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EU faces barriers to boosting single currency’s global status

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Brussels faces a steep climb in its effort to boost the international role of the euro as part of its quest to strengthen the EU’s self-reliance, investors and analysts said after the bloc set out new ambitions for the single currency. 

A European Commission paper on Tuesday argued that the EU’s unprecedented €750bn borrowing programme, which will pay for its Covid-19 recovery fund, will add “significant depth and liquidity to the EU’s capital markets”, making them and the euro more attractive for investors.

“For the foreseeable future the EU will be a substantial player in the international markets, and it is clear that this will help us strengthen the international role of the euro,” said Valdis Dombrovskis, commission executive vice-president, as he helped launch the new paper.

But Myles Bradshaw, head of global aggregate fixed income at JPMorgan Asset Management, said he was sceptical that the recovery fund — which is by its nature designed to be temporary — would by itself be a game-changer for the euro’s role. 

“Part of the characteristics of an international currency is a deep liquid bond market that’s easy to invest in. Having a bigger pool of assets is helpful. But there’s so much else that goes with it — and that’s where the euro gets left behind,” Mr Bradshaw said. 

The EU has long wanted to challenge the US dollar’s dominance in cross-border finance and trade, but there has been little progress on this in a range of areas.

The euro’s share of global foreign exchange reserves has fallen from 23 per cent a decade ago to 20 per cent in 2019, while its use in invoicing for eurozone exports and imports has remained steady at around 60 per cent and 50 per cent respectively. 

One of the few areas where it has established a dominant position is the fast-growing green bond market, almost half of which is denominated in euros.

Maria Demertzis, deputy director at the Bruegel think-tank, said that the size of the fresh issuance of euro-denominated safe assets was not by itself enough for the euro to be a “contender” with the dollar. The bloc also had to tackle residual investor doubts arising from the single currency’s “imperfect architecture”, which is based on a union of multiple sovereign states not just one.

The eurozone’s capital markets remain less developed and more fragmented than those of the US, something the commission is seeking to address via its long-running Capital Markets Union plan. Key elements of the monetary union remain uncompleted, including the Banking Union project, which ministers are also seeking to accelerate.

Ms Demertzis encouraged the EU to focus on getting more transactions in euros, instead of dollars, for example in energy invoicing. This is something the commission report highlights as an area of recent progress, as it vows to foster the euro’s status as an international reference currency in the energy and commodities sectors.

Despite scepticism about the euro’s ability to rival the dollar, some EU officials insist the scale of its new borrowing programme has the potential to be a game-changer, alongside other steps to boost the currency’s attractiveness.

Last year’s deal between member states on the recovery fund “is seen in the markets as a potential shift in European integration, not just a one-off event”, said one EU official. “There is an appetite among public and private institutions for something that helps them diversify away from the dollar, and they see Europe eventually having the critical mass for that.”

Kalin Anev Janse, chief financial officer at the European Stability Mechanism — the eurozone’s bailout fund — said the agreement on the recovery fund had sparked greater interest in euro assets among foreign reserve managers. 

Central banks from outside the eurozone have been buying a larger share of ESM debt sold since the summer, according to Mr Anev Janse. “Ten years ago markets were betting on a break-up of the single currency, but today is a completely different crisis, ” he said. “The monetary and fiscal response has been faster this time. Investors have gained confidence that Europe will stick together.”

Common European debt from the commission and European Stability Mechanism represents €450bn today, but this will leap to €1.23tn in five years, driven in large part by recovery fund borrowing, according to ING projections. Factoring in borrowings from the European Investment Bank, the total will reach €1.75tn, according to ING analyst Benjamin Schroeder. 

That figure would put the EU and these agencies among the region’s top debt issuers: Italy currently has €2.15tn of bonds, with France at €2tn and Germany at €1.46tn.

The commission paper was first reported by the Financial Times on Saturday. It also touts the potential introduction of a digital euro by the European Central Bank as a potential boost for the single currency.

Fabio Panetta, an executive board member at the ECB, said in a recent speech that a digital euro could become “an attractive payment vehicle or store of value for non-euro area residents” and therefore boost the currency’s international usage. 

It could also weaken the US dollar’s role as the clearing currency for most international payments if other central banks agreed to process cross-border payments directly by swapping digital currencies, an idea outlined in a recent ECB report.



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Numis sets out EU ambitions after record results

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Numis has picked Dublin for its new EU office to target European clients cut off by Brexit rules after the London-based broker posted record results for the first half of its financial year.

Numis said initial public offering volumes over the six months to the end of March were at their strongest level “for many years”, helping to more than double revenues in its investment banking division to £82m. The company advised on flotations including Moonpig and Auction Technology Group during the period. 

Overall revenue rose almost two-thirds to £115.4m, while pre-tax profit increased more than fivefold to £39.3m. 

