Financial Times Europe - 31.07.2019

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2 ★ FINANCIAL TIMES Wednesday31 July 2019

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I N T E R N AT I O N A L


H A N N A H C O P E L A N D
A N D V I C TO R M A L L E T— PARIS

A slight dip n Frenchi economic growth
in the second quarter of the year has
underlined the challenges faced by
President Emmanuel Macron as he tries
to defuse anti-government protests and
boost consumption with billions of
euros of tax cuts and benefits.
The economy has expanded solidly
for three years and year-on-year growth
— expected to be steady at 1.3 per cent in
2019 — has outpaced neighbouring
Germany and Italy almost continuously
for two years.
But quarterly French growth slowed
marginally to 0.2 per cent in the three

months to June from 0.3 per centin the
first quarter, largely because of tepid
household spending, according to Insee,
the French statistical body.
“The numbers are clearly a disap-
pointment,” said Daniela Ordóñez, chief
French economist at Oxford Economics.
About €25bn extra — or 1 per cent of
gross domestic product — has been
injected into the economysince Mr
Macron took office two years ago,
most of it in the form ofconcessionsto
thegilets jaunes, or yellow vest, anti-
government protesters since November
last year. She said: “The fiscal stimulus
has been huge.”
Emmanuel Jessua, economist at Rex-
ecode, a think-tank, said: “We didn’t
expect that household consumption
would be anaemic given that the gov-
ernment has tried to fuel household
purchases with tax cuts and benefits.”
Household spending growth slowed

to 0.2 per cent in the second quarter
from 0.4 per cent in the previous three
months despite buoyant consumer con-
fidence, which has rebounded from the

five-year low it hit in December 2018,
according to Insee.
After months of often violent street
protests by thegilets jaunes movement,
consumers are cautious. “You have a
‘wait and see’ attitude of French con-
sumers in the shadow of the yellow
vests,” said Julien Pouget, head of Insee’s
economics department.
Consumers also fearjoblessness.
Although unemployment dropped to a
10-year low in May this year, the rate is
more than double that of Germany and
the difference rises to nearly four times
for young people.
If Mr Macron’s measures fail to boost
spending and growth, they risk adding
to households’ savings while swelling
the government’s oversized budget defi-
cit, which is this year set to breach the
limit of 3 per cent of GDP set by the EU.
The president has vowed to cut the
deficit but Mr Jessua said he was “a bit

sceptical” of that pledge. “It will remain
high because of the political difficulty of
reducing expenses, and maybe techni-
cal difficulties too,” he said.
“They always say that they will find a
way but it’s always very vague, and each
year, important parts of the effort are
postponed to the last years of the man-
date.”
Fortunately for the president, both
the EU and the international financial
markets have made life easier. The EU
has not taken fright at the likelihood
that France will slightly exceed its 3 per
cent budget deficit ceiling, while falling
bond yields mean that the cost of debt
servicing has dropped sharply.
General government debt servicing
costs have dipped to about 1.6 per cent
of GDP this year, compared with 1.8 per
cent three years ago, according to
Ms Ordóñez. “Macron is a lucky man,”
she said.

L AU R A P I T E L— ISTANBUL

Recep Tayyip Erdogan’s ruling party is
wrought with “widespread un-
happiness”, his former prime minister
has warned, raising the prospect of a
split in Turkey’s dominant political
movement.
Ahmet Davutoglu said that a devia-
tion by the Justice and Development
party rom its core values was foment-f
ing deep discontent among the party’s
grassroots and its upper echelons.
The AKP once prized “justice, free-
dom, freedom of thought, freedom of
expression”, Mr Davutoglu said in an
interview with the Financial Times.
“[But] over the past three years, what I
have observed is that these basic values
we respected throughout our life were
ignored,” said the former party chair-
man, who resigned in 2016 following a
power struggle with the president.
Turkey’s “institutions are weaken-
ing”, he said, and the shift to apresiden-
tial system that placed unprecedented
power in the hands of Mr Erdogan
was “damaging the basic structures” of
the nation.
Mr Davutoglu, an important AKP fig-
ure since it swept to power in 2002, is
one of two heavyweights to have pub-
licly voiced discontent after the party
lost control of Istanbul, Turkey’s largest
city, and Ankara, the capital.
The former premier broke his silence
in April with a 4,000-word critique of
the direction the AKP was taking. Ear-
lier this month, Ali Babacan, an influen-
tial former economy minister, said he
was resigning from the party because
Turkey needed a “new future vision”.
Such criticism by party veterans rep-
resents an unprecedented challenge to
Mr Erdogan, who is dealing with deep
economic woesand heightened tensions
with the west. He has responded angrily
to the prospect of a split, warning last
week: “Those who take part in this kind
of betrayal will pay a heavy price.”
Mr Davutoglu, who remains an AKP
member, felt a “responsibility” to try

and reform the party from within, but
added: “I don’t have much hope.”
No timeline had been fixed to form a
new party.
Many opposition figures have
responded withscepticism to Mr Davu-
toglu’s drive to cast himself as the solu-
tion to Turkey’s problems. As the chief
architect of the AKP’s foreign policy, he
is blamed by many for Turkey’s regional
isolation after the Arab spring.
Critics also say his rallying cry rings
hollow given the severe curbs on free-
dom of expression and human rights in
Turkey by the time he left office in 2016.
Mr Davutoglu is defensive on his
record, insisting that he raised his con-
cerns repeatedly over Turkey’s drift into
authoritarianism. “I defended many
journalists,” he said. “I said ideas and
intellectual freedom should be
respected.”
Sceptical liberals are also unlikely to
be impressed by his refusal to condemn
the jailing of Selahattin Demirtas, a

