Category Archives: Financial Times

(FT) Portugal’s bright outlook offers Europe some hope – Editorial

(FT) Coalition has overseen growing foreign investment and mass tourism

For much of Europe, reasons for joy are thin on the ground. In Germany, the engine of European growth, the vital, export-dependent manufacturing sector is stuttering. Italy is plagued by economic and political instability, its relationship with Brussels tense. The UK is edging towards a disastrous no-deal Brexit, which could poison its relationship with the EU for years. On top of all of this, there is the turbulence of the US-China currency war and decoupling of global supply chains.

P.O. (FT) Arnault threatens to pull Le Monde ads after offshore tax exposé


Arnault threatens to pull Le Monde ads after offshore tax exposé

…Only fools think that there are several outcomes in this affair…

…In my opinion there is only one…

…Mr Arnault wins and Le Monde continues on it´s declining path…

…Le Monde is a shadow of what it was, and it´s credibility has been dented by    it´s defense of absurd policies and causes…

…I cannot imagine a scenario that would reverse that declining trend.


(FT) Arnault threatens to pull Le Monde ads after offshore tax exposé

LVMH owner unhappy about newspaper’s Paradise Papers coverage

(FT) Carles Puigdemont vows to lead Catalan fight from Brussels

Carles Puigdemont vows to lead Catalan fight from Brussels

Date published: 31 October 2017

Michael Stothard in Madrid and Michael Peel and Mehreen Khan in Brussels



Carles Puigdemont has said he will carry on the struggle for Catalan independence from Brussels, styling himself the turbulent region’s legitimate leader despite being ousted by the Spanish government over the weekend.

In a chaotic press conference, the former Catalan leader said he had not come to Belgium to seek political asylum but would not return to Spain until he received “guarantees” about any future trial.

“If they [Spanish authorities] can guarantee to all of us, and to me in particular, a just, independent process, with the separation of powers that we have in the majority of European nations, if they guarantee that, we would return immediately,” Mr Puigdemont said.

He faces as much as 30 years in prison after Spanish prosecutors on Monday called for charges of sedition, rebellion and misuse of public funds to be brought against him and other ousted leaders who organised an illegal referendum on October 1 and backed a declaration of Catalan independence last week.

Spain’s constitution holds that the country is “indivisible” and the final decision on whether to bring charges against Catalonia’s ousted leaders will be made by a judge. One Spanish judge on Tuesday called on Mr Puigdemont to testify on Thursday this week as part of the investigation into rebellion and sedition.

Mr Puigdemont accused Spanish authorities of acting “belligerently” and said he had come to Belgium to work in “conditions of peace”.

“I am not here to ask for political asylum,” he said, after travelling to the country with a handful of cabinet members on Monday. “I am here because it is the political capital of Europe. Belgium has nothing to do with it.”

Mr Puigdemont said he was ready to participate in the regional elections that have been called by Madrid on December 21, attempting to regain the initiative by calling them a “plebiscite” on the legitimacy of Spain’s actions in the region.

He added that he would accept a “slower” development of Catalonia as an independent republic if it meant no violence and called on Catalans to keep the region running.

“A republic for all cannot be built from violence,” he said. “We have not forced civil servants to take sides . . . if this attitude has the price of delaying the republic, we accept that.”

Mr Puigdemont also said Madrid should confirm it would respect the result if Catalan independence parties won a majority in the regional polls.

The two leading Catalan pro-independence parties said on Monday that they would stand in those elections in what some analysts view as a de facto recognition of the current reality of direct rule.

Some former Catalan ministers had said that moves by the Spanish government to assume control would be met with rebellion on the streets and a campaign of civil disobedience. But that failed to materialise, and Spain re-established its authority over the region with ease.

Charles Michel, Belgium’s prime minister, said the former Catalan leader had not been invited by the country’s government. “In the words of Mr Puigdemont, he came to Brussels because it is the capital of Europe,” Mr Michel said. “He will be treated like any other European citizen.”

But Mr Puigdemont had difficulty finding a venue for his remarks before settling on the Press Club of Brussels, whose president lamented that there were too many journalists for the modestly sized room.

“It was the only place we had,” said a Catalan official as the ousted leader entered the premises.

EU institutions have insisted the Catalonia crisis is an internal affair that should be dealt with under the Spanish constitution.

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© 2017 The Financial Times Ltd. All rights reserved. Please do not copy and paste FT articles and redistribute by email or post to the web.

(FT) Spain’s crisis is the next challenge for the EU

Spain’s crisis is the next challenge for the EU

Date published: 30 October 2017

Gideon Rachman



The EU is politically and intellectually unprepared for a crisis in Spain. The European project is based on the idea that the EU is a “safe space” for liberal values. Once a country enters the club it is assumed to leave old conflicts, whether internal or external, outside the door.

The EU’s belief in the peaceful resolution of disputes is fundamental, and is underpinned by basic commitments to democracy, the rule of law and market economics. Questions of national sovereignty are also meant to lose their urgency inside the EU, where decisions are said to be made at whatever is the appropriate level — regional, national or European.

But what if all that is not true? Catalonia’s bid for independence demonstrates that traditional questions of nationhood and sovereignty can still stir the blood in modern Europe. There is also a possibility that the crisis could lead to violence between the Spanish central government and pro-independence forces in Catalonia. That would challenge Spain’s traditional status as a prime example of the benefits of the European project.

Spain joined the EU in 1986, 11 years after the death of the dictator Francisco Franco, and almost 30 years after the launch of the European Economic Community in 1957. Ever since, it has been axiomatic in both Brussels and Madrid that Spain’s transitions from dictatorship to democracy, from isolation to internationalism and from poverty to prosperity, were intimately connected to its decision to join the EU.

But if the Spanish state enters a prolonged and dangerous crisis, then this happy story will be threatened by an unexpected twist in the plot. The EU’s self-image as the guarantor of peace and stability within Europe would also be undermined. For that reason, the current situation in Spain could ultimately represent an even bigger challenge to the EU than Brexit.

For the moment, however, the EU seems to have little option but to watch impotently from the sidelines. At the recent meeting of the European Council, which brings together the heads of government of the 28 EU nations, Angela Merkel attempted to start a discussion on Catalonia. But the German chancellor was brushed off by Mariano Rajoy, Spain’s prime minister, and none of the other leaders was inclined to press the point.

The incident underlined the fact that — despite the accusations of its British critics — the EU is not the enemy of Europe’s nations. On the contrary, it is a club of nation-states. Spain, unlike Catalonia, is a member of the club, with a seat at the table in the key EU institutions. So while several European leaders have private misgivings about the Spanish government’s handling of the crisis, regarding it as heavy handed, they are reluctant to express their concerns publicly. Some of the other nations around the table, notably Belgium and Italy, also fear encouraging their own separatist movements.

The EU has also had its fill of confidence-sapping crises over the past five years. After the euro crisis and the shock of Brexit, the European project can ill-afford yet another existential challenge in Spain.

Until the Spanish crisis boiled over, the Berlin-Brussels-Paris network that dominates EU thinking was having a pretty good 2017. The key event was the victory of Emmanuel Macron in the French presidential election in May. This simultaneously represented a defeat for populism in Europe, bolstered EU unity on Brexit and held out the promise of a Macron-Merkel deal to relaunch Europe.

For the EU elite, the overriding challenge now is to seize the opportunity of the Macron presidency and to reinvigorate the European project through a renewed Franco-German partnership. This prospect dominates the thinking of the cadre of EU experts, as I discovered at a conference in Berlin last week. There were hours devoted to careful discussion of the possibilities of a Franco-German deal. By contrast, the crisis in Spain was hardly mentioned. Nor was there much discussion of the spread of populism across central Europe, with recent elections in both the Czech Republic and Austria boosting the fortunes of Eurosceptic parties.

The issues at the heart of the Franco-German relationship are important and complex. But they are also a kind of comfort blanket, because the contours of the debate are so familiar. The Catalonia crisis is different. It raises issues that most EU specialists simply do not know how to deal with. The same is true of the rise of anti-democratic populism in eastern Europe. And there could be further, similar, challenges to come. Elections in Italy early next year could easily see further gains for populist and Eurosceptic parties.

In their different ways, Spain, Britain, Italy, Poland, Greece and most of central Europe are all now deviating dramatically from what used to be the European norm. At this point only the Nordic countries, Ireland, Benelux and the big two of France and Germany look like a “safe space” for the European project. The question for the EU elite is whether a relaunch of the Franco-German partnership is the indispensable step needed to save the European project — or an introspective evasion of other, more troubling, problems.

Europe’s leaders would like to ignore the crisis in Spain. But the Spanish crisis may not ignore them.

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(FT) Healing the wounds of secessionism in Spain – Editorial

Healing the wounds of secessionism in Spain

Date published: 30 October 2017


Word count: 569

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By declaring independence on Friday, Catalonia’s secessionists indulged in a futile, reckless gesture of defiance against the legal and constitutional order of Spanish democracy. It was as indefensible as the shambolic, illegal referendum on independence staged on October 1. The government of Mariano Rajoy, Spain’s prime minister, was entirely justified in responding to Friday’s announcement by dismissing the region’s government, dissolving its legislature and placing its public administration under central control.

