Aurelia Butler

HELSINKI (Reuters) – Finland’s conservative National Coalition (NCP), winner of April’s parliamentary election, has reached agreement to form a majority government with the eurosceptic, anti-immigration Finns Party and two smaller groups, its leader said on Thursday.”All issues have been resolved and the papers are ready,” said NCP leader Petteri Orpo, a fiscal conservative set to become Finland’s next prime minister, referring to the government program.By getting the NCP, the nationalist Finns, minority-language Swedish People’s Party and the Christian Democrats to agree on a common platform, Orpo shifts Finnish politics to the right and sends left-wing Prime Minister Sanna Marin into opposition.During 11-week talks over how to govern Finland during the coming four years the Finns and the Swedish People’s Party had struggled to agree on immigration, climate policy and public finances, but reached a compromise in the end.Orpo’s government is expected to curb the fiscal deficit by cutting unemployment and welfare benefits, and to tighten immigration and loosen environmental commitments.Each policy area was subject to tough negotiations, however it was not immediately clear how strong each measure would be.Orpo has wanted to cut taxes and sell off stakes in some government-controlled companies, and said his government’s policy programme would be presented on Friday. He declined to elaborate on any details.The NCP won 48 seats in the April 2 election, ahead of the Finns with 46, while outgoing Prime Minister Marin’s Social Democrats came third with 43 elected members of the 200-seat parliament.To secure a majority, Orpo included the Swedish People’s Party, which holds nine seats, and the Christian Democrats with five, bringing the total support to 108. More

The scale of losses facing Thurrock council in Essex as a result of failed investments has “undermined its financial viability”, according to county inspectors who said residents will have to pay higher taxes for bare bones services for years to come. Thurrock’s Conservative-led local authority is one of the UK’s most indebted, having racked up £1.3bn in borrowings. It is the latest of several councils to have declared effective bankruptcy after investments designed to make up for central government funding cuts by providing an additional income stream failed to deliver expected results. The government in Westminster appointed Essex county council to carry out an inspection last year and Thurrock issued a section 114 notice last December that it was unable to fulfil its statutory duty to balance the books.The county inspectors’ report issued on Thursday said that Thurrock’s deficit in the 2022-23 financial year was in the order of £470mn. That is more than three times its annual budget and one of the largest budget black holes declared by a local authority in the UK. The deficit would run to a further £184mn in 2023-24.“The council will require significant external support, as well as large increases in council tax and the delivery of an extensive savings programme for years to come,” the report said.Thurrock council admitted last year that it faced losses of £275mn of public money from its investments, which have mostly been in solar energy.The Essex inspectors found that elected members and senior officers in Thurrock council had initially tried to conceal the bad news “and avoid public scrutiny” after repeated failures both in its investment strategy and the delivery of infrastructure projects.“This pattern of failure, and the nature of the council’s response, has been enabled by dereliction in political and managerial leadership, inadequate governance arrangements and serious weaknesses in internal control,” they said. As a result of the financial challenges facing the authority, many services would have to be reduced to the statutory minimum “for the foreseeable future,” they added.Despite the crisis, the Conservatives narrowly maintained their majority in Thurrock at elections last month, although the council leader and cabinet member for finance were among those who lost their seats.Responding to the government report, the new Conservative leader of the council Andrew Jefferies, said he was “deeply sorry for the shocking and unacceptable failings of the past”.“Under my new leadership the council will never repeat these mistakes . . . The report will now shape our recovery as we build back from this,” he added.Thurrock’s chief executive Dave Smith, said: “This is a turning point for Thurrock council . . . The serious and significant failings that took place here cannot be understated. We will not shy away from the hard truths about the way the council was operating and the changes that need to be made.” More

