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Why the EU insists on a level playing field

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We keep waiting for white smoke from the Brexit negotiation rooms. But the signals from the EU-UK talks are now that the parties have reached an understanding that regulatory divergence — where one party adopts laxer rules than the other on the environment, social and labour issues, or state subsidies — will be managed by the option to retaliate with tariffs to avoid being undercut by a race to the bottom. The technical talks are focused on whether this can be turned into concrete enough procedures that both sides are willing to sign up to — how to “future-proof fair competition”, in the words of European Commission president Ursula von der Leyen.

This is good news: we are now in “split the difference” territory rather than irreconcilable disagreements on principles. That is where negotiations can succeed. It is also why fish, despite the direct conflict of the two sides’ interests, will not be what prevents a deal from being agreed.

Of course, things can still go wrong. Even high-placed EU diplomats now seem only vaguely acquainted with what precisely is going on at the negotiating table. We will just have to see; but I stick to my view that a deal will happen, and it will largely happen because Prime Minister Boris Johnson will make the required concessions while declaring at home that he made the EU back down.

If the most important action has been on the EU’s level playing field demands, what is the reason for this? Reactions to the EU’s focus on protecting against British deregulation have ranged from jingoistic (“they don’t get that we want sovereignty”) to playing the victim (“punishment tariffs”) or patronising Europe (“they are too defensive about their single market”). We should do better. It is crucial to understand the rationale for insisting on level playing field rules in trade deals because it is going to become an increasingly common component of trade liberalisation worldwide.

The reason, as Spain’s foreign minister Arancha González has pointed out, is that trade deals are not vehicles for independence, but frameworks to manage interdependence. And this interdependence is intensifying in two ways. One is that as trade evolves towards services and more sophisticated goods, the product you trade can no longer be separated from how it is produced: financial services and personal data are just two examples of how the quality of the product you receive (the risk to your finances or your privacy, say) depends fundamentally on how the service is regulated in another country.

The other is that we increasingly understand the difference between globalisation and deregulation. To be an economic liberal internationalist is to promote cross-border economic exchange where everyone pursues the activity they can do best. It is not to accept that production is moved purely in order to circumvent the rules that express democratic preferences over how workers should be treated, whether producers may pollute, or how states subsidise companies to tilt the playing field in their favour.

In one sense, it is “very simple” as von der Leyen put it to the European parliament on Wednesday: it is about making trade liberalisation compatible with “fair competition on our own market”. The same can be said for other forms of globalisation: flows of capital or people should be encouraged, but not serve as means to circumvent rules for how we govern our economies.

In practice, of course, there are a lot of fine lines to draw. But this new, richer view of globalisation is not going to go away — indeed it is the reason why globalisation will continue, but take on a more overtly political form.

The EU’s insistence on an ability to withdraw trade privileges from trading partners going by sufficiently different rules is not something unique to the talks with the UK. Something like this has already existed in the EEA agreement for a good quarter of a century.

It could be said that the EEA is special: it is expressly designed as a framework for deep and evolving economic integration between trading partners whose intention is to play by a single set of rules. The economic logic of this is that of free trade: different rules create frictions for cross-border exchange. However, few if any other trading partners in the world are as committed to rule-sharing as the EU and its Efta partners. 

But more recently, the EU has become more willing to use its heft to condition trade with other partners, too, on their willingness to adopt rules to its satisfaction. The (still unratified) free trade agreement with Mercosur is the clearest case: it requires the parties to comply with certain climate change commitments. Earlier trade deals are less richly equipped but not bereft of requirements on social and environmental conditions. The EU is, for example, pressuring South Korea to strengthen workers’ rights under a commitment given in the two economies’ free trade agreement. The EU has also withdrawn trade privileges to Cambodia under its “everything but arms” framework, because of human right violations in the country.

And the EU is not alone. When the Trump administration renegotiated the North American Free Trade Agreement, it insisted on demanding wage floors in Mexican car manufacturing as a condition for tariff reductions. As for China, no one should doubt its willingness to condition trade on others playing by its rules; Australia is only the latest example.

Compared to these examples, the EU’s rule-making is benign. It is not against free trade to insist on similar regulation: it is simply pointing out that businesses should not compete on their ability to circumvent the rules to govern how a population democratically has decided to live. One might even say that understanding how globalisation and common rule-making go together is a precondition for popular sovereignty.

Other readables

  • The EU is preparing aggressive new rules on Big Tech. The proposals unveiled this week have already ignited fierce debate.

  • Current and former colleagues of mine have produced insightful analyses of China in the past week. James Crabtree analyses President Xi Jinping’s new economic policy framework, calling it “a radical new understanding of globalization and of China’s place within it”. In the FT, James Kynge and Jonathan Wheatley observe a significant pullback of infrastructure investments in China’s Belt and Road megaproject. And global investors are rushing in to buy Chinese stocks and bonds.

  • Last week’s EU summit may go down in history as more momentous than many have noticed.

Numbers news

  • The EU’s resolution fund is clearing its last legislative hurdles, and it is already having its intended effects. In Spain, companies are drawing up ambitious proposals for investment in digital and green infrastructure.





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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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