Friday26 July 2019 FINANCIAL TIMES 3CLAIRE JONES— FRANKFURTMario Draghi is determined to launch
one last economic stimulus push before
his eight-year term as president of the
European Central Bank ends in Octo-
ber; the question is to what degree the
rest of eurozone officialdom shares his
ambition.
In 2012, his first year in office, Mr
Draghi saved the euro from a messy
break-up by saying he would do “what-
ever it takes” to prove the single cur-
rency is here to stay, a pledge that was
the forerunner to a radical loosening of
monetary policy.
But he has spent much of his last 12
months countering doubters who claim
the ECB is happy to persistently under-
shoot its inflation target of just under 2
per cent, and lacks the aggression of
counterparts such as the US Federal
Reserve. Inflation has been below 2 per
cent for most of his time in office.
Yesterday, Mr Draghi paved the way
for a fresh package of measures using
the strongest rhetoric yet, including
culling one of the most sacred cows of
eurozone central banking by saying the
ECB did not have to stop at 2 per cent
inflation and could tolerate even higher
price pressures for a period.
Frederik Ducrozet of Pictet WealthManagement, said it was “a ‘whatever it
takes’ moment, but for inflation”.
“[Mr] Draghi’s language on inflation,
inflation expectations, and the symme-
try of the [inflation target] was unprece-
dented, consistent with a super strong
determination to act,” he said.
“Although this debate might sound rhe-
torical to some observers, we see this
shift as a major, historical move by the
ECB under [Mr] Draghi.”
Danae Kyriakopoulou, chief econo-
mist at central bank think-tank OMFIF,
said the shift on inflation was “the real
game changer” and the signal that the
ECB would develop “an even wider set of
[policy] measures”.
But investors shrugged. After an ini-
tial dip, the euro rose. That suggests that
markets think that — whatever the ECB
president might want to achieve — the
time is running out for him to do so.
There are two main reasons for this.
Mr Draghi’s commentsyesterday con-
firmed whatwatchers of European cen-
tral banking have long suspected: other
members of the governing council are
less convinced of the need for aggressive
action than the ECB president.
While there was “broad agreement”
that the outlook was bad enough to war-
rant action, there was less consensus on
the “nuance” of what that action might
look like, Mr Draghi admitted.
People within the governing council
think Mr Draghi would be able to win
majority support for an aggressive
package including rate cuts and more
quantitative easing, which has already
seen eurozone bond yields fall sharply
to historic lows. But some policymakers
believe the ECB president has been tooeager to spell out what he has in mind
without consulting them first.
ECB members such as Klaas Knot, the
head of the Dutch central bank, are
likely to object to a tiering system that
would mitigate the impact of negative
rates on banks and more QE. Bundes-
bank president Jens Weidmann would
probably support a rate cut and tiering,
but is reluctant to back more QE.
All this raises the question of whetherMr Draghi will manage to delivermeas-
ures of the scale he believes necessary.
The second cause for concern is the
nature of the problems that confront the
eurozone. The outlook for its trade-
dependent manufacturing sector has in
recent months become “worse and
worse”, Mr Draghi said.
This sector is crucial for two of the
region’s biggest economies — Italy and,
to an even greater extent, its economicpowerhouse Germany. The Ifo poll of
business sentiment in Germany fell
sharply in July to its lowest reading in
more than nine years,data showed.
Ye tinvestors knowthe manwidely
nicknamed “Super Mario” can only do
so much in a world where rising political
populism is creating economic uncer-
tainty on a scale not seen since the
financial crisis. Many fear the ECB is
almost out of ammunition, with far less
room than the Fed to cut rates and tough
constraints on how far it canexpand QE.
“Trade war concerns have swiftly
moved on to a possible FX war,” said
Shweta Singhof TS Lombard.
Even Mr Draghi acknowledged yes-
terday that monetary policy was subject
to “diminishing returns”, warning that if
the downturn persisted “fiscal policy
would become of the essence”.
But a co-ordinated eurozone spend-
ing boost is unlikely to materialise: Italy
cannot afford to spend more and despite
signs the German economy could be
heading for recession, Berlin is not per-
suaded of the case for fiscal easing.
“We are not in a situation that makes
it necessary or wise to act as if we were in
a crisis, we are not,” Olaf Scholz, Ger-
many’s finance minister, said yesterday.