The Bank of England’s Monetary Policy Committee must be feeling rather like the worst-performing pupil in school right now. Its peers seem to have a better handle on inflation. Although the US Federal Reserve and European Central Bank both struck a hawkish tone this week, the end of their historic interest rate raising cycle is within sight. It will be harder for the MPC to convince markets that that is the case for the UK at its meeting next week.Headline inflation is a lot lower in the US and eurozone compared with the UK. The OECD expects UK price growth this year to be one of the highest among major economies. A recent run of higher-than-expected inflation and wage growth figures also suggests the BoE will have much more work to do. The persistence of Britain’s inflation is an increasing concern. Annual core inflation — which measures underlying price pressures — has eased recently in America and Europe to just above 5 per cent in May. Though the UK is yet to release data for last month, in April core price growth rose sharply to 6.8 per cent, from 6.2 per cent in March.Wage growth, which buoys inflation, is showing resistance. The annual increase in advertised wage data collected by Indeed, an employment site, has flattened out or declined across the EU and US after peaking in 2022. But it has continued to rise and hit new records in the UK. This means a wage-price spiral — when high inflation drives iterative demands for higher pay packets — remains a higher risk in the UK than in the US and the eurozone.The BoE does have some extenuating circumstances. The UK has experienced the worst of both worlds: a big energy shock similar to the eurozone, as well as labour shortages like those in the US. A fall in European natural gas prices since last year’s highs has driven down energy inflation more rapidly in some eurozone countries. This in part reflects differences in how consumer energy prices are set; further falls will increasingly filter through in the UK. Britain’s hot jobs market has meanwhile been exacerbated by idiosyncratic factors including high levels of long-term sickness, early retirement and changes to its immigration rules. Post-Brexit trade barriers may also have added to soaring food price inflation, according to a study by the London School of Economics.Nonetheless, the central bank has misjudged the persistence of inflation and extent of labour shortages. And wide-of-the-mark forecasts erode faith in the BoE’s command of price stability. After further data shocks this week, financial markets were expecting interest rates to reach 5.75 per cent by the end of the year — up from 4.5 per cent currently. Whether rates will need to go that high is unclear, but the impact on those seeking mortgages or coming off fixed rates is severe since rate expectations factor into the pricing of loans. Banks have been pulling mortgage products and pushing borrowing costs higher.The BoE’s governor, Andrew Bailey, appeared in front of a House of Lords committee on Tuesday as part of an inquiry into the central bank’s performance, much like a student being hauled into the headmaster’s office. The bank later announced a review into its forecasting errors in a welcome sign that it will attempt to learn from its mistakes.At next week’s meeting, a 25 basis point increase makes sense. A 50bp rise, as some are pushing for, may be too much of a shock for markets. But the central bank’s communications will be just as important as the rate rise. It will need to convince the public that it understands its recent errors, to help maintain its influence over rate expectations. The bank may also wish to reassert more forceful language on its determination to bring inflation back down to 2 per cent. It needs to get a grip quickly. More

Good afternoon. Last week I was trying to make the argument for bolder engagement with Brussels on the basis that another five years of stasis would lead to a permanent destruction of commercial, personal and intergovernmental relationships that would be hard to recover.This is, no doubt, just as some Brexiters intended when they negotiated the Trade and Cooperation Agreement (TCA), which creates structural barriers to EU-UK trade that will deepen over time, even if the UK does nothing to actively plot a divergent course.Two reports on the UK’s international trade prospects that have come out in the last week — one from the Resolution Foundation and one from the Midlands Engine trade body — make for chilling reading in this regard.They document in detail how the UK’s advanced manufacturing sectors, starting with cars and chemicals, are facing structural decline because of their reliance on highly integrated EU supply chains from which they are being squeezed out over time.This matters because while the UK is a services-oriented economy, in terms of trade nearly half UK exports are from manufacturing (and nearly half of those to the EU) and in areas like the Midlands and the north they support better-paying jobs. Modern industry is also, of course, supported by professional and technical services. Low-productivity manufacturing set to riseThe Resolution Foundation spells out why the current situation will lead to the ongoing atrophying of advanced UK industry; to be replaced by lower-productivity manufacturing. In short, the total amount of work will probably remain the same, it will just