It is nevertheless clear that a lasting settlement of the Catalonian question will require generous, thoughtful political initiatives as well as the application of blunt legal instruments. Critics of Mr Rajoy observe that he has too often adopted a narrowly legalistic approach to the crisis, and that his government’s use of police force to disrupt the October 1 vote was ill-judged. However, Mr Rajoy appears to be learning from these errors. He has made the right call in convening snap elections to Catalonia’s parliament on December 21.

At this stage it is impossible to be sure who will win the elections. It is not even certain that every pro-independence party and movement, especially those on the radical left, will take part. The most radical nationalists will continue to inhabit, in their minds, the non-existent state proclaimed last week. The elections may not therefore clear the political air in Catalonia quite as fully as is wished by Spain’s ruling conservative Popular party and by the Socialists and Ciudadanos, the two main opposition parties in Madrid, which for now are backing Mr Rajoy.

However, the elections can and should serve a more fundamental purpose. Spanish politicians must use them to make the case to Catalonian public opinion that Madrid’s latest actions against the separatists are not intended to suppress the region’s democracy and self-government. On the contrary, the elections are a way of asserting the primacy of legal, democratic processes and of paving the way for the restoration of Catalonia’s self-rule under Spain’s 1978 constitution.

It is to be hoped that Spain’s central authorities will not wait long after the elections before reinstating Catalonia’s autonomy. Naturally, such a step must be compatible with public order. However, excessive delay would arouse suspicions that the model of centralised government that characterised Spain in the 18th and 19th centuries, not to mention the Franco era, was casting its shadow once more over regions with rich traditions of self-rule. There are already considerable misgivings in the Basque Country, which enjoys extensive autonomy, about the Spanish government’s clampdown in Catalonia.

The mass demonstration held on Sunday in Barcelona in support of Spain’s unity was a useful reminder that much of Catalonia’s 7.5m population is utterly opposed to secession. Separatism is equally unappealing to the hundreds of businesses, big and not so big, that in recent weeks have relocated their headquarters outside Catalonia. Yet the great majority of Catalonians cherish their region’s self-rule. They will want it restored as soon as is feasible. Many will want it extended.

These feelings deserve careful attention from the Popular party and the opposition in Madrid. Mr Rajoy and Pedro Sánchez, the Socialist leader, promised in early October to set up a parliamentary committee that would study ways to amend Spain’s constitution and update Catalonia’s statute of autonomy. They must carry out their promise. It is the best way to heal the wounds of a struggle that has already inflicted too much harm on Catalonia and the rest of Spain.

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(FT) EU’s united front on Catalonia disguises a weak link or two – Tony Barber

EU’s united front on Catalonia disguises a weak link or two

Date published: 29 October 2017



Overwhelmingly, national governments across Europe display little or no enthusiasm for the cause of Catalan independence. They want Spain’s leaders to exercise restraint in handling the separatist challenge. However, governments in Berlin, Paris, London and elsewhere do not wish Spain to break up or think that the secessionists have legal or political grounds to do so.

On closer inspection, the EU’s united front disguises a weak link or two. Take the former Yugoslav republic of Slovenia. As Catalan secessionists pushed forward with their campaign, vocal expressions of sympathy for the separatists have come from Slovenia. “Many Slovenian hearts beat for the Catalan people,” said Borut Pahor, Slovenia’s president, on October 1, the day of the chaotic referendum on independence that Madrid declared illegal.

The Slovenes’ emotional bond with Catalan separatists is understandable. Only 26 years ago, their own land broke free from communist Yugoslavia and won full independence for the first time in its history. The Slovenes draw parallels between their experience as a small nation, living under what they saw as Serb domination of the Yugoslav federation, and that of the Catalans, chafing under the supremacy of Madrid.

Catalonia’s separatists think along similar lines. Carles Puigdemont, leader of the regional government, visited Slovenia in 1991. He admired the peaceful, democratic methods which the Slovenes had used to achieve their goals. Just as George Orwell immortalised Mr Puigdemont’s region in his 1938 book about the Spanish Civil War, Homage to Catalonia, so Mr Puigdemont has been paying homage to Slovenia. Arguably, however, there are more differences than similarities between the cases of Slovenia and Catalonia.

In 1989 pro-independence politicians amended Slovenia’s constitution, emphasising the right of national self-determination. In April 1990 they staged free, multi-party elections. In December 1990 they held a referendum on independence. The vote in favour and turnout were above 90 per cent. In June 1991 Slovenia declared independence. After a struggle against the Yugoslav army known as the Ten-Day War, Slovenia was home and dry.

In Catalonia, the population is nowhere near as united behind independence as the Slovenes were. In the October 1 vote, 90 per cent voted for secession from Spain, but the turnout was a mere 43 per cent. Voters opposed to independence boycotted the referendum.

Moreover, Slovenia in 1989-91 was a compact territory inhabited almost entirely by Slovenes. There was only a small Serb minority. Slovenia had no contiguous border with Serbia. This distinguished Slovenia from Croatia and Bosnia-Herzegovina, whose Serb populations, backed by neighbouring Serbia, fought the Croats and Bosniaks (Bosnian Muslims) in wars that lasted from 1991 to 1995.

Catalonia lacks Slovenia’s compactness. According to a 2013 Catalan government census, about 46 per cent of the region’s people speak Spanish as their main language, against 36 per cent who use Catalan and 12 per cent who speak both equally. It is clear that a majority of the Spanish-speakers wish to remain part of Spain.

Another difference concerns leadership. Mariano Rajoy, Spain’s prime minister, can be faulted for an overlegalistic and heavy-handed approach to the Catalan crisis. But he is not Francisco Franco, Spain’s former dictator, and he is not Slobodan Milosevic, the Serbian strongman of the late 20th century, either. Spain is a democracy. Communist Yugoslavia was acquiring democratic features towards the end of its existence, but more at the level of its republics, especially Slovenia, than at the centre.

Perhaps the biggest difference is that, like Greece in the 1820s and Italy in 1860, Slovenia’s bid for independence attracted the support of powerful foreign governments. Catalonia, like Iraqi Kurdistan, does not have such support.

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© 2017 The Financial Times Ltd. All rights reserved. Please do not copy and paste FT articles and redistribute by email or post to the web.

(FT) Are you ready for an interest rate rise?

Are you ready for an interest rate rise?

Date published: 31 October 2017

Lucy Warwick-Ching, James Pickford and Josephine Cumbo


Britain’s first interest rate rise in more than a decade looks to be imminent after inflation hit its highest level in five years and the governor of the Bank of England said it had further to climb.

Mark Carney warned MPs a few weeks ago that it was “more likely than not” that prices would increase further in October and November. His comments came after official data showed consumer prices rose 3 per cent in the year to September, from the previous month’s 2.9 per cent rate. The rise, which took inflation to its highest level since March 2012, was driven largely by increasing food and transport prices.

If it had risen further, Mr Carney would have had to write to Philip Hammond, the chancellor, explaining why inflation is more than 1 percentage point above the central bank’s 2 per cent target and what to do about it.

Higher inflation makes it more likely that the BoE will raise interest rates from its record low of 0.25 per cent when its Monetary Policy Committee meets next month.

A rise would help bolster the weakened pound, but would also push up borrowing costs — with immediate implications for millions on floating-rate mortgages — and could run the risk of choking off growth at a time when economic activity is already weakening due to uncertainty over Brexit.

How likely is a November rate rise?

The base rate has been at 0.25 per cent since August 2016 and has not risen at all since July 2007. Last month, Mr Carney said he expected a rate rise “in the relatively near term”. And this week’s labour market data — which revealed that wages are continuing to rise at a slower rate than prices — is adding to the growing pressure to raise rates in November, say analysts.

But a November rise is not set in stone. Even as inflation rose, some MPC members expressed doubts to MPs about the need for an increase. Dave Ramsden, deputy governor for markets and banking, and Silvana Tenreyro, an external member, were sceptical about the need for imminent tightening. It seems the vote in the MPC meeting on November 1 could be tighter than previously thought.

How quickly could rates go up?

Given market sentiment, Mr Carney will need to take action soon, says Calum Bennie, a savings specialist at Scottish Friendly.

“Interest rates have to rise to help tackle inflation and the sooner this happens, the better,” he says. “Mr Carney must recognise the wolves are now at the door and take action to strengthen the pound, even though this may increase mortgage costs. Consumers have been dealt a double blow of poor income growth and rising shop prices over the past year. For many, this has increased dependency on credit, but with defaults now on the rise it is clear that many families are finding it nigh on impossible to balance the books.”

Kallum Pickering at investment bank Berenberg predicts rates will rise by 25 basis points in November with a further three 25bp rises before the end of 2019, with two in 2018 and one in 2019.

However, others predict that the BoE will be wary of the fragile state of the UK consumer as it considers its next move.

“On one hand, the BoE doesn’t want to heap pressure on borrowers by raising rates, potentially slowing economic growth from an already glacial pace,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “On the other hand, consumer borrowing is rising at quite a clip, and inflation is also heading in the wrong direction, both of which suggest a rate rise is in order.”

He concludes that the Bank of England is “caught between a rock and a hard place”. Markets have bought into the hawkish rhetoric emanating from the central bank of late, and are now pricing in a rate rise before the end of this year.

“The BoE does have form for disappointing spectators on this front, however looking beyond a potential rate increase in the next few months, the longer term picture is still one of low interest rates dominating the economic landscape for some time to come,” he adds.

