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Bundesbank hawk adapts his strategy



Good morning and welcome to the last edition of Europe Express before the summer break.

Officials in Brussels and other capitals have already started peeling off for the holidays, but it will be a busy day in Frankfurt, where the European Central Bank’s last governing council before the summer hiatus takes place. We thought it would be timely to profile Jens Weidmann, the governor of Germany’s Bundesbank, and look at his somewhat unexpected transformation over the past few years.

With another batch of national recovery plans due to be signed off by the bloc’s finance ministers on Monday via videoconference, we will also take a look at the situation with Poland and Hungary’s bids for EU funding.

And with that, we hope you enjoy your summer and we will be back in your inboxes on September 6. Bis dann!

This article is an on-site version of our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday morning

From Mr No to Mr Yes, but . . .

Jens Weidmann, the head of Germany’s central bank, was once dismissed by Mario Draghi as Nein zu allem — German for “No to everything” — after he opposed many of the European Central Bank’s unconventional policies over the past decade, writes Martin Arnold in Frankfurt.

Yet under Draghi’s successor, Christine Lagarde, the Bundesbank boss has become more likely to say Ja, aber, or “Yes, but”, when debating the ECB’s plans to provide more economic stimulus.

Weidmann’s newfound conciliatory approach is underlined by the fact that he agreed along with the 24 other ECB governing council members to the new strategy announced two weeks ago, which shifted the Frankfurt-based institution in a more dovish direction.

Having raised its inflation target slightly to 2 per cent, ditched a commitment to keep price rises below that level and accepted they can even temporarily exceed it, the ECB is today set to embed these policies into its guidance on the future path of its interest rates and bond purchases.

The strategy also means that policies previously considered unconventional and often criticised by Weidmann, such as negative interest rates and bond purchases, are now firmly counted by the ECB as part of its regular toolbox.

In many ways, what Lagarde has dubbed the ECB’s new “foundational document” marked a significant break with the Bundesbank’s conservative, inflation-fighting doctrine that formed the bedrock of the euro’s creation. The ECB even diluted the monetary analysis that was a pillar of Bundesbank orthodoxy by combining it with financial stability analysis.

As if this was not already difficult enough to swallow for Weidmann, he has also had to significantly shift his position on the question of how far the ECB should go to tackle climate change — a topic Lagarde made a focus of the strategy review. 

Two years ago, Weidmann said he would view “very critically” any move to shift bond buying and collateral policies in a greener direction, warning that this would violate the “market neutrality” principle that the bank’s corporate asset purchases should mirror the overall market.

Now, the ECB has launched a climate action plan that aims to overhaul its corporate bond purchases and a collateral programme to address climate risks and seek alternatives to the principle of market neutrality.

However, this does not mean that Weidmann has gone soft. Instead, he is moving with the times. His red lines may have shifted, but they are still there, as shown in his recent “hawkish” speeches. 

He warned last month that “inflation is not dead” and compared it to the Galápagos giant tortoise, which was wrongly classed as extinct for 100 years only to reappear. As the economy rebounds from the pandemic, he is likely to be even more vocal.

The Bundesbank boss can also say that he successfully argued against calls for the ECB to copy the US Federal Reserve’s average inflation target, an even more dovish stance than the one adopted by the eurozone central bank, and he resisted pressure for it to sell all bonds issued by fossil fuel companies.

The 53-year-old former economic adviser to Angela Merkel became the youngest person ever to lead the Bundesbank in 2011. He is on track to be its longest-serving president if he remains in office next year. (Read our full profile)

He is already gearing up for his next battle — to ensure the ECB’s €1.85tn pandemic emergency purchase programme is wound down as soon as the Covid crisis ends and to prevent much of its flexibility and potency from being simply transferred to future bond-buying.

Chart du jour: Semiconductor superpower?

Global wafer semiconductor production capacity

The EU has set the ambitious goal of doubling its share of the global semiconductor market by 2030, and US chipmaker Intel is eager to be part of that effort. But some in the industry are asking if the push is even worth it given the huge sums it will cost. Supporters argue it is important for the bloc to stake its claim in the strategically important industry dominated by Asian companies. (Read more here)

Polish-Hungarian limbo

Yesterday marked the first anniversary of the summit deal struck by EU leaders to set up a coronavirus recovery fund fuelled by common borrowing, writes Brussels bureau chief Sam Fleming.

It was a landmark joint response to the economic crisis that has won praise not only within the EU but also outside it, including recently from Janet Yellen, the US Treasury secretary (though she added that the EU’s fiscal response needed to be boosted further).

Of course, leader-level agreements are one thing, and it is quite another to turn a summit communiqué into hard law and large amounts of borrowing. But as EU ministers prepare to disappear for their summer breaks, we are not far from the point where billions of euros will start pouring into member states’ bank accounts — or at least some of them.