pay less well. The British frog is being slowly boiled. The challenge is that the UK’s Brexit settlement will continue to harden on a relative basis even if the UK stands still. That’s because the EU internal market is deepening over time, while actively using its own regulatory heft (carbon taxes, subsidies, car battery recycling regulations etc) and sheer market size to encourage the onshoring of supply chains to which the UK now has reduced access.Both the reports are clear that unless the UK reassesses the fundamental parameters of its relationship with the EU, the UK’s decline will not be arrested — despite all the ‘good ideas’ set out recently by trade groups, the Lords’ EU select committees and the laudable Trade and Business Commission report that I mentioned last week. (I’ll be reporting from the related Trade Unlocked conference next week.)So proposals, for example Labour’s idea for a veterinary deal to reduce sanitary and phytosanitary checks for animal products, or indeed the government’s announcement this week of a new commission to boost ecommerce, can’t obscure the Brexit-sized elephant in the room. We should definitely do these things, but they won’t really move the needle.Or as Shania Bhalotia and her colleagues at the Resolution Foundation put it:“Politicians are united in their desire to reverse the decline of manufacturing exports since the TCA was implemented. But the proposed changes are small: they would reduce trade costs for specific sectors, but are not material for the economy overall, and do not offer much hope of avoiding the structural shift out of higher-value manufacturing.” There will be those who see this as a counsel of despair — and as I said last week, there is a real risk politicians lose heart when they realise how hard this is going to be — but actually it is the opposite.As the Resolution Foundation report argues, the UK still badly needs a ‘defensive strategy’ to reduce the impact on industry — unilateral alignment on EU regulation and standards, digitising borders and doing vet deals etc — in order to create breathing space for change.As Professor Jun Du and colleagues at Aston University put it in the Midlands Engine report:“While it will take time to effect improvements in the EU-UK trade relationship, that time will allow policymakers to work on developing firm capabilities and competitiveness domestically, which will help firms to export when conditions are right. This builds up business confidence and the firm’s preparedness for change.”Of course any UK government, of whatever stripe, actually needs to do that stuff — sort out planning, invest in skills etc — but it also at some point needs to ask how long it wishes to passively acquiesce in making people poorer?I mentioned last week the EU-UK Forum annual conference themed around “A New Relationship” but, as I reported with my Brussels-based colleague Andy Bounds, the conference actually served to highlight the gaps between the two sides.Brussels moves onFor all the high-level diplomatic warmth generated by Rishi Sunak signing the Windsor framework, on a host of core EU-UK issues — negotiations to rejoin the Horizon science programmes, electric vehicle tariffs, repatriating euro clearing to the EU and financial services co-operation — at an institutional and official level the relationship grinds slowly.The EU UK Forum panel on regulatory divergence provided a chilly reminder that — for all the new energy in the UK debate around possible Brexit ‘fixes’ — there is instinctively much less enthusiasm and bandwidth in Brussels for change.The panel included a rare public appearance by Stefan Fuehring, the lead EU Commission official overseeing the TCA, who was at pains to repeat that the five-year review of the TCA starting in 2026 was an “implementation” review and not a moment for “revising, revisiting or renewing, let alone amending” the deal. As he said:“There’s almost on a bi-weekly basis a report [on how to improve the existing Brexit deal] coming from the Tony Blair Institute, the UK in a Changing Europe, the House of Lords and so on. My job is to follow all these, of course, but I’m not aware that in the last two years any such report has come out of the EU system. We have really moved on now with this debate [over Brexit] and I think the next decade is one where we’ll deal with future member states, rather than a past member state.” Such EU Commission orthodoxy is the starting point for any future discussion, but I still believe it doesn’t necessarily have to be the endpoint if a future British government made a conscious decision to reframe the discussion. It will take a major diplomatic heave, but the arrival of a new UK government next year and the 2026 TCA implementation review still has the potential to provide a political inflection point in the relationship. But it will be difficult to argue the domestic political case unless and until the realities set out in those two reports are acknowledged and actively fed into the public discussion on Brexit. For now, and on a day when the Boris