How are mortgage lenders responding?

Rates on mortgage deals have been plumbing record lows in the past two years as base rates have been held at 0.25 per cent. But many lenders’ fixed rates have ticked up in recent weeks after a rise in swap rates, which lenders use to price their home loans.

HSBC last week raised interest rates on some of its 2, 3 and 5-year fixed-rate home loans by up to 0.2 percentage points. This follows increases by Barclays, NatWest, Nationwide and Santander.

Those already tied in to a fixed-rate deal will see no change in their monthly repayments if base rates rise in November. But millions on tracker mortgages or standard variable-rate mortgages — which are typically higher than fixed-rate deals — could see their loan costs rise before Christmas.

Aaron Strutt, product manager at Trinity Financial, says: “In the past, lenders have put rates up and brought them down again. We wonder if we’ve reached the point where they won’t come back down.”

David Hollingworth, director at broker L&C Mortgages, says more borrowers are likely to focus on longer-term deals. “We will see more people questioning whether this is the turnabout for interest rates and whether they can lock in for medium-term rates. There will be quite a bit of interest in the five-year rates,” he predicts.

The extra costs of a 0.25 percentage point rise in mortgage interest will not be onerous for most. A borrower with a £200,000 25-year term mortgage paying a standard variable rate of 4.5 per cent would see their annual repayments rise by £330 a year if the rate rose to 4.75 per cent.

The most likely effect will be borrowers rushing to fix, as lenders withdraw their best deals. In the past two weeks, for instance, two-year fixed-rate deals below 1 per cent have disappeared from the market. “[A rate rise] will start to lead to people taking action,” says Mr Hollingworth.

Lindsay Cook, the FT’s Money Mentor columnist, warns that it could take several months for any new mortgage deal to be processed. “If you are on a floating rate and are thinking of remortgaging, start getting your paperwork in order now before rates rise,” she advises.

Will savings rates increase?

The average interest on savings accounts has been gradually ticking up from record lows, according to the latest data from Moneyfacts, the consumer data site, which revealed that the rates on fixed rate individual savings accounts (Isas) rose faster than any other savings product this month — with the average one-year cash Isa up 0.04 per cent to 1.04 per cent.

However, the Moneyfacts data reveals there is still not a single standard savings account that beats, or even matches, the current 3 per cent rate of inflation.

“Positive news is hard to come by in the savings market, but rate increases outweighing cuts for yet another month is exactly that,” says Charlotte Nelson, finance expert at Moneyfacts.

“Where previously the rate increases were concentrated on the fixed rate savings market, September saw the start of an easy access revival as many providers made noticeable increases to their easy access accounts.”

In September, the average increase in rates on easy access savings accounts was 0.34 per cent, according to Moneyfacts — the largest monthly increase in the past year.

There are several current accounts that offer better interest rates as a switching incentive, but these tend to be for fixed periods and on a limited amount of cash.

Is it better to invest my money in the stock market?

Low wages and high inflation mean we need our savings to work even harder to generate an inflation-beating return.

Maike Currie, investment director for personal investing at Fidelity International, says stock markets offer the best chance of generating a real return in the long term.

Calculations from Fidelity show that if you had invested £15,000 into the FTSE All-Share index 10 years ago, you would have amassed £26,273 (factoring in the reinvestment of dividends). By contrast, putting £15,000 into the average UK savings account over the same period would have generated just £15,604.

In real terms, your cash savings would have gone backwards — allowing for inflation, £15,000 10 years ago would be the equivalent of almost £20,000 today, according to the Bank of England’s inflation calculator.

How should I change my investment strategy?

Investing in the stock market can provide protection against inflation. Provided that inflation does not increase to a level which prompts an extreme interest rate rise, experts say gently rising prices can often be favourably exploited by companies.

Inflation also bodes well for highly geared companies. As debt tends to be fixed, a business’s borrowings will be eroded as inflation takes off. Fidelity’s Ms Currie says that even with no change in the overall enterprise value of a company, all investors need is for the balance to move from debt to equity to make a significant gain.

Experts say investors should be wary of investing in retail stocks in times of high inflation, because they may struggle to pass on price rises to consumers. Instead, investors should consider investing in companies and funds with high exposure to international earnings.

Darius McDermott, managing director of Chelsea Financial Services, advises investors to seek overseas exposure.

“With the UK economy and currency looking a little shaky, investors could benefit from increasing their overseas exposure,” he says. Two actively managed funds that he recommends are the M&G Global Dividend Fund and the Scottish Mortgage Investment Trust. “The latter has the added attraction that it has increased its dividends each year for the past 34 years,” he says.

Should I adjust my portfolio for higher interest rates?

According to Seven Investment Management (7IM), which publishes fund purchases in every quarter, many investment managers are already preparing client portfolios for potential interest rate rises.

Gilts, and to a lesser degree corporate bonds look particularly vulnerable to rising inflation. This is because they pay a fixed rate of income that buys less as inflation eats into it.

“The inclusion of two short dated bond funds in the top 10 [of fund purchases for this quarter] is interesting — advisers are clearly looking to protect investors from potential interest rate rises,” Tony Lawrence, an investment manager at 7IM says. “Short dated bonds are a low risk, albeit lower return, approach to fixed income investing.”

Others say alternative assets such as infrastructure and commercial property can offer good inflation protection as the income these assets produce is typically linked to inflation, and will rise accordingly.

What about my pension?

Inflation can often be bad news for pensioners as it will erode any cash savings, says Tom McPhail, head of policy at Hargreaves Lansdown, the investment manager. However, this week’s well-timed inflation rise will trigger a relatively generous increase for both private and state pensions.

Millions of pensioners will see their state pension payments rise by up to 3 per cent from next April thanks to the “triple lock” which guarantees the benefit will rise by the higher of September’s inflation figure, average earnings or 2.5 per cent.

The new state pension, which came into force from April 2016, is likely to increase by nearly £5 per week from its current £159.50 to £164.50 for those who can claim the full amount.

The basic state pension, payable to those who reached pension age before April 2016, is likely to rise by £3.80 a week from £122.30 to £126.10. The government will confirm the exact level of pension rises next month.

The rise in consumer price inflation will also affect millions of retired public sector workers, including teachers, doctors and nurses, who will also see their pensions increase by 3 per cent next year.

Furthermore, retired private sector workers, whose defined benefit pensions are linked to the retail prices index, will see bigger increases to their income than those in the public sector, whose pensions are linked to CPI.

According to the ONS, the RPI was 3.9 per cent in September. About two-thirds of the UK’s 6,000 defined benefit pension schemes currently use the RPI to calculate annual increases for pensioners.

The pensions lifetime allowance (LTA) will also rise by £30,000 to £1.03m from April next year. This is because increases in the LTA are also linked to CPI.

The LTA governs how big a pension pot can grow over a lifetime while benefiting from tax relief. Any savings above the lifetime threshold, when the pension is eventually drawn, will attract a higher tax charge.

People with pension savings above the current lifetime allowance of £1m who have not taken out available tax protections could see a cut of up to £16,500 in excess tax charges, plus a £7,500 increase to the amount of tax-free cash they can take, according to Hargreaves Lansdown.

What effect will the Budget have?

There is a good chance the first interest rate rise in a decade will occur weeks before the chancellor’s first autumn Budget on November 22, increasing the political pressure to help those who are “just about managing” as real incomes are squeezed.

Speculation is mounting that Philip Hammond will unveil bold policies to tackle the surge in support for Labour among younger voters.

A potential way of doing this could be to offer tax cuts targeted at younger voters, for example reducing their national insurance contributions, or cutting interest rates on student loans (which are linked to inflation). Speculation is rife that to fund such policies, the chancellor could raid pensions tax relief.

However, should interest rates rise as expected, many debt-laden youngsters could find themselves struggling under increasing financial pressure, says Gary Smith, chartered financial planner at Tilney.

“Many young people simply can’t afford to save much into pensions in their early years, as they use their income to fund a property purchase and mortgage costs, raise a family, and repay student loans,” he says.

“It is typical for people to increase their pensions funding in later years once they have the excess financial resources to do so, but any reduction to how much can be contributed could restrict this type of planning.

“Ultimately, I do feel that changes to the pension tax relief system are inevitable at some point, but there are other ways to achieve this without penalising older savers in favour of young people.”

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© 2017 The Financial Times Ltd. All rights reserved. Please do not copy and paste FT articles and redistribute by email or post to the web.

(FT) The challenge of Xi Jinping’s Leninist autocracy – Martin Wolf

The challenge of Xi Jinping’s Leninist autocracy

Date published: 31 October 2017



Whether you like it or not, history is on our side. We will bury you!” Thus in 1956 did Nikita Khrushchev, then first secretary of the Communist party of the Soviet Union, predict the future.

Xi Jinping is far more cautious. But his claims, too, are bold. “Socialism with Chinese characteristics has crossed the threshold into a new era,” the general secretary of the Communist party of China told its 19th National Congress last week. “It offers a new option for other countries and nations who want to speed up their development while preserving their independence.” The Leninist political system is not on the ash heap of history. It is, yet again, a model.