To date, 25 recovery and resilience plans have been submitted to the European Commission for approval, including those of all the biggest member states — Germany, France, Italy and Spain. The only ones that have yet to land are those of Bulgaria and the Netherlands, which have been hamstrung by lengthy government formation.

The plans of 12 member states have already received the green light from both the commission and the EU’s council of ministers, the latter step last week at a meeting of finance ministers. Another four should be signed off at a finance ministers’ meeting on Monday.

That means the cash should start flowing by the end of the month and through August, as the pre-financing element of the €800bn recovery package becomes available. The commission has already raised €45bn for these early disbursements, which will be available once member states sign financing agreements and, where appropriate, loan agreements with the EU.

There are, however, a number of plans that have yet to be endorsed by the commission. For most, it looks to be a matter of time, but there are heavy clouds hanging over two in particular — those submitted by Poland and Hungary. As Paolo Gentiloni, economics commissioner, put it to the FT, when it comes to the Warsaw and Budapest plans, “we are not yet there, unfortunately”.

There is no formal indication from Brussels of how soon these plans will win the commission’s nod, but there is an increasing likelihood that neither will get the all-clear until after the summer break given the difficulty of the negotiations.

As she unveiled the commission’s latest rule of law report on Tuesday, Vera Jourova, commission vice-president, said she could not predict how long the talks would last with either capital. She warned the commission was being “very demanding” when it came to the audit and control systems required of member states to ensure distributions of cash will be “legally sound”.

At the same time, Poland is engaged in a deepening stand-off with the commission over judicial independence, which has complicated the talks, as have disagreements over the environmental aspects of its recovery plan.

Hungary’s discussions have also stalled, in part because of disagreements over rule of law-related commitments and anti-corruption measures. The situation has been further clouded by controversy over the country’s bill restricting LGBTI+ discussions in schools and the media.

There is a huge amount of money at stake for the two countries — almost €24bn of grants in the case of Poland, and more than €7bn for Hungary. The longer the first payments are delayed, the more painful the stand-off will become for them.

What to watch

  1. The governing council of the European Central Bank meets today in Frankfurt

  2. EU finance ministers are set to approve another batch of national recovery plans on Monday

Notable, Quotable

  • No (re)negotiation: Brussels has snubbed an attempt by the UK to renegotiate the Northern Ireland protocol. London has threatened to suspend parts of the Brexit deal if the EU does not agree to new trading rules for Ireland.

  • Pipe deal: The US and Germany have reportedly reached a deal over the Nord Stream 2 pipeline. Washington has dropped its opposition on the provisos that Berlin invest in Ukraine’s renewables industry and Kyiv receive annual transport fees from Russia that it would lose if Nord Stream 2 comes online.

  • Hungary referendum: Hungary’s prime minister Viktor Orban is taking his contentious anti-LGBTI+ legislation, which has angered the EU, to a referendum. Citizens will be asked five questions, such as whether they support holding sexual orientation workshops in schools without parents’ consent.

Smart (summer) reads

  • The Brexit stats gap: Ask officials in Brussels and London how trade has changed and you may get two very different answers. John Springford at the Centre for European Reform breaks down why there is such a difference in post-Brexit import and export data.

  • Where to place Turkey: Turkish plans to settle ghost towns on the island of Cyprus was quickly met with a chorus of condemnation by the EU. But according to a paper by the Heinrich Böll Foundation, it is up to Washington and Brussels to better co-ordinate policy to promote democracy in the country and avoid a more fractious relationship with Ankara.

  • Smart listen: The FT’s TechTonic podcast is back with a second season that explores the use of artificial intelligence in healthcare, trading and more. Episodes drop on Mondays.

We may be off until September 6, but we do want to hear from you and what you’d like to read more about:

Today’s Europe Express team:,,, Follow us on Twitter: @MAmdorsky, @Sam1Fleming, @valentinapop.

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Ransomware attacks rise despite US call for clampdown on cybercriminals




Ransomware updates

In mid-June, US president Joe Biden held talks with his Russian counterpart Vladimir Putin to discuss a recent scourge of cyber attacks against the US, including by Russian-based criminal ransomware hackers. 

Biden has said he told Putin in no uncertain terms that “certain critical infrastructure should be off limits to cyber attack — period”. Nevertheless, data show that ransomware attacks continue apace, including in sectors such as healthcare and education. It is unclear whether Biden will take further action in light of this. 

Ransomware, which usually involves hackers seizing an organisation’s data or computer systems and only releasing access if a ransom is paid, has long plagued businesses large and small. The first known ransomware virus, PC Cyborg, was recorded in 1989, with victims infected via floppy disk and told to send a $189 cheque to an address in Panama.