It was “not a wise idea” for the govern-
ment to spend more, as this would lead
to rising prices rather than bolstering
economic growth, he added.
“If [Mr] Draghi convinces the govern-
ing council to push rates closer to the
lower bound and asset purchases to the
upper bound, then it becomes even
more important to hand the easing
baton over to finance ministers for the
next downturn,” said Richard Barwell of
BNP Paribas Asset Management.
“But they still need persuading of the
case for doing more.”
Tail Riskpage 11INTERNATIONAL
LAURA PITEL— ANKARATurkey’s central bank slashed its
benchmark interest rateyesterday,
marking a shift in direction after the
sacking of its former governor by Presi-
dent Recep Tayyip Erdogan.The bank’s monetary policy committee
reduced the one-week repo rate from 24
per cent to 19.75 per cent, slicing 4.
percentage points off the cost of fund-
ing, the biggest rate cut since the bank
shifted to a policy of inflation targeting
in 2002.
Analysts’ expectationshad ranged
widely before the meeting, but the
median prediction of surveys by Bloom-
berg and Reuters was for a cut of 250
basis points.
The lira fellsoon after the announce-
ment, then rallied as much as 0.8 per
cent against the dollar before reversing
most of those gains. Turkish assets have
been bolstered by a dovish tilt by the US
Federal Reserve and the European Cen-
tral Bank that has fuelled investor appe-
tite for riskier emerging market assets.
“The most extreme scenario of
around 600bp of cuts has been avoided,
which has allowed the market to focus
on the still-elevated return the lira
offers,” said Marek Drimal, an emerging
markets strategist at Société Générale.
The bank cited Turkey’s improving
inflation outlookfor making the cut. Its
forecasts suggest year-end inflation will
be better than the 14.6 per cent predict-
ed in itsreport earlier this year.It said it
was committed to “maintaining a sus-
tained disinflation process”, adding:
“The central bank will continue to use
all available instruments in pursuit of
the price stability and financial stability
objectives.”
Thestatement highlighted the bene-
fits of recent steps by the Fed and the
ECB for emerging market assets; some
analysts interpreted this to suggest that
further rate cuts would follow.
“Our current forecast is for the one-
week repo rate to be lowered to 16 per
cent by early next year,” said Jason
Tuvey, an emerging markets economist
at Capital Economics. “But the scale of
today’s move has raised the chances of
larger cuts.”
Yesterday’s decision wasseen as a key
testof Murat Uysal, the new central
bank governor, whotook over earlier
this month after Mr Erdogan sacked his
predecessorfollowing a rowover the
pace and depth of rate cuts.
The Turkish president, who is a vocal
opponent of high interest rates, said that
former governor Murat Cetinkaya
“wouldn’t follow instructions”. Mr Erd-
ogan has said he wants both inflation
and interest rates to fall to single digits
by the end of this year.
Many investors agree that Turkey has
leeway to cut rates thanks to the drastic
economic rebalancing since last sum-
mer’s currency crisis. Growth has
slowed, thegapingcurrent account defi-
cithas almost disappeared and headline
inflation has cooled from a high of more
than 25 per cent to less than 16 per cent
last month. The lira, which lost almost
30 per cent of its value against the dollar
last year, hasbeen relatively stable.
Yet after yesterday’s cut, some analy-
stsfear the bank will pursue an over-
aggressive approach to lowering rates.JIM BRUNSDEN— BRUSSELSThe EU has urged the US to join forces
in countering Chinese attempts to
define the technologies of the future,
saying a transatlantic alliance is
needed to influence global standards
for sectors such as telecommunica-
tions and the internet of things.As part of a progress report into EU-US
co-operation on trade, Brussels said the
“strategic case” for the two economies to
work together on setting technical
standards “has never been greater”,
given the competing models being
advanced by Beijing.
“These new regulatory models are a
cause of common concern given the
important role played by the [Chinese]
state in deploying market-distorting
practices to build domestic champions
in key strategic sectors,” the commis-
sion, the EU’s executive branch, said.
The comments reflect EU concerns
that Chinahas sought to extend its influ-
ence in bodies such as the International
Telecommunication Union and the
International Organisation for Stand-ardisation, which set technical criteria
for new products and technologies.