Khrushchev’s claim seems ridiculous now. It did not seem so then. The industrialisation of the Soviet Union had helped it defeat the Nazi armies. The launch of Sputnik in 1957 indicated it had become a technological rival for the US. Yet 35 years after Khrushchev’s boast, the USSR, the Soviet Communist party and its economy had collapsed. This remains the most extraordinary political event since the second world war. Meanwhile, the most remarkable economic event is the rise of China from impoverishment to middle-income status. That is why Mr Xi is able to talk of China as a model. (See charts.)

Yet how has the system that failed in Moscow succeeded in Beijing? The big difference between the two outcomes lay with Deng Xiaoping’s brilliant choices. China’s paramount leader after Mao Zedong kept the Leninist political system — above all, the dominant role of the Communist party — while freeing the economy. His determination to maintain party control was made clear by his decisions during what the Chinese call the “June 4 Incident” and westerners the “Tiananmen Square massacre” of 1989. Yet his resolve to continue with economic reform never faltered. The results were spectacular.

Whether the Soviet Union could have followed such a path is open to debate. But it did not. As a result, today’s Russia does not know how to mark the October revolution of a century ago: President Vladimir Putin is an autocrat, but the communist system has gone. Mr Xi is also an autocrat. His dominance over party and country was on display at the party congress. But he is also an heir to the Leninist tradition. His legitimacy rests on the party’s.

What are the implications of China’s marriage of Leninism and market. China has indeed learnt from the west in economics. But it rejects modern western politics. Under Mr Xi, China is increasingly autocratic and illiberal. In the Communist party, China has an ostensibly modern template for its ancient system of imperial sovereignty and meritocratic bureaucracy. But the party is now emperor. So, whoever controls the party controls all. One should add that shifts in an autocratic direction have occurred elsewhere, not least in Russia. Those who thought the fall of the USSR heralded the durable triumph of liberal democracy were wrong.

Will this combination of Leninist politics with market economics go on working as China develops? The answer must be: we do not know. A positive response could be that this system not only fits with Chinese traditions, but the bureaucrats are also exceptionally capable. The system has worked spectacularly so far. Yet there are also negative responses. One is that the party is always above the law. That makes power ultimately lawless. Another is that the corruption Mr Xi has been attacking is inherent in a systems lacking checks from below. Another is that, in the long run, this reality will sap economic dynamism. Yet another is that as the economy and the level of education advances, the desire for a say in politics will become overwhelming. In the long run, the rule of one man over the party and that of one party over China will not stand.

All this is for the long run. The immediate position is quite clear. China is emerging as an economic superpower under a Leninist autocracy, controlled by one man. The rest of the world has no choice but to co-operate peacefully with this rising power. Together, we must care for our planet, preserve peace, promote development and maintain economic stability. At the same time, those of us who believe in liberal democracy — the enduring value of the rule of law, individual liberty and the rights of all to participate in public life — need to recognise that China not only is, but sees itself, as a significant ideological rival.

The challenge occurs on two fronts.

First, the west has to keep a margin of technological and economic superiority, without developing an unduly adversarial relationship with Mr Xi’s China. China is our partner. It is not our friend.

Second and far more important, the west (fragile as it is today) has to recognise — and learn from — the fact that management of its economy and politics has been unsatisfactory for years, if not decades. The west let its financial system run aground in a huge financial crisis. It has persistently under-invested in its future. In important cases, notably the US, it has allowed a yawning gulf to emerge between economic winners and the losers. Not least, it has let lies and hatred consume its politics.

Mr Xi talks of the “great rejuvenation of the Chinese nation”. The west needs rejuvenation, too. It cannot rejuvenate by copying the drift towards autocracy of far too much of today’s world. It must not abandon its core values, but make them live, once again. It must create more inclusive and dynamic economies, revitalise its politics and re-establish anew the fragile balance between the national and the global, the democratic and the technocratic that is essential to the health of sophisticated democracies. Autocracy is the age-old human norm. It must not have the last word.

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(FT) The Brexit debate is too important to be conducted in the dark

The Brexit debate is too important to be conducted in the dark

Date published: 29 October 2017



There is something sorely missing in the debate about the terms of the UK’s withdrawal from the EU and its future bilateral relationship with the EU27. Passions are running high, wild assertions are commonplace. But the British public and its elected representatives need fact-based evidence to inform the hard choices that lie ahead.

It would be the height of irresponsibility to ask the House of Commons to vote on any prospective Brexit deal without a clear idea of its impact on the economy. The Treasury is known to have conducted “impact assessments” on several models of Brexit — examining how 50 sectors of the UK economy would be affected. Despite persistent calls from Conservative and Labour MPs, these documents have been kept private, ostensibly to avoid undermining Britain’s negotiating hand, according to David Davis, the Brexit secretary. This argument is spurious, as the EU will have analysed the UK’s options and understands which ones are realistic.

If the Treasury were to publish the documents, some Brexit supporters would inevitably cry foul

There are four broad paths for the UK’s immediate future after Brexit day in March 2019. The first is a standstill transition, which will retain the UK’s membership of the EU single market and customs union for the immediate future. This was mooted by Mrs May in her Florence speech and is preferred by most businesses. It would deliver the most certainty and lessen the risk of a shock to the UK’s economy.

The second is an exit that continues membership of the customs union during the transition period but stops short of full single market membership. This option, suggested by Manfred Weber, leader of the centre-right European People’s party, would risk immediate damage to the UK’s services sector. Some licenses could be phased out gradually but it would be far from business as usual.

If the negotiations under Article 50 fall apart, there are two “no deal” scenarios. Both risk an economic shock. The first is a negotiated no deal, which could see the UK retaining membership of some regulatory agencies — such as the European Aviation Safety Agency and Euratom. But on trade with the EU, the UK would flip straight into World Trade Organisation terms — raising tariffs and, more importantly, non-tariff barriers. Or there is the most disorderly scenario: a non-negotiated no-deal Brexit with no formal agreement between the UK and the EU. This last option is often canvassed by hardline Brexiters who want Britain out of the EU whatever the cost. Their refrain that “no deal is better than a bad deal” is empty and economically illiterate, obscuring the reality of a serious shock to the UK and administrative chaos.

If the Treasury were to publish the documents, some Brexit supporters would inevitably cry foul. They would argue that the Treasury was wrong in its short-term projections before the EU referendum last year and could be wrong again. The crucial difference, however, is that those assessments were released in the heat of a referendum campaign and further hyped by the then-chancellor George Osborne.

The Brexit debate is simply too important to be conducted in the dark. There is too much airy talk about what kind of post Brexit model sounds right. For the City of London or the aviation industry, for example, the standstill route is likely to have very different consequences to a “no deal” exit.

It is in Mrs May’s instincts to keep such information private. Yet the magnitude of Brexit requires a different approach. This is not a repeat of Project Fear to scare the public about Brexit. It amounts to Project Fact — an informed debate about which options are best for the UK and least harm economic growth. In short, let there be light.

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(FT) Why machines do not have to be the enemy – Sarah O’Connor

Why machines do not have to be the enemy

Date published: 31 October 2017

Sarah O’Connor



Many of us have already lost the “race against the machines” — we just don’t know it yet. That is the conclusion of new research by the Organisation for Economic Co-operation and Development.

Unlike most studies into the impact of automation, this one does not rely on informed guesswork about what machines will be able to do in 20 years’ time. Instead it takes three core skills that three-quarters of us use every day in our work — literacy, numeracy and problem-solving with computers — and compares our performance against the abilities of machines. The results are sobering, but rather than a reason to despair, they suggest we might want to rethink the race altogether.

The OECD has a good idea of our proficiency in these areas because it has put 216,000 adults in 40 countries through a 50-minute assessment called the Survey of Adult Skills. In the survey a group of computer scientists was given the same test and asked which questions computers could answer, using technology that exists but has not necessarily been rolled out yet in the workplace. The conclusion? Almost a third of workers use these cognitive skills daily in their jobs and yet their competency levels have already been matched by computers. About 44 per cent are still better than the machines. The remaining 25 per cent have jobs that do not use these skills every day.

There are two caveats. First, the OECD only asked computer scientists how well they thought machines could do. The results would be more compelling if machines were actually put to the test. Second, just because technology exists does not mean it will be deployed quickly in the workplace. It depends on how easily it can be made operational, how much it costs relative to the value it creates, and whether companies have the appetite to invest.

And yet, the implications of the study are hard to shrug off. Stuart Elliott, the author, concludes that in 10 to 20 years, only workers with very strong literacy and numeracy skills will be comfortably more proficient than computers. At the minute, only about one in 10 working-age adults in OECD countries are of this standard.

It is true that the education systems in most countries have been raising their game: younger people tend to have better skills than older people (the UK being one notable, and worrying, exception). But even if you take the most skilled generation in the most skilled country — young people in Finland — two-thirds still do not meet these top levels of literacy and numeracy. Short of astonishing improvements in education, it looks like only a minority of people can win this race.

But that does not necessarily mean everyone else becomes redundant. In most jobs, people combine cognitive skills with other human abilities: physical movement; vision; common sense; compassion; craftsmanship. On many of these fronts, computers are behind humans, if they are in the race at all.

The risks to workers from ever smarter computers are clear, but the opportunities will lie in maximising the value of their human skills. For some people, such as talented chefs, the battle is already won. Others might need to harness the computers to leverage their human talents. For lower-skilled workers, there is already evidence to suggest that working alongside technology can help their prospects.