Today, these financially motivated hacks are far more sophisticated — and are proliferating fast. Attacks have quadrupled during the pandemic, SonicWall data show, partly because the shift to remote working has left staff more vulnerable than if they were connecting to more secure corporate networks. 

Chart showing that ransomware attempts reached an unprecedented level in 2021

Additionally, hackers have swapped demanding cheques for requesting hard-to-track cryptocurrencies, meaning that as the price of bitcoin has risen during the past year, the business of ransomware has become all the more lucrative. It is also easier to launch attacks with little to no technical knowhow, given the growing market for “ransomware-as-a-service”, where hackers maintain their ransomware code but rent it out to others and take a cut of any extortion payouts. 

While known attacks have reached unprecedented levels, the story of what we do not know — given that there are few rules around disclosure — may be far worse. Earlier this week, Bryan Vorndran, assistant director of the FBI Cyber Division and other cyber agency officials called for mandatory reporting rules around attacks, so that accurate data can be gathered and analysed by the US government.

Chart showing the median size of companies targeted by ransomware (number of employees)

Small businesses with little spare resources have tended to be the hardest hit by ransomware attackers. But the matter was thrust into the spotlight earlier this year after several audacious attacks on critical infrastructure such as the Colonial Pipeline, which led to fuel shortages for several days on the US east coast, the Irish health system and Brazilian meat supplier JBS. All of these attacks were believed to originate from Russia-based ransomware hackers, although the US government has accused Chinese state-backed groups of also orchestrating attacks.

The number of ransomware gangs stretches into the dozens and continues to proliferate as the economics remain so profitable. Vorndran said the FBI tracked 100 gangs, using an algorithm to rank them and the effect that each has on the economy. The largest one rakes in an estimated $200m a year in revenues, he said.

Chart showing that ransomware demands can often be negotiated down

To help victims fight the gangs, a cottage industry for “ransomware negotiators” has emerged. These middlemen are tasked by victims with haggling down the ransom payments. As go-betweens, they also collect data on attacks, learning the playbooks of various groups in order to best know how to speak to them. 

According to data from Coveware, the average ransom payment has fallen in the second quarter to $136,576, from more than $200,000 in the first quarter, amid an emergence of smaller ransomware groups. But in the majority of attacks — about 80 per cent — hackers are using the newer tactic of threatening to leak data as extra leverage in extorting victims. About half of these “leak threat” victims paid out in the second quarter, Coveware said.

Chart showing publically reported ransomware attacks on US healthcare, public, state or local government and schools, by month

Unfortunately, the negotiators’ services continue to be in high demand. According to data on reported attacks collated by Recorded Future, in the US there have been 10 attacks on healthcare, nine on schools and 10 on public state and local government groups during June and July this year. Despite Biden urging Putin last month to crack down on the criminal groups and warning against attacks on 16 critical entities, attacks on many of these key sectors have continued.

“The volume of targeted attacks on government organisations and enterprises that impact civilians, countries and the global economy will not end without a change in approach,” said Bill Conner, the chief executive of SonicWall.

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France delays EDF reforms after failure to agree terms with Brussels




EDF updates

France has been forced to delay the restructuring of state-owned utility EDF after it failed to agree the terms with the EU, a setback to a major economic reform promised by President Emmanuel Macron.

“Significant progress has been made in our discussions with the European Commission, but to date we have not reached an overall agreement,” said a government official. “Therefore it is not possible to submit a draft law to parliament if the principle points of the reform have not been agreed to in advance.”

Jean-Bernard Lévy, EDF chief executive, on Thursday declined to provide a specific timetable for when the reform could be completed, but analysts said it would likely prove difficult at least until after the French presidential elections next April.

“I regret that this reform that is indispensable to EDF cannot happen now,” said Levy. “Our short term [prospects] are guaranteed, but our medium and long term are not if we want to play in the big leagues, which is what is expected of EDF.”

Dubbed Project Hercules, the planned overhaul of EDF was meant to give it the financial firepower to invest in both nuclear and renewable energy in the coming decades.

An important element would be changing the mechanism and regulated prices at which EDF sells nuclear power, which provides 70 per cent of France’s electricity. France wanted to push through higher regulated prices for nuclear power, so EDF could pay down heavy debts and absorb the high costs of maintaining its nuclear reactors.

But Brussels would have to approve such a change because of its remit to ensure free competition in the energy sector and to prevent member states from unfairly bailing out companies.

The plan would effectively split up EDF by creating a government-owned mother company, EDF Bleu, containing the nuclear assets as well as a hydroelectric subsidiary. Another subsidiary, EDF Vert, would house renewable assets, the networks and services businesses, and would be publicly listed with about a third sold to raise funds to boost EDF’s green energy investments.

Macron has argued that the changes are vital for EDF to flourish and keep up with rivals. Given that France owns almost 84 per cent of the group, the government had also hoped the reforms would lighten the state’s financial burden.