Kurdish opposition leader who has
spent almost three years behind bars on
terrorism charges.
“Demirtas was put in jail six months
after my resignation, so I am not respon-
sible for this,” he said. “It is a legal proc-
ess... I cannot do anything.”
Mr Davutoglu would not be drawn on
the strategy that he would pursue if and
when he launched a party or how it
might steer the country along a different
course.
Despite the erosion in his support, Mr
Erdogan remains the country’s most
popular politician. A recent survey by
the pollster PIAR found that 80 per cent
of AKP voters would never back a party
founded by Mr Davutoglu. But the poll
also suggested that a party led by Mr
Babacan, who has resisted joining forces
with Mr Davutoglu, would be viewed
more favourably.
The former prime minister said that
politicians needed to change the dyna-
mics rather than follow them, adding

that his aim was to create a new political
climate in Turkey. “What we need is a
new psychology based on openness,
transparency, freedom and speaking
without any fear,” he said.
Mr Davutoglu said that when he de-
cided to raise his voice, no mainstream
Turkish broadcaster would accept his
requests to appear on their channels.
Three opposition journalists who int-
erviewed him in a YouTube programme
this month found that their shows with
the Turkish-language arm of Sputnik,
the Russian state-owned network, had
been terminated, an apparent sign of
the growing closeness between Ankara
and Moscow after Turkey’spurchase of
a Russian S-400air defence system.
Mr Davutoglu said he had deliberately
sought to open a discussion on issues
such as corruption and nepotism “bec-
ause as a former prime minister, if I am
scared, citizens cannot talk”. He added:
“If you are scared of talking, of thinking,
there cannot be a solution.”

J O S E P H C OT T E R I L L— JOHANNESBURG

The economic challenge facing Presi-
dent Cyril Ramaphosa was laid bare as
South Africa’s unemployment rate rose
to its highest in more than a decade and
the state-ownedEskom ower monop-p
oly announced its biggest annual loss.

Joblessness in Africa’s most industrial-
ised nation increased to 29 per cent in
the second quarter, a 16-year high,
according to official statistics released
yesterday. The figure was 27.6 per cent
in the first quarter.
The rate, which is 38.5 per cent on an
expanded definition including those
who have given up looking for work,
reflects obstacles to the black majority.
Mr Ramaphosa, who became presi-
dent last year with a promise of eco-
nomic revival, is under pressure as signs
of a slowdown mount and reforms face
resistance in his African National Con-
gress. Th ruling party said in a state-
ment that joblessness was the “single
biggest challenge facing our nation”.
But Mr Ramaphosa is distracted by a
power struggle in the ANC linked to
allies of Jacob Zuma, hs predecessor,
who was deposed over graft scandals.
The battle to overhaul Eskom has
been complicated as it revealed a loss of
R20.7bn ($1.5bn) in results for its
2018-19 financial year. The loss was
smaller than expected but investors are
increasingly alarmed about the utility’s
finances and the effect on state coffers.
The Treasury has approved R59bn of
bailouts for Eskom over the next two
years, on top of a R23bn cash injection
earlier in 2019, in order to cover its debt
payments and persuade auditors that
the utility is a going concern.
Fitch Ratings said last week the latest
bailouts would raise the budget deficit
next year to more than 6 per cent of
gross domestic product, versus a 4.5 per
cent government forecast. As a result
Fitch said it had cut its outlook on South
Africa’s credit rating to negative. It
already rates the country as junk.
Moody’s is the last big agency rating the
country as investment grade.
Eskom sells nearly all of the electric-
ity powering South Africa but it is haem-
orrhaging money because of cost over-
runs and graft. Its mostly sovereign-
guaranteed debts have grown to more
than $30bn.
In the past financial year debt pay-
ments of R69bn outweighed the R33bn
cash that Eskom generated from opera-
tions. It warned of a similar imbalance
for the next year.
Mr Ramaphosa has promised to split
Eskom into more manageable state-
owned businesses that could borrow
debt more cheaply. But trade union
allies of the ANC oppose the plan.
The government announced yester-
day Freeman Nomvalo, head of South
Africa’s institute of chartered account-
ants, as a chief restructuring officer for
Eskom.
South Africans have lived with severe
blackouts for years because of problems
at Eskom’s coal-fired plants caused by a
lack of funds for maintenance.
Jan Oberholzer, Eskom chief operat-
ing officer, said that blackouts had
been avoided during the winter, but
“we are not out of the woods yet” to
prevent their return during the coming
months.

