @Sam1Fleming
david.hindley@ft.com





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Europe

Bullying Russia yearns to be treated as a great power

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The writer is the author of ‘Putin’s Russia’ and a member of the Liberal Mission Foundation

At their Conference on the Future of Europe, which opened on May 9, EU leaders invited citizens to “join the debate” on the path ahead. In Washington, President Joe Biden has called for “togetherness” as he announces ambitious plans to transform the US economy and society. For the west, the way to deal with crises is to build images of a better, shared future.

By contrast, Russia is turning to the past in its search for unity. At a Red Square military parade, also held on May 9, President Vladimir Putin asserted that the Soviet people had fought “alone” on their road to victory over fascism in the second world war. In this way, he confirmed that Russia and the west are on opposite trajectories.

Putin’s emphasis on his nation’s past achievements could secure stability in Russia for a while. His rule benefits from the fact that the Kremlin today faces no serious internal or foreign threats. Why, then, is Putin acting like some geopolitical Alfred Hitchcock and creating suspense in international relations, forcing western leaders to play “who blinks first”?

As Russia’s chief decision maker, Putin’s personal moods obviously matter. However, more important is the logic of the Russian system of power, with its demand for recognition on the world stage of the nation’s great power status. According to this logic, Russia cannot be ignored and must be a member of the global concert of powers. It believes macho bullying is the entry ticket to the concert.

Despite the crackdown on domestic dissent and the anti-western rhetoric of state propaganda, the Kremlin’s policies are aimed at preventing Russia from turning into a sealed-off fortress. For in order to be a great power, Russia has to sit at the same table as its peers. To satisfy its global aspirations and conform with the logic of its domestic power arrangements, Russia has to be simultaneously with the west and against it.

In a sense, Putin is getting what he wants. Biden has suggested holding a US-Russian summit, and EU leaders are trying to keep open lines of dialogue with Moscow despite low levels of mutual trust. However, if western governments hope to find a modus vivendi with Russia, they may be disappointed.

For the price that the Kremlin is willing to pay for the risks its policies are incurring is higher than the costs that the west is ready to impose on Russia for causing disruption. In effect, the west is pursuing a dual-track policy towards Russia of containment and co-operation. In recent times, however, this policy has run into the problem that co-operation stalls every time the west feels a need to deter Russia. If they want their approach to work, western countries will have to do a better job of compartmentalising the two tracks.

There are important differences with the cold war era of Soviet-western confrontation. In those decades, the Soviet Union unintentionally consolidated western unity by behaving in ways that strengthened the west’s commitment to principles of liberal democracy and the rule of law. Nowadays, post-Soviet Russia undermines the west by mimicking its liberal principles and getting “inside” western societies through its political and economic elites, business operations and powerful lobbying machines.

Partly for these reasons, the west finds it hard to set clearly defined “price tags” for what it deems unacceptable Russian behaviour. The Kremlin’s recent military build-up on Ukraine’s borders was evidently no red line for the EU. Yet to accommodate Moscow simply encourages its assertiveness.

Nevertheless, a bitter irony may lie in store for Russia. Putin’s international bullying beefs up his image as a strong leader at home. Yet the Kremlin’s continual testing of western patience serves to undermine Russia in more subtle ways.

After the Soviet Union’s collapse, Moscow learnt to use the west as an economic and technological resource. The Russian elite made the west its home. But to preserve the west as a resource, Russia needs the trust of western partners. Instead, the Kremlin’s Hitchcock-style games of suspense provoke western suspicions and an instinct to fall back on deterrence.

There is a potential trap for the west, too. Its dual-track policy helps Russia’s power structures, as they have evolved under Putin, to limp on. The Kremlin and its agencies engage in international behaviour that the west finds disagreeable. But the west can hardly try to undermine them without running the risk that Russia would plunge into instability. Is the west really prepared for the huge uncertainties of a world in which the existing power structures in Moscow unravel before any domestic alternative is available to take their place?