Research by Richard Blundell, an economics professor at University College London, suggests the low-skilled tend to fare better in big companies that invest heavily in research and development. They have higher wages than other low-skilled workers and tend to stay with their employers for longer.

These findings, though preliminary, are a reminder that technology does not necessarily mean doom to all but the highest skilled. The best response to the race against the machines is not to hold the machines back; it is to help the humans jump aboard.

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(FT) Beijing warns US against trying to contain China’s rise


Beijing warns US against trying to contain China’s rise
Date published: 30 October 2017
Shawn Donnan and Katrina Manson in Washington

China has fired back at the Trump administration’s plans for a new “Indo Pacific” strategy to counter Beijing’s growing economic and security hold on the region, warning that the world’s two biggest powers should not be treating their rivalry as a “zero-sum game”.
Speaking ahead of a visit to Asia by President Donald Trump later this week, the Chinese ambassador to Washington warned that any US effort to contain China’s rise or intervene in the South China Sea would be viewed with scorn by Beijing.
“I don’t think it will be in the interest of any countries if their aim is to contain China,” Cui Tiankai said on Monday. “I don’t think anybody would be able to contain China . . . We don’t have a zero-sum game in the Asia-Pacific. We recognise the interest of the United States in the Asia-Pacific and we want to co-operate with the United States.”
The White House has been working for months on an Asia strategy that people involved bill as a more robust response to a China they see as a predatory economic and trade power to which past US administrations have been too willing to bend. Mr Trump next week is due to spell out more detail in a speech on the sidelines of the Asia-Pacific Economic Cooperation summit in Vietnam.
In recent weeks senior US officials including Rex Tillerson, the secretary of state, have been pointing to India and Japan as allies in an “Indo-Pacific” alliance as a bulwark against China in both security and economic terms.
They also are eager to counter the view that Mr Trump — with his withdrawal from the 12-country Trans-Pacific Partnership trade pact — has been forfeiting US leadership in the region.
In a speech this month Mr Tillerson warned that countries were being seduced by cheap loans from China as part of its “Belt and Road Initiative” that would eventually lead to Beijing gaining sovereignty over important strategic economic assets in other countries.
The US is now discussing a menu of high-grade military hardware sales to India. US defence secretary Jim Mattis spent last week on a tour of south-east Asian countries in a bid to unify the region against China.
Mr Mattis repeatedly affirmed the importance of freedom of navigation through vital trade routes and sovereignty, an indirect reference to China building controversial artificial islands equipped with military installations in the South China Sea.
But the recent US interventions have irked China with Mr Cui telling reporters that the US and other non-regional players should keep out of discussions between Beijing and its south-east Asian neighbours. China, he said, was eager to create a “community with a shared future” in the Asia-Pacific.
“I don’t think there is any evidence that China is trying to dominate the region,” he said.
Among the big issues to be discussed during Mr Trump’s visit to Beijing was the continuing crisis over North Korea’s pursuit of nuclear weapons, the ambassador said, although he warned that China was already doing all it could to exert its influence over Pyongyang.
Mr Cui also said China was hoping to make progress on trade and other economic issues during Mr Trump’s visit and to have concrete measures to announce, something the two sides failed to do after a July economic dialogue in Washington.


Mr Trump has complained repeatedly about the $500bn annual US trade deficit with China and vowed to make closing it one of his administration’s top economic goals.
China was conscious of that, Mr Cui said, and shared Mr Trump’s concern, though he warned that narrowing the deficit would have to be a long-term project.
“We certainly want to have more balanced trade. But this will have to be done over time. You cannot reduce the trade deficit overnight. It is a structural problem. It is not caused by somebody’s policy,” he said, pointing to the global supply chains that now mean goods originate from many different countries.
But he also issued a thinly veiled rebuke of the bellicose language on trade employed by Mr Trump and his administration, who have long accused Beijing of unfair trade practices and waging an economic war on the US and its industrial base.
“I think when people are saying these things about China they might just look into the mirror,” he told reporters. “They might be describing themselves.”
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(FT) Direct democracy threatens way we are governed – Janan Ganesh

Direct democracy threatens way we are governed

Date published: 30 October 2017

Janan Ganesh



There are living citizens of Britain who were born before mass representative democracy. Not all women had the vote until 1929; not all men until 1918, and it took the atrocity exhibition of the Great War to shame the state into their enfranchisement.

This, I stress, is Britain, centuries-steeped in political enlightenment. In other countries, representative democracy has even wispier roots. The norm we have grown up with, of the greater share of the population being free to choose its rulers, has been around for the historical equivalent of the time it takes to cough. During its most severe test, the second world war, it was suspended. During another great trial, the inter-war depression, it surrendered to strongmen in cultures as sophisticated as Germany and Italy.

It is innately difficult to imagine the end of the one political system we have ever known. When we try — and many far-from-hysterical commentators have been moved to since the rise of Donald Trump as US president, the moderate conservative David Frum among them — the dread is always an authoritarian dictatorship. In a typical dystopia, Mr Trump is in the third term of his two-term presidency, Britain is ruled by (depending on your fevered nightmare of choice) Tories hostile to foreigners or socialists hostile to property rights, and France finally consummates its flirtation with the National Front.

This assumption that autocracy is the alternative to what we have is understandable. When representative democracy fell before, it fell in that direction. It also fits the trend of events in places such as Russia and Turkey.

Much more insidious are the unprecedented and thus undiscussed threats. There is no folk memory of a nation losing its mind to endless referendums, so we discount the prospect

But there are other dark futures to which our system can succumb. This month, the Pew Research Center published a global survey of attitudes to democracy. In the west 80 per cent of people said representative democracy was a good thing. Just 13 per cent said the same about a strong leader ruling without parliament or courts. Anyone who assumes a strict choice between the two models would, at this point, relax.

The trouble is that 43 per cent approved of a system in which “experts, not elected officials, make decisions” (Britain and America were in line with that average) and fully 70 per cent wanted one where “citizens, not elected officials, vote directly on major national issues to decide what becomes law”. Britain, despite or perhaps because of its referendum experience, was comparatively low on that count, but still approved by 56 versus 38 per cent.

The plausible menace to representative democracy is not dictatorship. It is Platonic rule-by-genius or, likeliest of all, direct democracy.

The public has not lost its vigilance to despots. The 20th century threw up too many examples in too many countries to too bad an effect. As a crude rule, the more a culture worries about strongmen, the less susceptible it is to one, and the west worries as a full-time job. It is there in the dystopic commentary and the fretful re-reading of Philip Roth’s The Plot Against America (a novel whose greatness, like that of 1984, lies in everything but its predictive power).

Much more insidious are the unprecedented and thus undiscussed threats. There is no folk memory of a nation losing its mind to endless referendums, so we discount the prospect. But look at the Pew findings — and at the trends of economics and technology.

Business used to reinforce representative democracy. The great corporations (think Ford, McDonald’s, Sony) were like governments in themselves. They employed droves, did tangible things and had executives who varied little from the political class. Google and Facebook are more like rolling referendums. These companies employ few people (relative to their market capitalisation) but allow billions a directness of say, an immediacy of gratification, that is new to the human experience. They sometimes betray a view of the world in which earthly government is peripheral. Perhaps none of this will re-wire our civic culture over time. Perhaps.

The best case against a second referendum on EU exit (there are some fine ones in favour) has nothing to do with Europe. It is the normalisation of direct democracy. Imagine mass direct votes on tax rates or migrant numbers. Or, to save you some sleep, do not.

What Karl Marx said of capitalism’s inherent instabilities is truer of democracy. The poor will always outnumber the rich. Technocracy can protect the rich from the poor. Direct democracy gives the poor maximal power over the rich. Representative democracy is not optimal for either. If it falls again, the culprit need not have the specific human face of a dictator. It might have the seething faces of all of us.

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(FT) Catalan crisis finally boils over – Gideon Rachman

Catalan crisis finally boils over

Date published: 27 October 2017

Gideon Rachman



All observers of modern Spanish politics have been aware of the Catalan question for decades. But very few believed that it would ever come to this: a formal vote in favour of independence by the Catalan parliament, in defiance of the Spanish government in Madrid.

For occasional visitors to Barcelona, it has been tempting to treat Catalan nationalism as a piece of colourful local theatre — something that gave an extra edge to “El Clásico”, the football matches between FC Barcelona and Real Madrid. But nothing too serious. The Catalan independence movement lacked the violent, threatening edge of Basque nationalism — which spawned its own terrorist movement in the form of ETA.

For that reason, until recently even the authorities in Madrid seemed much more concerned by the secessionist threat from the Basque country than from the Catalans.

But the language of the two sides in the dispute has long been unsettlingly harsh.

It is common to hear Catalan nationalists refer to the Spanish government as “fascists” — an evocation of the Franco era, when all manifestations of Catalonia’s separate identity were stamped upon.

At the same time, it has long been apparent that many non-Catalan Spaniards are angered and offended by Catalan nationalism — with its edge of cultural superiority, its insistence on the use of the Catalan language and its rewriting of local history books to foster a Catalan identity.

Many in Madrid argue that the Spanish government has been too indulgent of Catalan nationalism for too long. With that thought in the background and a rising atmosphere of confrontation, the risk of a resort to force is very real. As one foreign observer in Madrid puts it: “I have lost count of the number of times I have been told that ‘Two tanks in the Plaça de Catalunya and this will all be over’.”