Numis said mergers and acquisitions had also started to recover, driven by domestic and international buyers identifying attractive investment opportunities as the economic impact of the pandemic on the UK market eased. The broker is advising property group St Modwen on a £1.2bn takeover approach from Blackstone announced on Friday morning.

Alex Ham, co-chief executive, said activity for the rest of the year looked strong, with a number of IPOs and deals expected.

Some of these are likely to be European IPOs, despite the fact Numis has been unable to market to EU clients since the UK left the trading bloc. 

Numis has relied on so-called reverse solicitation — in effect, requiring EU clients to approach the broker for help — but plans to open a Dublin office next year to ramp up growth across Europe. Brexit had caused a reduction in institutional income from EU-based clients over the six-month period, it said.

“This is a departure for us in expanding beyond the traditional UK market,” said Ross Mitchinson, co-chief executive. “Dublin is a real focus for us to much better attack the European market.”

Mitchinson said EU regulators were being “tough but fair” about requirements on opening the office. “They want to see a well-capitalised business.”

The UK government and regulators have launched a series of consultations and proposals to deregulate and streamline rules to help British financial services groups after losing easy access to EU markets and clients.

But Mitchinson said these had not made much difference so far to Numis, adding that he did not “see the point” of a recent push to reduce the impact of Mifid II rules on research for small companies. “Institutions will not take a different approach,” he said. 

Numis will move to a new London office in September, which has been reconfigured with additional “Zoom rooms” to reflect the push for more flexible working in a future split between the office and home. 

Ham said he expected Numis staff to aim for two to three days a week in the office, with less need for international travel. But he added that many at Numis would be led by the needs of their clients, rather than any prescriptive working arrangement.

The average market capitalisation of its clients has almost doubled, in part owing to the rebound in the FTSE and a focus on “growth stock” clients such as Asos and Ocado. Numis also stopped working for businesses in the natural resources sector last year — partly owing to environmental, social and governance concerns about mining and oil — but these also tended to be smaller clients.



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Angela Merkel rejects US move to waive patents on vaccines

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Angela Merkel has expressed opposition to the Biden administration’s proposal to suspend intellectual property rights for Covid-19 vaccines, saying it would have “serious implications” for vaccine production worldwide.

The German chancellor said the limiting factors in vaccine supply were “production capacities and the high quality standards, not the patents”.

“The protection of intellectual property is a source of innovation and it must remain so in the future,” she added.

Merkel was responding to President Joe Biden’s top trade adviser Katherine Tai who said that while the US “believes strongly” in IP protections, it would support a waiver of those rules for Covid-19 vaccines.

A waiver would allow any pharmaceutical manufacturer in the world to make “copycat” vaccines without fear of being sued for infringing intellectual property rights.

“This is a global health crisis, and the extraordinary circumstances of the Covid-19 pandemic call for extraordinary measures,” Tai said in a statement on Wednesday.

The US would “actively participate” in negotiations at the World Trade Organization to hammer out the text of a waiver, she added, noting that those discussions would take time given the complexity of the issues involved.

Washington’s proposal has put the EU on the back foot. In recent months the bloc has resisted a push led by India and South Africa within the WTO for a vaccine patent waiver.

The US move received a cool response from Ursula von der Leyen, European Commission president. She said the EU was “ready to discuss” how the proposal could help address the current crisis “in an effective and pragmatic manner”.

But she also insisted the priority was for vaccine-producing countries to lift barriers to exports and address supply chain interruptions.

Von der Leyen contrasted the EU’s approach with that of some allies: “Europe is the only democratic region in the world that exports vaccines on a large scale.” The US, a large vaccine-producing country, has reserved most of its homegrown jabs for domestic use.

The US proposal received a more positive response from Vladimir Putin, who said Russia, which manufactures the Sputnik V vaccine, would support the move. “A pandemic is an emergency situation . . . No doubt, Russia would support such an approach,” the Russian president said.

China’s foreign ministry said it looked “forward to having active and constructive discussions with all parties under the WTO framework in order to reach an effective and equitable agreement”.

Emmanuel Macron, the French president, said he was open to the idea of a waiver of IP rights, but “the reality is that the bottlenecks today are not price, or the patents”.

“You can transfer the intellectual property to pharma companies in Africa but they have no platform to make mRNA vaccines,” he said.

The idea of a waiver is also opposed by BioNTech, the German start-up whose joint venture with Pfizer brought the first messenger RNA-based vaccine to the market. The company said it would not ease current supply shortfalls and warned of the risks of opening up manufacturing to producers with no mRNA experience.

“Together with Pfizer, we are also working with various organisations to support the supply of vaccines to populations worldwide. And we will continue to provide low or lower middle-income countries with our vaccine at a not-for-profit price,” BioNTech said in a statement on Thursday.