Both the EU and the US fear that
China— having forced foreign compa-
nies active on its territory to share their
technology for years — is seeking to
dominate intellectual property in cut-
ting edge fields such as artificial intelli-
gence and 5G mobile networks.
These fears have been stoked byChi-
nese telecoms company Huawei’s domi-
nance of5G technology. Donald Trump,
US president, has sought to drum up
international opposition toHuawei.
Areas where EU-US co-operation
appears promising, according to the
report, include robotics, 3D printing,
machinery for the oil and gas industry,
and self-driving cars.
Vera Jourova, the EU’s justice com-
missioner, said in April that EU-US co-
operation would mean “our voice would
be heard around the world... But, if we
will become rivals and promote con-
flicting models, none of us will win.”
The report reviews the state oftrade
ties one year after a deal between the EU
and USto improve co-operation.Draghi ‘whatever it takes’ signal on
inflation fails to convince colleagues
Some policymakers believe ECB president has been too eager without consulting them first
Monetary policy
Turkey’s new
central bank
chief oversees
biggest rate
cut since 2002
Regulation
EU seeks US pact to challenge
China on tech standards
SONG JUNG-A— SEOULSouth Korea’s economy grew at its fast-
est rate in nearly two years in the sec-
ond quarter, as heavy government
spending countered the effects of a
slowdown in China, a trade spat with
Japan and the US-China trade war.Advance data published by the Bank of
Koreashowed that gross domestic prod-
uct in Asia’s fourth-largest economy
grew 1.1 per cent in the second quarter
compared with the first quarter, when
the economyposted itsbiggest contrac-
tionsince the global financial crisis. GDP
grew2.1 per centcompared with the
same quarter a year ago.
But it remains unclear how strong the
recovery will be, given deteriorating
external conditions. Japan is set to
expand its export curbs on high-tech
materials to South Korea, which is
expected to hit South Korean chipmak-
ers hard.
“The big picture is that the economy
remains on a shaky footing and contin-
ues to face multiple headwinds, includ-
ing weak external demand, a global techdownturn and souring relations with
Japan,” economists at ANZ bank said in
a report yesterday.
The data showed the economy would
have contracted without increased gov-
ernment spending, following a 0.4 per
cent quarter-on-quarter contraction in
the first quarter.
“It [the rebound] is mainly due to the
low base effect and big contribution
from government spending. Still, the
country avoided the worst,” said Park
Chong-hoon, head of research at Stand-
ard Chartered in Seoul. “The key ques-
tion is how the trade tension with Japan
will affect South Korea’s chip produc-
tion and how hard the US-China trade
war will damp Korea’s exports to China.”
The announcement follows last
week’s decision by South Korea’s central
bankto cut interest rates for the first
time in three years to support the slow-
ing economy.
TheBank of Korea cut its policy rate
by 25 basis points to 1.5 per cent and
slashed its growth target for this year to
2.2 per cent, from its previous forecast
of 2.5 per cent.Asia
South Korea returns to growth
after heavy state spending
The European
Central Bank
headquarters
in Frankfurt
Ralph Orlowski/ReutersSource: Refinitiv- Early
Eurozone crisis
intensifiesNov
Mario Draghi takes oice
Jul Draghi announces
the ECB will do ‘whatever it
takes’ to save the euroMar
ECB begins QEDec
ECB ends QEGerman -year
Bund yieldECB overnight
deposit ratePer centAs Mario Draghi comes to the end of his term, ECB hints at rate cuts to come but holds the line
VALERIE HOPKINS— BUDAPESTThe European Commission is referring
Hungary to the European Court of
Justice over laws that toughen eligibil-
ity requirements for asylum seekers
and make it a criminal offence to help
refugees.Brussels is also opening infringement
proceedings against Budapest for refus-
ing to feed migrants denied asylum.
Hungary’s parliamentpassed a pack-
age of legislation in June 2018, known as
the “Stop Soros” laws — referring to bil-
lionaire philanthropist George Soros,
whomfar-right prime minister Viktor
Orban has accused of trying to flood the
country with Middle Eastern migrants.
The measures make it illegal for indi-
viduals or organisations to help asylum
seekers and prohibit asylum applica-
tions from those arriving from third
countriesif there is no immediate risk to
their lives.