It will be left to future historians to debate exactly why, after bubbling away for decades, the Catalan issue boiled over in 2017. Some in Spain blame the years of austerity and high unemployment that followed the financial crisis of 2008, arguing that the last real upsurge of Catalan nationalism took place in the 1930s. In that sense, the upheavals in Spain could be seen as part of a general perturbation of Western politics that has also led to the election of Donald Trump and to Brexit.

Others could point to much more specifically Spanish origins of the crisis. It is arguable that the asymmetric federalism of the Spanish constitution — adopted as part of the country’s transition to democracy — was intrinsically unstable.

Other parts of the post-Franco settlement, in particular the “pact of forgetting”, in which all sides agreed to bury the grievances of the Spanish civil war, may also have been ultimately untenable.

Spain’s membership of the EU was meant to have been a crucial part of the creation of a modern, democratic state. But the existence of the EU has also made the idea of an independent Catalonia seem more plausible, since it made it possible to argue that an independent Catalonia could be a prosperous small state under the EU umbrella.

In the event, the EU has given absolutely no encouragement to the Catalan separatists. That helps strengthen Spain’s hand as it deals with the Catalan crisis. The Spanish government also has the law on its side. It also faces a divided Catalonia, with around 50 per cent of the Catalan public thought to oppose Catalan independence.

The danger however is that the Rajoy government will overplay its hand. A very heavy-handed response from Madrid could easily backfire and create the clear majority for Catalan independence that currently does not exist.

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(FT) Spain faces test of authority in Catalonia under direct rule

Spain faces test of authority in Catalonia under direct rule

Date published: 29 October 2017

Michael Stothard in Madrid



Spain faces a crucial test of its authority over Catalonia on Monday when regional government ministries open under the direct control of Madrid for the first time since the country’s return to democracy 40 years ago.

Some Catalan ministers have signalled they will refuse to recognise directives by the Spanish government this weekend removing them from office. Activists have promised to take to the streets and defend ministers as they try and return to work.

Oriol Junqueras, the former number two in the Catalan government, wrote in an open letter in Catalan newspaper El Punt Avui on Sunday arguing that he and his colleagues were still in power because they were elected by the Catalan people.

But while tensions remain high, there were also signs over the weekend that the secessionist onslaught may be losing some momentum. Carles Puigdemont, who was ousted as leader of the regional government on Saturday, called for “peaceful opposition” to direct rule but did not say whether he or others would resist it.

Josep Lluis Trapero, who was removed as Catalan police chief on Saturday, urged the regional force to comply with orders from Madrid.

Tensions in the region reached boiling point on Friday after the Catalan parliament voted to become an independent republic. Hours later Madrid used exceptional powers to fire the government, dissolve the parliament and take over government ministries. New regional elections have been called for December 21.

There has long been fear that the imposition of direct rule would lead to a sustained campaign of opposition to Madrid. Open defiance by Catalan ministers and possibly institutions could put Spanish authorities in a difficult spot. They will have to work out how to enforce their own orders without resorting to force, which could inflame the region further.

On Sunday, political developments were dominated by a vast anti-independence demonstration in Barcelona. An estimated 300,000 people, according to the police, marched under banners that read “We won’t let Spain to be torn into pieces” and “The awakening of a silenced nation”. The organisers claimed more than 1m people joined the march.

Politicians used the rally to start campaigning for the regional elections. “It’s time to take over the streets and take over the ballot boxes,” said Albert Rivera, the leader of the centre-right Ciudadanos party.

The anti-independence march showed the strength of feeling among the unionists in Catalonia as well as the separatists.

A poll published by Spanish national newspaper El País on Saturday found that 55 per cent of Catalans opposed a declaration of independence by the region, with 41 per cent in favour.

Mr Puigdemont’s address on Saturday was not a rousing call to arms. He asked for people to engage in peaceful opposition to Spain’s takeover of regional affairs. But he stopped short of saying that he was still the leader of an independent republic, or that he was forming a government in exile. He said that all the roughly 150 fired officials would keep “working to build a free country”.

Analysts said separatists may have been wrongfooted by Mr Rajoy’s decision to make the regional elections in just eight weeks. Direct rule from Madrid will therefore be short, and separatists will have to focus on the election campaign.

Even Mr Junqueras suggested his leftwing separatist party might take part in the polls.

Jorge Galindo, a Spanish political analyst, said separatists have a “tough dilemma”. They either have to accept Spain’s directives and focus on winning the election, or stay true to their pledge to being independence and risk having no power at all.

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(FT) Three former Trump aides charged in Russia probe


Three former Trump aides charged in Russia probe

Date published: 30 October 2017
Courtney Weaver in Washington

Robert Mueller has filed the first charges of his investigation into Russian links to Donald Trump’s election team, indicting the president’s former campaign manager and striking a plea bargain with an ex-aide who attempted to broker meetings with senior officials in Moscow.

The charges against Paul Manafort, who headed the Trump campaign from June to August 2016, and George Papadopoulos, a campaign adviser who was arrested in July but has since agreed to co-operate, mark the most serious legal threat to the president since Mr Mueller was appointed special counsel in May.

Although the 31-page indictment against Mr Manafort, who was charged along with business partner Richard Gates, focused mainly on the Republican operative’s work in Ukrainian politics before joining Mr Trump’s team, Mr Papadopoulos provided a detailed account of his work to secure damaging information about Democratic rival Hillary Clinton from Russian sources.

According to a charge sheet filed along with his guilty plea, Mr Papadopoulos is accused of working with a London-based academic who claimed to have connections to President Vladimir Putin’s family. “They [the Russians] have dirt on her,” the professor told Mr Papadopoulos in April 2016, according to the documents. “The Russians had emails on Clinton . . . they have thousands of emails.”

Mr Papadopoulos attempted to pass on the leads to top Trump campaign officials and set up a meeting between the Republican candidate and Mr Putin, the charges allege.
The agreement with Mr Papadopoulos mark the second documented incident where senior Trump campaign officials met with Russia-linked operatives and discussed working with Moscow to secure information damaging to Mrs Clinton.

In July, Mr Trump’s eldest son released emails showing he and other campaign officials, including Mr Manafort and Mr Trump’s son-in-law Jared Kushner, met with Russian lobbyists after being promised similar compromising information.
White House press secretary Sarah Huckabee Sanders denied the charges signalled any co-ordination between Moscow and the Trump campaign.

“Today’s announcement has nothing to do with the president, has nothing to do with the president campaign, or campaign activity,” Ms Huckabee Sanders said. “We’ve been saying since day one there is no evidence of Trump-Russia collusion and nothing in the indictment today changes that.”

She described Mr Papadopoulos as holding an “extremely limited, volunteer position” in the campaign.

The three indictments reveal the twin-track approach taken by Mr Mueller in his investigation, with the former FBI director aggressively targeting senior Trump campaign officials while simultaneously cultivating junior aides such as Mr Papadopoulos as sources who can aid the inquiry.

Both Mr Manafort and Mr Gates pleaded not guilty during a court appearance in Washington. The government requested bail of $10m and $5m respectively, and for them to be placed under house arrest.
Mr Manafort turned himself in to the FBI’s Washington field office early on Monday morning after he and Mr Gates were accused of funnelling $75m through unreported offshore accounts.
Mr Manafort, 68, is accused of laundering $18m, while Mr Gates is accused of transferring $3m from offshore accounts from 2006 to 2015, a period in which the two men served as “unregistered agents” for Ukrainian leader Viktor Yanukovich and his pro-Russian political party. Mr Yanukovich was ousted in a pro-western revolution in 2014.
According to the indictment, Mr Manafort used “his hidden overseas wealth to enjoy a lavish lifestyle in the US”, which included buying multiple multimillion-dollar properties and obtaining loans using the properties as collateral.
On Twitter, Mr Trump quickly seized on the fact the charges focus on Mr Manafort’s work for Mr Yanukovich and his Party of Regions government, rather than any conduct during the 2016 race.
“Sorry, but this is years ago, before Paul Manafort was part of the Trump campaign,” Mr Trump wrote on Twitter. “But why aren’t Crooked Hillary & the Dems the focus????? . . . Also, there is NO COLLUSION!”
His son Donald Trump Jr, meanwhile, retweeted a post from a pro-Trump commentator alleging that Mr Papadopoulos was “an unpaid foreign policy campaign adviser who stupidly lied to the FBI. He wanted Trump to meet Putin, Trump Team said no.”

According to Mr Papadopoulos’ agreement, the young aide received an email from his professor contact last May informing him the Russian foreign ministry was “open to co-operation” with the Trump campaign. Mr Papadopoulos then forwarded that email to a senior Trump campaign aide, who forwarded it to a second senior campaign aide, both of whom are unnamed in the document.
“Let[’s] discuss,” the first senior campaign aide wrote in an email to the second, the document states. “We need someone to communicate that DT [Donald Trump] is not doing these trips. It should be someone low level in the campaign so as not to send any signal.”
Mr Papadopoulos has pleaded guilty to willingly making false statements to the FBI, a charge that carries a maximum prison sentence of five years and a maximum fine of $250,000.
A spokesman for Mr Manafort did not respond to requests for comment. Mr Gates could not immediately be reached for comment, and a mobile number for Mr Papadopoulos went straight to voicemail.
The charges come less than six months after Mr Trump fired FBI director James Comey, setting in motion a chain of events that led to the appointment of Mr Mueller to lead an independent probe into Russian interference in the 2016 election but allows him to pursue any potential leads he finds in the process, even ones not relating directly to the campaign itself.
US intelligence agencies concluded in January that Russia interfered in the election to try to help Mr Trump defeat Mrs Clinton through a campaign of hacking and releasing embarrassing emails, and disseminating propaganda via social media to discredit her campaign.