“However, patents are not the limiting factor for the production or supply of our vaccine . . . The manufacturing process of mRNA is a complex process developed over more than a decade.”

Stéphane Bancel, Moderna’s chief executive, said the vaccine makers would have vastly expanded their capacity before any new players could make a real difference to supply. 

“If you were to start today, you’re going to have to start by hiring people. Those vaccines don’t fall from the sky,” Bancel told the FT US Pharma and Biotech Summit on Thursday. “There is no mRNA industry . . . When we hire people that come from traditional pharma, we have to train them in the art of mRNA.”

Matthias Kromeyer, a general partner at the venture capital firm MIG, one of BioNTech’s earliest investors, said a patent waiver would discourage future investments in the sector.

“If the US/EU/WHO suspend patent protection, they will lose a lot in the long run — namely the willingness of private investors to invest in such companies, many years before it is clear whether their technologies will succeed or not,” he said.

“This would mean the collapse of an entire industry that has just demonstrated it is the only one that can deliver a sustainable solution for this global medical, economic and social crisis. Without private investors, this innovative power will no longer exist in the future — what will we do then?”

The chief executive of Bristol Myers Squibb described the US government’s support for waiver as “very concerning” during an interview at the FT US Pharma and Biotech Summit on Thursday.

“Our industry depends on intellectual property protection in order to invest in R&D and make the investments needed to address crises like Covid,” Giovanni Caforio said. “The developments of the past 24 hours are very concerning and disappointing.”

As well as being important during the coronavirus crisis, Caforio said that IP protection is “critical for some of the areas of higher medical need where BMS invests like cancer care”.

Additional reporting by Leila Abboud in Paris

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UK ends damaging post-Brexit clash over status of EU envoy

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UK foreign secretary Dominic Raab has finally ended a corrosive diplomatic dispute over the status of the EU’s ambassador in London, a stand-off that had added to post-Brexit tensions.

Raab had previously refused to grant João Vale de Almeida full diplomatic status after Brexit took effect on January 1, arguing the EU was an “international organisation” not a state.

Brussels retaliated by shutting Britain’s head of mission to the EU, Lindsay Croisdale-Appleby, out of key meetings with EU officials, adding to Brexit tensions on trade and Northern Ireland.

But on Wednesday the issue was settled after a meeting between Raab and Josep Borrell, the bloc’s foreign policy chief.

Officials briefed on the deal said Vale de Almeida would now receive the same diplomatic recognition as his counterparts in EU missions in all other world capitals, including Washington and Beijing.

In a joint statement, issued at a G7 meeting in London, Raab and Borrell said they had reached an agreement based on “goodwill and pragmatism” on an establishment agreement for the EU delegation to the UK.

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While Vale de Almeida will enjoy full ambassadorial status, British officials said Raab had secured a deal “which gives us some of what we want” regarding the legal situation of EU staff in London.

EU officials will enjoy a largely similar status to other diplomats but with some downgrades: notably, under the agreement, they will not have immunity from prosecution for road traffic accidents.

Raab insisted on this carve-out following the death of Harry Dunn, a British motorcyclist killed in 2019 in a collision with a vehicle driven by Anne Sacoolas, the wife of a US diplomat. She returned to the US claiming diplomatic immunity. 

But many British diplomats were dismayed at how long it had taken to resolve the dispute. “It was a stupid thing to do in the first place and we’ve had to back down,” said one former ambassador.

The diplomatic rapprochement was hailed in Brussels as a sign of a “new cycle” in UK-EU relations following the European parliament’s formal ratification last month of the trade deal between the two sides, which took effect on January 1.

There has also been a thawing in relations over the management of tensions in Northern Ireland, as London and Brussels look for ways to soften border checks on goods coming from the British mainland to the region.

Vale de Almeida will now get to present his diplomatic credentials to the Queen — an honour not available to the heads of international missions.

Boris Johnson has never recognised the EU as equivalent in status to a national government but Number 10 insiders insisted that the Foreign Office — not the prime minister — was responsible for the diplomatic dispute.

Meanwhile, Ireland and the UK announced plans for the first meeting in two years of the British-Irish Intergovernmental Conference, a structure created under the 1998 Good Friday Agreement for the two countries to liaise on issues around Northern Ireland. 

“We are aware that there are sincerely held concerns in different communities in Northern Ireland in relation to a number of issues and firmly agree that the best way forward is through dialogue and engagement,” said Northern Ireland secretary Brandon Lewis and Ireland’s foreign affairs minister Simon Coveney in a joint statement after they met in Dublin on Wednesday afternoon.

The meeting will take place in June, ahead of the July marching season in Northern Ireland, which could inflame tensions between unionists — who feel that their region’s status in the UK is under threat from post-Brexit trading arrangements — and nationalists, who are pushing for a vote on a united Ireland. 

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