Second quarter


French growth dip raises stakes for Macron


Tax cuts yet to boost


spending despite buoyant
consumer confidence

Ramaphosa challenges


South Africa


obless tallyj


surges and


Eskom suffers


record loss


Interview. hmet DavutogluA


Erdogan’s party deeply divided, says former ally


AKP grandee and ex-premier


adds voice to dissent after poll


defeats in Istanbul and Ankara


Reform call: Ahmet
Davutoglu, former
Turkish PM and
foreign minister, at
his Istanbul offices
Bradley Secker/FT

‘What we need
is a new

psychology
based on

openness,
transparency,

freedom and
speaking

without fear’


C L A I R E J O N E S— FRANKFURT

Germany’s constitutional court has em-
barked on a fresh hearing about the
legality of theEuropean Central Bank’s
programme of asset purchases — just as
the ECB gears up for an expansion of its
economic stimulus measures.
After more than four years and with
about €2.6tn-worth of bondsbought,
thequantitative easing rogramme re-p
mains controversial in the northern
eurozone, especially Germany, where
the Karlsruhe court’s hearing is part of a
long-running caseon whether the pur-
chases constitute so-called “monetary
financing”, which isvetoed under EU
law. The timing of the hearing is deli-
cate. Last week ECB president Mario
Draghi saidhis officialswould look at
stimulus options o counter fears thet
bank wouldkeep undershooting its
inflation target founder 2 per cent.

What is monetary financing?
EU treaties prevent the ECB from fin-
ancing member overnments by buyingg
their debt, a tactic known as monetary
financing. This rule aims to protect the
central bank from political pressure and
avoid stoking inflation. QE involves the

central banks of eurozone states buying
huge amounts of government bonds,
financed by the ECB.
The complainants in the case; a group
of almost 2,000, led by German econo-
mists and law professors, argue it isille-
gal. They want the Bundesbank, which
has been the biggest purchaser of bonds
under QE, toleave the ECB programme.
They first brought their case against
the ECB afterit began QE in 2015, trying
to get the German constitutional court
to block it. The ECB argues that QE does
notamount to monetary financing as it
is only buying the bonds in secondary
markets from other investors, rather
than purchasing the debt directly from
governments. And ECB QE rules pre-
vent it from holding more than a third of
any member’s outstanding debt.

What have the courts said?
The German courts have been busy for
years withcases about the scope of the
ECB mandate. In 2016, the constitutio-
nal courtruled for the ECBin aseparate
caseabout its Outright Monetary Trans-
actions programme,unveiled in 2012.
But when asked to look at QE in July
2017 the court said t was “doubtfuli
whether [QE] was compatible with the

prohibition of monetary financing” and
that QE “may not be covered by the ECB
mandate” but it reserved judgment and
referred the case o the European Courtt
of Justice. In December last year the ECJ
foundfor the ECB, saying that QE as
designed is legal. The case now returns
to the German court to interpretit in the
context ofdomestic law.

What are the ramifications?
The legal ramificationsalso concern
whether the judgments of Germany’s
highest court should take precedence
over European law. The complainants
brought their case under the German

constitution; until now it has been un-
clear whether the constitution’s power
can be superseded by EU law.
The dangers for the ECB’s QE pro-
gramme are twofold. First, if Karlsruhe
rulesfor the complainants the Bundes-
bank may decide it is preferable to obey
German constitutional law.
Second, it could constrain the ECB in
designing any new QE package.The ECB
believes the ECJ judgment was flexible
enough to enable the bank to raise the
amount of outstanding bonds of any one
member it can buy, known as the issuer
limit, from a third toup to 50 per cent,
but the Bundesbank could dispute that.
The German central bank will sendits
head of legal and its head of economics
to Karlsruhe this week, and they are set
to argue against the complainants, say-
ing that QEas it is is legal, but they could
stress that the rules cannot be bent
much more. This may make it tricky for
the ECB to raise the issuer limit. The
ECB only has a limitedleeway for new
QE; only a small amount of outstanding
German debt remains in the market
that is eligible for the ECB to buy.
Some observers do not expect a deci-
sion until theyear-end. Bythen, any
ECB timulus could be under way.s

Easing erman constitutional court to rule on ECB bond buyingG


Born askent in central Anatolia, 1959T
Career former academic who likes toA
be referred to as “professor”, Ahmet
Davutoglu became a foreign policy
adviser for the Justice and
Development party in 2002. He was
appointed Turkey’s foreign minister in
2009.
In 2014, when Recep Tayyip Erdogan
became Turkey’s first directly elected
president, Mr Davutoglu took hisjob
as prime minister. He stood down in
2016 after a power struggle, vowing:“I
will maintain my loyal relationship with
our president until my last breath.”

Political rise curtailed
by power struggle

Slowing growth
 change in French GDP

-















   

Qtr vs previous qtr
Qtr vs same qtr in previous year

Source: Refinitiv

ECB: prevented from financing
governments by buying their debt

‘If you are
scared of

talking, of
thinking, there

cannot be
a solution’

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