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Angela Merkel faces final challenge at EU summit

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Angela Merkel heads to an EU summit this week that could end up defining her legacy, just nine months before she quits the political stage, and Germany and Europe embark on the post-Merkel era.

It is the last summit of Germany’s six-month presidency of the EU, a time of unprecedented challenges for the 27-member bloc. The coronavirus pandemic plunged it into the worst economic crisis in its history, talks on Brexit have gone to the wire and a row over the rule of law has caused a damaging split between Hungary and Poland and the bloc’s 25 other member states.

That dispute threatens one of the EU’s singular achievements — a €1.8tn deal on its next seven-year budget and a massive Covid-19 recovery fund, financed by debt raised on capital markets by the European Commission and designed to help struggling economies rebound from the crisis.

“This was to be the main legacy of the German presidency and, perhaps, the pinnacle of Merkel’s time as chancellor — and now it’s hanging by a thread,” said Jana Puglierin, head of the Berlin office of the European Council on Foreign Relations.

Hungary and Poland’s objections centre on a key provision tying the release of EU funds to adherence to the rule of law. Their response — threatening a veto over the whole budget deal — threw down the gauntlet to all the other member states. But for Ms Merkel it was particularly painful — a rejection of everything she stands for.

“Merkel is all about patiently, doggedly searching for compromises,” said Josef Janning of the German Council on Foreign Relations. “But you can’t do that when a member state threatens a veto. That just pulled the rug from under her feet.”

The shockwaves from a potential veto would be far-reaching. Leaders had been hoping to use this week’s summit to land a major agreement on the EU’s emissions targets, with member states pencilling in a 55 per cent reduction by 2030. But those plans hinge on the availability of funds to help pay for the transition to a lower-carbon future. So without a deal on the budget — known as the MFF or multiannual financial framework — and the recovery fund, diplomats warn, the climate discussion is likely to be derailed.

“Not agreeing on the MFF . . . endangers reaching the very, very urgent and necessary conclusions on climate,” said one.

Then there are the ongoing Brexit discussions. If the UK and EU fail to strike an agreement on their future relationship in the next few days, the potential chaos associated with a no-deal outcome could spill over into the summit as well.

Officials have been working behind the scenes to tee up a compromise between the two sides in the rule-of-law dispute. This would add some reassuring language aimed at easing concerns in Poland and Hungary that they would be unfairly targeted by the rule-of-law mechanism.

But the commission has at the same time been working on fallback options that would allow the 25 member states backing the mechanism to set up the recovery fund by themselves, cutting Poland and Hungary out.

That, however, goes against everything Ms Merkel believes in. Her mantra has always been to “keep everyone onboard”, as her officials put it, and to keep negotiating until a solution acceptable to everyone begins to emerge. The idea of a new EU instrument from which certain EU members are excluded is deeply inimical to her.

Some say she has not much choice. “Merkel now just has to stand up to [Hungarian prime minister Viktor] Orban and [leader of Poland’s Law and Justice party Jarosław] Kaczyński,” said Ms Puglierin. “If she doesn’t, she will just damage her credibility.”

Opposition MPs argue she should have stood up to them long ago. “When you compromise for too long with populists, they push you so far that by the end of it you’re right up against the wall,” said Franziska Brantner, Europe spokeswoman for the German Greens.

Hungarian prime minister Viktor Orban, right, and his Polish counterpart Mateusz Morawiecki hold a press conference after meeting in Budapest last month © Andrzej Lange/EPA/Shutterstock

The German presidency of the EU was not supposed to end with such a crashing row. There were high hopes that Ms Merkel’s deft stewardship would put the EU firmly on the path to recovery. 

Some think that was always unrealistic. “Expectations were a little overloaded,” said Manfred Weber, head of the centre-right European People’s party group in the European parliament. “Everyone said — here comes Merkel, she’ll solve all Europe’s problems. But it was clear from the start that would be hard to achieve.”

Ms Merkel herself had big ambitions for the presidency. She wanted to launch a discussion on the EU’s future, advance the green and digital agendas, and kickstart stalled talks on reforming the EU migration system.

Yet progress has been halting. Ms Merkel’s hopes that the EU could finally clarify its relations with China “didn’t get very far”, Mr Weber acknowledged, with the pandemic forcing the cancellation of an EU-China summit that had been due to be held in Leipzig in September. The virus, which made it next to impossible for working groups to meet physically, “put an enormous strain” on the German presidency, Mr Weber said.

There are still hopes that compromises can be found. Yet diplomats remain fearful the German presidency could end in failure — on reaching a Brexit trade deal and on getting the recovery fund off the ground. That could badly harm Ms Merkel’s reputation just months before the Bundestag elections that will mark the end of her 16 years in power.

“It would be the proof that her time is over,” said Mr Janning. “It would show that her magic powder just doesn’t work any more.”



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ECB signals rising concern about eurozone bond market sell-off

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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

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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

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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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