The nationalist governmentpassed
the laws following a 2015 crisis, in which
more than 1m migrants passed through
the country on their way further west.Yesterday’s movecame after the com-
mission sentformal letters of concern to
the government in July 2018 and Janu-
ary this year. “After analysing the Hun-
garian authorities’ reply, the commis-
sion considered that the majority of the
concerns raised have still not been
addressed,” itsaidyesterday.
The legislation “curtails asylum appli-
cants’ right to.. .be assisted by rele-
vant national, international and non-
governmental organisations by crimi-
nalising support [for] asylum applica-
tions”andbreached the EU asylum
procedures directive and reception con-
ditions directive, it said.It found that
broadening“inadmissibility grounds
[for asylum] curtails the right to asylum
in a way that is not compatible with EU
or international law”.
Brusselsgave Budapest one month to
reply to a letter of formal notice, the first
stage of the infringement procedure,
about itsdenying of food to asylum
seekers whose claims had been rejected
but who remained in“transit zones” on
the border with Serbia.
FT Big Readpage 7Asylum seekers
Brussels takes Hungary to
court over migrant crackdown
German factory executives have
reported that industry conditions
are in “freefall”, according to a
closely watched survey that came
just hours before the European
Central Bank’s policy decision.
The Ifo Institute’s manufacturing
business climate index slumped to
minus 4.3 in July from plus 1.3 the
previous month.
The reading was the lowest in
more than nine years and echoes a
separate surveyreleased on
Wednesday that pointed to
mounting troubles in Europe’s
powerhouse economy.
The broader Ifo sentiment gauge,
which also covers Germany’s
services sector, declined as well,
hitting the lowest level since 2013.
“In manufacturing, the business
climate indicator is in freefall,” said
Clemens Fuest, president of the Ifo
Institute, aresearch group.
“No improvement is expected in
the short term, as businesses are
looking ahead to the next six
months with more pessimism.”
Adam Samson, LondonGermany
Factory bosses warn
of industry in freefallECB hints at rate cuts as Draghi’s term comes to end
‘We see this shift as a
major, historical move by
the ECB under Draghi’Frederik Ducrozet
РЕ
ЛИЗП
ПTelecommunication Union and theTelecommunication Union and theTelecommunication Union and theTelecommunication Union and theООДence in bodies such as the International
Дence in bodies such as the International
Telecommunication Union and theTelecommunication Union and theДence in bodies such as the Internationalence in bodies such as the Internationalence in bodies such as the Internationalence in bodies such as the InternationalГГОО
Тthat China
Тthat China
ence in bodies such as the Internationalence in bodies such as the InternationalТthat Chinathat Chinathat Chinathat ChinaООВВ
that Chinathat ChinaИИЛThe comments reflect EU concernsThe comments reflect EU concernsThe comments reflect EU concernsThe comments reflect EU concernsЛААГsion, the EU’s executive branch, said.
Гsion, the EU’s executive branch, said.
The comments reflect EU concernsThe comments reflect EU concernsГsion, the EU’s executive branch, said.sion, the EU’s executive branch, said.sion, the EU’s executive branch, said.sion, the EU’s executive branch, said.РРУ
Пin key strategic sectors,” the commis-
Пin key strategic sectors,” the commis-
sion, the EU’s executive branch, said.sion, the EU’s executive branch, said.Пin key strategic sectors,” the commis-in key strategic sectors,” the commis-in key strategic sectors,” the commis-in key strategic sectors,” the commis-ППА"What'sence in bodies such as the International"What'sence in bodies such as the International
Telecommunication Union and the
"What'sTelecommunication Union and the
International Organisation for Stand-International Organisation for Stand-"What'sNews"that China
News"that Chinahas sought to extend its influ-
News"has sought to extend its influ-
ence in bodies such as the Internationalence in bodies such as the InternationalNews"VK.COM/WSNWShas sought to extend its influ-VK.COM/WSNWShas sought to extend its influ-
ence in bodies such as the InternationalVK.COM/WSNWSence in bodies such as the International
Telecommunication Union and theVK.COM/WSNWSTelecommunication Union and the
International Organisation for Stand-
VK.COM/WSNWSInternational Organisation for Stand-