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PiS unveils ‘Polish Deal’ to lift economy

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Poland’s conservative-nationalist government has set out plans to boost health spending and cut income tax, as part of a sweeping programme designed to bolster the economy in the wake of the pandemic.

The so-called Polish Deal, which will include support for housebuyers, pensioners and families, as well as tax cuts for low and middle-earners, is widely regarded as an effort by the ruling Law and Justice party (PiS) to set out its stall ahead of parliamentary elections due at the latest in 2023.

Like most countries in the EU, Poland has been ravaged by Covid-19, with the pandemic claiming more than 70,000 lives and tipping the economy into recession for the first time in three decades.

Prime minister Mateusz Morawiecki said the Polish Deal — which will be buttressed by loans and grants from the EU’s recovery fund — was a chance to fulfil Poles’ dreams of catching up with richer countries in western Europe, as well as to expand the country’s middle class.

“We have a huge opportunity in front of us,” he said. “[In the past] we always had to worry about freedom from external oppression. But today, we can care about the freedom to decide about the rules of social and economic growth on our own sovereign Polish conditions.”

As part of the changes announced on Saturday, PiS and its two smaller allies plan to boost spending on the underfunded health system, parts of which have been overwhelmed by the pandemic, from 5 per cent of GDP in 2020 to more than 7 per cent in 2030.

The tax system will also be rejigged. The income-tax-free allowance will rise to 30,000 zloty, and the threshold at which Poles start paying the higher 32 per cent rate of tax will rise from 85,000 to 120,000 zloty per year.

Mortgage rules will also be revamped and guarantees will be provided to make it easier for the young to buy property, while the rules around building permits will be relaxed. There will also be further benefits for families with young children, and pensioners, as well as a programme of investments that PiS claimed would create 500,000 new jobs.

Morawiecki and his fellow speakers at the congress of the ruling camp gave few details on financing for the tax cuts.

Jaroslaw Gowin, deputy prime minister and head of Agreement, one of PiS’s two junior coalition partners, conceded richer Poles would have to pay more taxes, but did not go into detail. He also said the state budget would be hit.

Poland’s finance minister Tadeusz Koscinski told the FT that the tax cuts would partly be funded by faster growth. However, he added that the fiscal shortfall would also be partly covered by higher social security payments from workers and business, resulting from changes that would push more workers from self-employment to full employment contracts, and from the removal of a cap on social security payments for the self-employed.

Koscinski said the annual net cost to the state budget of the tax cuts would be about 7bn zloty. He added that there would be a further 3bn zloty in subsidies to co-finance investments by local governments that had lost revenue as a result of the tax changes.

Adam Czerniak, an economist at Polityka Insight, said the government’s assumptions about faster growth helping to cover the cost of the government’s plans were “optimistic, but I think they can happen”.

However, he expressed concern that the changes around housing — which include state guarantees on home loans for young borrowers — could cause a booming market to overheat.

“Guarantees on down payments are very risky at this point in the business cycle in the housing market,” he said.



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Gastronomes look beyond pandemic to a revolution in French fine-dining

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Chef Yannick Alléno used to serve a €395 menu featuring langoustines and foie gras at his three-starred Michelin restaurant near the Champs-Elysées.

But as France prepares to allow restaurants to reopen for outdoor service next week after six months of closure, he will instead be serving up burgers at his wine bar for a fraction of the price. 

That a superstar chef such as Alléno, whose stable of high-end restaurants from Courchevel to Marrakesh hold more than a dozen Michelin stars, is changing strategy underscores the difficulties facing France’s grands restaurants as they seek to recover from the ravages of the coronavirus pandemic

“We have to inspire people to come here by sparking their curiosity,” he said of the Pavillon Ledoyen, the neoclassical building that houses several of his restaurants, including the three-starred Alléno Paris.

Such temples to French gastronomy have long catered to wealthy foreign tourists, who will happily pay more than €1,000 for a meal for two as long as they experience l’art de vivre à la française. But with international travel severely curtailed by the pandemic, such customers are not expected back for some time. 