But the overhaul has been caught in wrangling with the commission. Le Monde reported that the key sticking point was how the relationship between the newly created entities would work and whether cash could freely flow between them as if the company were still fully integrated.

The French finance ministry, which has piloted the talks, and the Elysée Palace declined to comment further on the details.

EDF’s powerful labour unions had opposed the plan as a prelude to the group being broken up or privatised, and have also raised concerns that it would pave the way for nuclear energy to be marginalised.

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“We celebrate the knockout punch delivered to Hercules,” the far-left CGT union said. “The only aim of these manoeuvres is to pull off juicy financial transactions at the expense of consumers and EDF employees.”

EDF shares fell as much as 4 per cent on Thursday as the reform’s failure overshadowed strong second-quarter financial results that showed the utility rebounding as economic activity picked up despite the Covid-19 pandemic.

Barclays analysts wrote in a note that investors were being too pessimistic on the outlook for the reform even if its timing was hard to predict.

“We continue to believe that ultimately there will be an agreement between the EU and France on EDF’s reorganisation.”

Additional reporting by David Keohane

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EU economy chief urges end to ‘muddling through’ with budget rules




EU economy updates

Brussels cannot afford to carry on fudging the application of its own fiscal rules to blunt their negative impact, the EU’s economics chief said as he called for a far-reaching legislative overhaul to help drive stronger public investment and growth.

Paolo Gentiloni said he wanted “renewed and reviewed” EU budget rules that would provide an incentive to public investment in the green and digital transitions, while fostering stability and durable economic growth.

“It is clear we cannot simply go back to normal,” Gentiloni said in an interview with the Financial Times. “You need common rules that are connected to the economic challenges we have. Otherwise, the risk is that the European Commission will spend the next decade finding creative ways to bypass its own rules, which I think is not the best solution we can have.”

The commission is due to restart this autumn a consultation on how to amend the rules surrounding the Stability and Growth Pact (SGP). The budget framework is currently suspended because of the Covid-19 crisis, but the rules are likely to be reimposed in 2023, and there will be a fierce debate ahead of that over how they should be reformed.

Janet Yellen, US Treasury secretary, this month added her voice to those arguing that the SGP restricts governments’ latitude to battle downturns as she called for the EU to reinforce its stimulus efforts. But fiscally conservative northern European member states will chafe against efforts to substantially loosen the rules, reigniting a north-south divide over economic policy.

Gentiloni said he did not see it as the commission’s role to question the EU treaty, which contains the basic goals of keeping public debt at 60 per cent of gross domestic product and deficits to 3 per cent. But he said he wanted the commission to propose reforms to legislation as it seeks to reflect post-pandemic realities, including the surge in average eurozone public debt burdens to 100 per cent of GDP.

He questioned whether the bloc should return to a “‘low for long situation’ — low inflation, low growth, low interest rates? Or should we try to use this crisis . . . to try to have stronger and more sustainable growth?”

He supported several changes, including adjusting the rules governing the mandated path for bringing down public debt ratios, which under the current framework would entail deep and punishing reductions following the debt blowouts over the past year.

The changes would entail a shift to more “simple and observable” criteria to manage fiscal policies, he said, referring to a suggestion from the European Fiscal Board, a commission advisory body, for a budget policy set according to an “expenditure rule” setting a ceiling on the growth rate of nominal public spending.

In addition, the rules would need to be changed to provide an incentive to public investment. This would help avoid repeating the aftermath of the financial crisis, when net investment drifted rapidly lower, stymying growth.

One idea is a “golden rule” excluding some specific growth-enhancing expenditure from the ceiling on spending growth, but Gentiloni stressed he was not wedded to that specific concept. “There are a lot of possible solutions, proposals, if we recognise the need to encourage, to strengthen, public investment in certain sectors.”

To “muddle through” with the budget rules might have previously seemed reasonable, Gentiloni said, but he argued that given the circumstances, legislative changes would be needed. “This is the only way to have real common rules, and not just common rules that are there to be bypassed,” he said.

Gentiloni reiterated the upbeat short-term economic outlook he offered this month when the commission published forecasts predicting the strongest growth in decades, with an expansion of 4.8 per cent this year and 4.5 per cent next.

While the spread of the Delta coronavirus variant presented a “downside risk” to growth, he stressed that the current situation was far more propitious given the rapid rate of Covid vaccinations. The EU, he pointed out, had caught up with the adult vaccination rate of the US.

“We know very well we’re not out of the woods. At the same time we should be very clear we’re in a different situation from the one last summer and the difference is caused by vaccines and vaccination,” Gentiloni said.

Indicators of individual mobility, and the stringency of lockdown measures, continued to point to a recovery “with speed”.

“I think the recovery will proceed. All in all our brighter forecast is still supported by what we see on the ground,” he said.

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