Johnson show and personality politics once again consumes the news agenda, heads remain collectively in the sand.Brexit in numbersThis week’s chart comes courtesy of the Resolution Foundation report, and shows the UK lagging the G7 competitors since the Trade and Cooperation Agreement came into force. The report makes several really fundamental — but often under-appreciated — points about the challenge facing advanced UK manufacturing.Advanced manufacturing provides a large proportion of the higher-paying, higher productivity jobs in the Midlands and the north.These jobs are found in sectors like cars, chemicals, aerospace and pharmaceuticals that rely more deeply on access to integrated EU supply chains hit hardest by Brexit.While the overall volume of UK manufacturing activity will hold up as some manufacturing is repatriated into the UK, as Brexit progresses, we “are likely to see a shift to lower-productivity manufacturing”.This is because, as we’re already seeing with chemicals and autos, over time higher-productivity UK manufacturers will be shut out of those supply chains as EU businesses gravitate inexorably to other EU businesses with which they can trade friction-free.It’s a vicious circle which won’t be arrested if we stick to the current ‘red lines’ advanced by both Conservative and Labour parties. As the Resolution Foundation states: “Preventing further supply-chain damage and allowing manufacturers to take advantage of the larger market means revisiting the relationship with the EU.”Britain after Brexit is edited by Gordon Smith. 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The central bank for the 20 countries that share the euro also said it expected inflation to stay above its 2% target through 2025 and hinted once again at more rate hikes in the coming months.MARKET REACTION: STOCKS: European stocks were down 0.7% on the day, compared with a 0.4% drop just before the ECB decision. BONDS: Government bond yields rose, with Germany’s two-year yield last up around 15 basis points at around 3.19%, versus 3.15% just before the rate move.FOREX: The euro rose and was last trading at $1.0876 versus $1.0828 before the hike.COMMENTS:COLIN ASHER, SENIOR ECONOMIST AT MIZUHO, LONDON:”The surprise is the revision up in the inflation forecasts, which were higher across the board, but they’ve especially increased their core CPI forecast for next year. They are clearly more concerned that inflation will take a longer time to come down.” “The forecasts were more hawkish than expected. Market pricing was already looking for a hike at the late July meeting and now there will be question marks about the meeting after that as well, but it’s not a huge surprise in terms of the 25 bps hike, which was expected.”BAS VAN GEFFEN, SENIOR MACRO STRATEGIST, RABOBANK, NETHERLANDS:”We’ve seen a decision that has actually been fully in line with expectations. The 25-basis-point hike is not a surprise.””We are seeing quite a big market response, which does seem to be mostly related to the inflation projections being increased across the board and that is a signal to the markets that policy might either have to go higher than markets were anticipating or that the ECB will have to keep their policy rates at the peak level for much longer than the market is currently pricing in.” CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:”The fact that the ECB’s newest staff projections include an upward revision of both headline and core inflation across the entire time horizon must have strengthened the case for continued hiking.””Still, with the Federal Reserve’s hawkish pause and a eurozone economy not only turning out to be less resilient than anticipated but also facing a very subdued growth outlook, the ECB is increasingly taking the risk of worsening the economic outlook.” NATHANIEL CASEY, INVESTMENT STRATEGIST, EVELYN PARTNER, LONDON:”The decision to raise the deposit rate by 25 bps came as no surprise to markets as preceding rhetoric from policy makers outlined that ‘we have not reached the end of the rate-hike cycle’ yet.””Although there is likely to be at least one more rate hike to come, we’re seeing signs that the ECB is getting closer to the end of its tightening cycle.”PIET HAINES CHRISTIANSEN, CHIEF STRATEGIST FOR THE ECB, DANSKE BANK, COPENHAGEN:”Clearly ‘inflation has been coming down but is projected to remain too high for too long.’ This is an acknowledgment of recent developments but also a concern for the inflation outlook.” IPEK OZKARDESKAYA, SENIOR MARKET ANALYST, SWISSQUOTE BANK, SWITZERLAND:”No surprise, the ECB was broadly expected to raise rates by 25 bps today. Devil will be in the press conference: will the ECB keep its hawkish stance despite easing inflation and deteriorating economic outlook, or will the bank soften its hand?””For now, we expect another 25bp hike in July before a pause in ECB tightening. This is in line with the hawkish moves and actions from the other major central banks.”STUART COLE, CHIEF MACRO ECONOMIST, EQUITI CAPITAL, LONDON:”It was fully expected, given that (ECB chief Christine) Lagarde had already said a couple of weeks ago that interest rates needed to be raised further to bring CPI back to target.””The real story for me is that the outlook for inflation was revised upwards too. Yes, the revisions are small, but they do suggest that we will see further rate rises before the ECB is willing to pause.”ARNE PETIMEZAS, SENIOR ANALYST, AFS GROUP, AMSTERDAM “Mixed statement: ECB acknowledges ‘tentative’ improvement in core inflation and sees proof of monetary tightening cooling economy and prices gradually. On the other hand, ECB staff raised core inflation forecasts. The latter could explain why yields extended increases post-ECB. There is no interest rate guidance in the statement, except the generic statement that the ECB will review its stance at each meeting.””The market reaction is overblown and that yields should move off the highs. Given the positive inflation and producer price surprise and the monetary slowdown, the ECB will do one more rate hike. They can’t take a third rate hike off the table though, because something close to a majority wants optionality with regards to a third hike. Hence, the hawkish market response after the Fed wake-up call.” More

MANDEVILLE, Jamaica (Reuters) -World Bank President Ajay Banga wants to focus on improving the development lender so that he can earn the right to press member countries for more capital, as the new chief looks to expand its role in fighting climate change, pandemics and other crises.Banga said in an interview he would wait to seek a capital increase until he has made progress re-focusing the bank’s development lending on more impactful projects, made it more nimble and boosted lending with its existing balance sheet.”I don’t want to put the cart before the horse,” Banga told Reuters on Tuesday on his first foreign trip, to Jamaica and Peru.”I think a better bank is an important thing” to achieve. “And then I earn the right to come back ask for a bigger bank,” he said.U.S. Treasury Secretary Janet Yellen ruled out a capital increase during congressional hearing in March, but with the caveat: “at this time.” Germany’s development minister, Svenja Schulze, told the Financial Times that if World Bank reforms are substantial and tangible, “Germany is willing to embark on a discussion about more funding.”International development experts say that annual clean energy transition financing needs in the trillions of dollars will require more capital for the World Bank and massive funding from the private sector.NEW MISSIONBanga said his first task in improving the 78-year-old institution is to talk to shareholders about a change to the lender’s mission statement to focus on eliminating poverty “on a livable planet” – codifying its expanded role.The bank’s current mission statement refers to ending extreme poverty within a generation and promoting shared prosperity. “What I mean by livable is climate, but also pandemics, and also fragility and food insecurity,” Banga said.His first two destinations, Jamaica and Peru, both face climate threats while nearly a quarter of their populations are in poverty. “How do you eliminate poverty if you can’t breathe, you don’t have clean water, you’re scared of COVID and you’re a refugee, and you can’t eat? I don’t understand how these are either-or. To me, they’re together.”On Wednesday, he visited a Jamaican greenhouse farm that uses abandoned bauxite mining pits to collect rainwater for drip irrigation, allowing 20 local farmers to grow peppers and tomatoes, selling some to resorts. After helping plant some seedlings, he said the project, launched with a World Bank-supported government grant, marries two main goals of his vision: sustainability and jobs.”This would have been an exposed eyesore. Instead, you end up with water, fruits and vegetables. That’s pretty cool,” he said.INITIAL PLANSBanga is seeking buy-in from shareholders on the new mission statement, but laid out his initial plans to start the bank’s transition. This includes promoting more inclusion of women and youth in the bank’s development work, with a strong emphasis on job creation.He also said he would start work soon on efforts to harness more private capital, seen as essential for financing climate-related and other projects, for developing countries.On several occasions during visits in Peru and Jamaica, Banga said the various divisions of the World Bank Group needed to work together better as “one bank,” saving countries the difficulties of dealing with them separately, and speeding its approval processes.He wanted to measure success not by projects approved or dollars committed, but by “tangible things that are reflective of development. How many girls went to school, how many private sector dollars did we crowd in for every dollar we invested? How many people got a better job?”Banga also said he wanted to focus the bank on “scalable, replicable” projects in numerous countries, such as Lima’s bus rapid transit system and government-run legal aid centers for women throughout Peru. More