Chef Yannick Alléno
Yannick Alléno operates high-end restaurants from Paris to Courchevel and Marrakesh that hold a dozen Michelin stars combined © Francois Durand/Getty

Attracting locals is the new challenge, as well as retaining employees, many of whom have left the sector and its notoriously challenging working conditions. Many restaurants are also saddled with large debts after taking state-guaranteed loans to ride out the crisis.

“I have three years of struggle ahead,” said Alléno, adding that half the group’s €4m in cash reserves had been spent. “For three-star restaurants, there will be many casualties.” 

His flagship restaurant used to generate more than three-quarters of revenue from foreign diners, mostly from Asia and the US. As there is little point reopening without them, the doors will remain shut until September. Alléno will for now experiment in the less-formal location as he plots an overhaul that seeks to drag fine-dining into the 21st century.

“Everything must change,” he said, quoting the title of the book he co-wrote during lockdown. In it, he called for a revamp of everything from the style of service (warmer, more personalised) to staffing (more flexible and family-friendly).

French haute gastronomie traces its roots back to visionary 19th-century chefs such as Auguste Escoffier and Marie-Antoine Carême, who created a cuisine based on rich sauces and meticulous — often theatrical — service. For decades it was considered the world’s best and became a key part of French identity.

But its popularity has faded in recent decades thanks to competition first from the flashiness of molecular gastronomy and then the pared-back Nordic style. As French haute cuisine lost ground, it became much more expensive, putting it out of the reach of many.

“The pandemic has exposed that the business model of high-end restaurants in France simply doesn’t function without tourists,” said Joerg Zipprick, co-founder of La Liste group, which ranks the world’s best restaurants.

“This is a relatively new development. It used to be that . . . a local doctor or manager would come to these places to celebrate a special occasion. No longer.”

Zipprick said that for the top chefs, many of whom had spent the past year experimenting with takeouts and meal kits, success depended on their willingness to adapt.

A customer picks up his order from Baieta in Paris
Baieta restaurant in Paris. Many top chefs have experimented with takeouts and meal kits during the past year © Franck Fife/Getty

Diners would not want fussy and experimental dishes on their return, he predicted, but would instead want to eat good food at a nice restaurant in the company of friends and family.

“No more technical stuff or food that requires a long explanation from the waiter about the fermentation process. People don’t want their meal to be a work of art,” Zipprick said.

The last time French cuisine reinvented itself was in the 1970s when chefs such as Paul Bocuse and the Troisgros brothers created nouvelle cuisine. The movement, less opulent and calorific than the fine-dining that preceded it, put fresh and high-quality ingredients to the fore and service became less formal. 

Alléno believes top restaurants must aim to tailor experiences by talking to clients beforehand about the occasion for their dinner, the guests and their tastes.

This “concierge service” approach would allow menus to be better planned, improving the customer experience and the economics for the restaurant.

“If I know I only have three people who’ll eat langoustine on a given night then I don’t need to order six kilos just in case,” he said. “It really changes things for the kitchen.” 

Others are being even more radical. Daniel Humm’s three-starred Eleven Madison Park in New York will no longer serve meat and seafood when it reopens next month, as the Swiss chef seeks to show that sustainable and environmentally conscious eating can be compatible with luxury.

However, Éric Fréchon, the three-Michelin-starred chef behind restaurant Epicure at the five-star Le Bristol Paris hotel, played down expectations of radical change.

“Things will return much as they were before,” Fréchon said, noting that the hotel’s restaurants had a significant local client base. “People have missed the experience of haute gastronomie for so long they’ll be eager to come back.”

Fréchon said he would retain some coronavirus-era innovations, including the €1,390 “gastronomy and to bed” package that is marketed as a one-night staycation for locals that includes dinner in their suite or hotel room.

“For New Year’s Eve we had 60 servers running back and forth to rooms, it was really difficult,” he said. “But it allowed us to reach new clients who perhaps would not have dared to come to a three-star restaurant. Now we have to keep them.”

Additional reporting by Domitille Alain in Paris



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