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(FT) Central banks alone cannot deliver stable finance – Martin Wolf

Central banks alone cannot deliver stable finance

Date published: 24 October 2017

Martin Wolf



Favourable global economic prospects, particularly strong momentum in the euro area and in emerging markets led by China and India, continue to serve as a strong foundation for global financial stability.” This statement opened the International Monetary Fund’s April 2007 Global Financial Stability Report. Since this benign view was published on the eve of the most devastating financial crisis in nearly eight decades, it has to be viewed, in hindsight, as a spectacular misjudgment. The fund is determined not to be caught out again. The question is whether the concerns it pours forth in its latest Global Financial Stability Report are well judged or whether it is crying wolf. As important, what might be the implications, especially for policy, of its worries?

The underlying argument of the report is that “near-term risks to financial stability continue to decline”, but “medium-term vulnerabilities are rising”. The return of global economic growth, combined with comfortable monetary and financial conditions, together with sluggish inflation, strengthens investors’ reach for yield and appetite for risk. With market and credit risk premiums at decade-low levels, asset valuations are vulnerable to a “decompression” of risk premiums — in blunter words, a crash.

As the report notes, shocks to credit and financial markets well within the historical range could have large negative impacts on the world economy: “A sudden uncoiling of compressed risk premiums, declines in asset prices, and rises in volatility would lead to a global financial downturn.” Many hold the room for monetary policy manoeuvre to be limited. The result might then be a less deep, but still more intractable, global recession than that of 2009.

It has to be possible for the financial system to cope with changes in asset prices without blowing up the world economy. This should not need saying

One element in these risks is yield compression. Yields on investment-grade fixed income instruments have collapsed since 2007, with almost none now yielding over 4 per cent. This has also encouraged greater capital flows to — and so more borrowing by — emerging countries. Non-resident capital inflows of portfolio capital reached an estimated $205bn in the year through August 2017 and are on track to reach $300bn in 2017, more than twice the total in 2015-16. In addition, argues the fund, low yields, compressed risk spreads and abundant financing are encouraging a build-up of debt on corporate balance sheets. Reversals in these spreads could cause a jolt: to reach the average levels for 2000-04, market risk and term premiums would have to rise by about 200 basis points for investment-grade bonds. Market volatility is also highly compressed. (See charts.)

Possibly most important, leverage continues to rise across the world, notably in China. In the high-income countries, the net asset position of the private sector has improved somewhat since the crisis, but the governments’ has worsened. Moreover, assets are currently valued at high, quite possibly unsustainable, levels. Debt service burdens are generally low, at current interest rates. But this would change if those rates rose sharply. Moreover, in several economies debt service burdens in the private non-financial sectors are greater than average — notably in China, but also in Australia and Canada.

Such analyses bring worries into the open. This is helpful: the more worried people are, the safer the system. Yet it is also essential to tease out the implications of the fragility the fund describes so clearly. I would identify four.

First, investors must be very wary.

Second, it has to be possible for the financial system to cope with changes in asset prices without blowing up the world economy. This should not need saying. An essential part of achieving this is deleveraging and in other ways strengthening intermediaries, notably banks. That has indeed happened, but not, in my view, nearly enough.

Third, the generation of demand sufficient to absorb potential supply has become far too dependent on unsustainable growth in credit and debt and also on consumption (especially in high-income countries) or wasteful investment (as in China). We might break this linkage in several ways. One is to redistribute income, via the tax system, from savers to spenders. Another is to increase incentives for investment, especially by profitable businesses. Another is to remove the tax-favoured position of debt and rely more on equity financing throughout the economy. A final one is to rely more on government spending and borrowing, especially spending on public investment.

Finally, we should not conclude that central banks have to abandon the priority of stabilising the economy in favour of the possibly conflicting goal of stabilising the financial system. One reason is that monetary policy is a blunt instrument for achieving the latter. A more fundamental objection is that we cannot tell people they must remain stuck in a deflationary economy because it is the only way to stop the financial system from exploding. They will rightly respond that these priorities are wrong. Similarly, ensuring creditors get the returns they think they deserve is not the job of the central banks. If governments think creditors are so deserving, they should change taxes accordingly. Again, if they think the financial sector remains excessively unstable, they should regulate it.

Criticising the success of our central banks in reflating our crisis-hit economies, because this created today’s financial risks, is not a valid reaction to their actions. It is, however, an extremely valid criticism of finance. It is also a valid criticism of the failure of governments to address the many frailties that still lead to financial excess. The central banks did their job. Unfortunately, almost nobody else has done theirs.

Letters in response to this column:

Policymakers need a financial stability target / From Richard Barwell, BNP Paribas Asset Management, London, UK

Credit set to remain the machine’s oil and grit / From Quin Casey, Takapuna, Auckland, New Zealand

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(FT) ECB can do better than ‘normalising’ monetary policy

ECB can do better than ‘normalising’ monetary policy

Date published: 27 October 2017

Martin Sandbu



The European Central Bank did what most people expected on Thursday and announced it would halve the rate at which it buys securities — and hence the rate at which it “prints” new central bank money to inject into the economy — to €30bn a month. There are many good things to say about this. In contrast to the Federal Reserve’s “taper tantrum” in 2013, the ECB’s market communication was perfect. And this compromise between hawks and doves keeps the purchase programme in force indefinitely, leaving the central bank room for manoeuvre rather than signalling a firm end to purchases at some future point.

As Free Lunch argued on Wednesday, however, keeping the current €60bn-a-month purchase rate unchanged would have been better. A decent growth rate does not indicate inflationary pressure when the economy is still well below its potential capacity. And just look at the ECB’s own survey of professional forecasters published today: even by 2019, inflation is expected only to reach 1.6 per cent, well below the ECB’s 2 per cent ceiling. It is too soon to withdraw monetary stimulus.

Virtually all the talk now is nevertheless of when and how to “normalise” — ie tighten — the ECB’s policy. So it may seem an odd time to think of new unconventional policies. But I want to give some more attention to the suggestion I brought up earlier this week, following a comment by Steve Donzé: that the ECB could follow the Bank of Japan by targeting long-term interests rates directly.

Note that long-term rate targeting — also known as “yield curve control” because when you control both short-term and long-term rates, you pin down the whole term structure of interest rates (the yield curve) — is a substitute for “quantitative easing”. QE targets a quantity of long-term securities to purchase in order to ease long-term borrowing conditions by driving down the yields on the purchased assets, driving investors into other securities. Direct rate targeting simply specifies the desired yields on the relevant assets and buys (or sells) securities to achieve it. It is similar to how many central banks fix short-term interest rates.

How would the ECB do this? Since it’s the central bank of many countries, it would have to target a composite rate — the average rate on a specified bundle of all its member countries’ government bonds. But this is no more complex than what it already has to do in its QE programme. A very useful first step would be to construct and regularly report an official synthetic long-term interest rate — say the average 10-year yield on governments’ bonds weighted by either the size of their economies or their total debt stock. Once the measure was in place and followed by markets, the ECB would be in a position to influence the rate through signalling or market operations.

There are two strong reasons why this would be a particularly useful step for the ECB to take. One is that worries remain that it may run out of assets to buy under its self-imposed cap on how much of each bond it is willing to own. That is not just a potential operational challenge; it also means that arithmetic alone makes markets expect a hard limit to monetary accommodation. By halving the purchase rate, the ECB has gained some time, but not removed the built-in expectation of tightening. By announcing a long-term interest rate target instead, the Japanese experience suggests that standing ready to buy and sell as required would mean the ECB did not actually have to do so. A bonus would be to calm the nerves of those worrying about a large central bank balance sheet, even as the ECB could credibly say it had a tool for further easing should this be required.

The other reason is that direct long-term interest rate targeting would be useful when policy has to be tightened as well as loosened. At some point monetary stimulus will have to be withdrawn, and some of that tightening will aim to raise long-term rates. Under the current regime, the ECB will have to copy the Federal Reserve’s strategy for reducing its bond holdings. A rate-targeting regime would offer an alternative. Since the policy would involve targeting a rise in the synthetic common interest rate, the obvious way to achieve that would be for the ECB to package (securitise) the bonds it holds (or create new, asset-backed securities based on them), and sell the bundles that exactly correspond to the constructed rate. That would not only achieve the desired monetary policy, it would also create the common safe asset many are asking for without having to go through the political minefield of debt mutualisation which exposes different eurozone countries’ taxpayers to one another.

A safe normalisation of eurozone monetary policy in due time, with the legacy of creating a permanent foundation for financial stability — what’s not to like?

Other readables

  • The Atlantic’s Alana Semuels reports on Sweden’s employer-funded job-security councils and their policy of protecting workers, not jobs.
  • A new study finds that the top marginal tax rate on personal income is positively correlated with economic growth up to a fairly high level. Growth is only hurt when top marginal tax rates rise above around 60 per cent, which is the growth-maximising rate.

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(FT) Oil stays above $60 as production cuts seen holding for next year

Oil stays above $60 as production cuts seen holding for next year

Date published: 30 October 2017

Anjli Raval and David Sheppard in London



Oil sustained its rise above $60 a barrel on Monday as expectations of an extension to Opec-led production cuts beyond March buoyed prices.

“The latest uptick can to a certain extent be attributed to further Saudi and Russian support for extending the supply cut,” noted analysts at JBC Energy.

Saudi Arabia’s crown prince Mohammed bin Salman said on Saturday the kingdom “affirms its readiness” to back an extension of supply curbs by global producers into 2018.

His comments followed remarks in recent weeks by Opec and Russian officials calling on some of the world’s biggest producers, inside and outside the cartel, to prolong the cuts and active management of the oil market until the end of 2018.

Global producers seek an end to a three year oil downturn that has crushed the economies of resource-rich nations and hammered the budgets of oil and gas companies which have cut back on investments into future production.

But prices had already found support late last week, with Brent crude oil rising to its highest price in more than two years on Friday as the market reflected signs of a shrinking crude surplus.

Hedge funds and other money managers have amassed a near record net long position in crude futures and options, indicating that they see oil prices shifting to a slightly higher price range.

“We think the move reflects the start of a widespread re-evaluation by traders of global balances and the pace of inventory draws,” said Paul Horsnell at Standard Chartered.

Stephen Brennock, at London-based broker PVM, said not only have supply curbs by some of the world’s biggest oil producers — which came into effect in January — helped give oil a boost, but so have “geopolitically-fuelled” disruptions in the Middle East and a lull in US drilling activity.

Oil exports via pipeline to Turkey from the Kurdish region in northern Iraq have resumed after a halt earlier on Monday, but the development only underscores the uncertainty around crude sales from Opec’s second-biggest producer.

And while a rebound in prices has spurred US shale oil output, some market participants question how much it can grow as companies shift their focus towards profitability, not just production volumes.

“Demand considerations have attracted relatively little attention,” Mr Brennock added. “Yet they have also played their part in hastening the rebalancing process.”

The IEA said demand is growing by 1.6m barrels a day this year, almost double the amount it was growing in the period when oil was above $100 a barrel between 2011 and 2014.

Global economic activity has accelerated and lower oil prices have also driven more crude purchases. As consumption offsets production, Opec is quickly closing in on its target to reduce oil inventories in industrialised nations to their five-year average.

The international Brent benchmark reached a high of $61 a barrel on Monday before retreating to $60.61 a barrel in afternoon trading.

West Texas Intermediate, the US marker, hit $54.46 a barrel before easing to $54.07 a barrel.

Consultancy Energy Aspects has also said the easing of US rules, now allowing for more exports of crude in recent months, has only caused a tighter domestic market as refiners were forced to process more crude for use at home.

This shows “just how strong current fundamentals are,” they said. “Brent at $60 is undoubtedly justified.”

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(FT) ETF price wars deepen as Deutsche cuts fees at flagship fund

ETF price wars deepen as Deutsche cuts fees at flagship fund

Date published: 30 October 2017

Robin Wigglesworth, US markets editor



The passive investment price wars deepened further this week with Deutsche Bank cutting the cost of its flagship junk bond fund and Franklin Templeton unveiling a series of cheap country-focused exchange traded funds.

Deutsche Bank’s asset management trimmed the expense ratio of its $281m Xtrackers USD High Yield Corporate Bond ETF from 25 basis points to 20bp, making it about half as expensive as the two big junk bond ETFs from BlackRock and Vanguard. That means it costs 20 cents annually to buy $100 worth of the ETF.

Also on Monday, Franklin Templeton Investments unveiled a series of 16 ETFs that track the stocks of a country or region, such as Australia, Germany, Japan or Europe as a whole, most of which cost just 9bp annually.

The ETFs are part of Franklin’s LibertyShares ETF arm, which launched last year and now manages just under $1bn.

The mammoth flows of investor money into ETFs and other passive index-tracking funds continued this year, despite a pick-up in the performance of many traditional active fund managers, with the total universe of ETFs crossing the $4tn mark earlier this year.

However, this has resulted in a mounting price war among ETF providers, which are scrambling to grab as much market share in the passive investment landscape as possible — especially with the entry of new players such as Franklin Templeton and Goldman Sachs Asset Management.

Some analysts even speculate that it will only be a matter of time before some simple ETFs essentially become free.

“The fee wars have ramped up over the past few weeks,” said Ben Johnson, head of ETF research at Morningstar, the data provider.

“Despite all the new products, investor interest is still mostly for plain vanilla, cheap products. And that’s where we’ve seen the flows go this year.”

However, Mr Johnson pointed out that the pressure on fees was broadening out from simple products to more complicated “smart beta” and fixed income ETFs as well. “The price war is pervasive.”

Earlier this month, State Street reduced the price of 15 of its smaller ETFs in response to competition from BlackRock and Vanguard — the two other big players in the passive investment universe.

The annual price of two US equity ETFs was slashed to just 3bp, or 3 cents per $100 invested.

The liquidity of ETFs is important to big investors that want to trade easily in and out of a fund without moving the underlying market, explaining why State Street has kept the price of its flagship $255bn US equity ETF at 9bp despite the competition.

But underscoring how price is now a bigger battleground, State Street also started using its own indices for three ETFs, dropping more expensive benchmarks licensed from FTSE Russell.

That followed Charles Schwab launching an ETF that tracked its own index of 1,000 big US companies at an expense ratio of just 5bp, pitting it head to head with Vanguard, BlackRock and State Street’s flagship US equity ETFs.

The competition from increasingly cheap passive products is bleeding into the traditional active asset management industry as well.

The average expense ratios of US equity funds have fallen from about 99 cents for every $100 invested in 2000 to 63 cents in 2016, according to the Investment Company Institute.

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(FT) Hail the large activist investor – Martin Sandbu

Hail the large activist investor

Date published: 30 October 2017

Martin Sandbu


The FT carries a story on Monday about the Norwegian sovereign wealth fund’s approach to activist investment. (Not “active investment” as opposed to “passive” in the sense of formulaically following a market index, but “activist” in the sense of making demands of company managers.)

The fund’s move two years ago to start pre-announcing its voting intentions at shareholder meetings has been so successful that it has done this much less frequently than it expected: only three times this year. Apparently the implicit threat of a public showdown is enough to make management more solicitous of this mega-investor’s preferences.

That clearly proves the fund’s power, but it may also suggest it is not putting that power to the best use — for itself, investors generally, and society at large.

The best way of thinking about investors’ role in corporate governance for the common good is to acknowledge that investors as a class also suffer when the companies they own act in anti-social ways. This is because the “negative externalities” that occur when a company pushes the costs of its behaviour on to others affect other companies as well. Managers who act in what they perceive as the company’s interest may thus act against the interest of shareholders as a class: corporate negative externalities harm investors. This is compounded when managers also have a shorter-term horizon than investors, even aside from externalities.

That is why sovereign wealth funds, pension funds and other large investors are particularly well-placed to remedy this problem through activism.

First, they tend to be “universal investors” with stakes in a broad range of companies — so the externalities are directly “internalised” in their overall investment portfolios. Despoliation of common natural resources or unwillingness to invest in real productive capital by one company may be opportunistically sensible and even profit-maximising yet still reduce such universal investors’ return by imposing costs or reduce demand for other companies in the portfolio.

Second, large investors have the clout to influence company management, both directly and as standard-bearers around which other, smaller investors can rally.

The question is whether they decide to use that clout. As my colleague Rana Foroohar points out in her latest column, many investors tend to outsource their voting decision in shareholder meetings to “proxy advisers”. That is better than ignoring one’s voting power altogether. (I disagree, however, that it is “understandable that large asset managers like BlackRock or Fidelity and myriad smaller institutions would want to offload this task”. Smaller institutions, yes, but large asset managers have the wherewithal to make their own decisions, as well as an interest in wanting to for the reasons outlined above.) But it is far from good enough if the proxy advisers themselves do not take externalities and long-term effects of company decisions into account.

Foroohar suggests that this is the case, and that proxy advisers focus too much on short-term shareholder return. If she is right, that means they simply replicate the myopia and unenlightened selfishness of the conventional governance practice of treating management with benign neglect.

That only increases the responsibility of large investors to show better stewardship for the private business economy in which they hold such big stakes. One can see the political reasons for a sovereign wealth fund such as Norway’s to be discreet. But the argument for taking into account the external and long-term effects of management decisions is also an argument for doing so publicly: giving smaller investors leadership leverages the self-interest of the larger ones. But when that self-interest is of the enlightened kind, this is also a public good. And at a time when private sector leaders themselves say the promise of capitalism has been broken, it even counts as a public duty.

Other readables

  • Last week we urged the European Central Bank to follow the Bank of Japan’s lead in targeting long-term interest rates directly. Daniel Moss explains just how important this has been for Japan: even if BoJ governor Haruhiko Kuroda is not reappointed for another term, his adoption of this tool has put the central bank in a position to continue stimulating the economy long after his departure.
  • Germany’s policy of encouraging employers to reduce hours worked rather than firing workers in the last recession kept unemployment low but came at a cost in productivity growth, by slowing down the movement of workers from lower- to higher-productivity jobs.

Numbers news

  • Business and consumer confidence in the eurozone is at a 17-year high.

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