Aurelia Butler

Good morning and welcome to Europe Express.The European Central Bank’s governing council’s meeting in Amsterdam is expected to take the first steps towards ending its negative interest rate policy and stop its bond purchasing programme. We’ll dive into four things to look out for when Christine Lagarde speaks to the press this afternoon.Meanwhile, the bloc’s climate agenda suffered a setback yesterday when the European parliament voted to weaken some of the draft laws coming up for talks with EU governments and the European Commission (though it maintained a full ban on CO₂-emitting cars as of 2035). We’ll hear from internal market commissioner Thierry Breton, who expressed disappointment at the development.End of an eraChristine Lagarde will call time on the eurozone’s era of ultra-cheap money later today when the European Central Bank president is expected to outline plans to stop buying more bonds and to start raising interest rates next month, writes Martin Arnold in Amsterdam.Most of the ECB’s 25 governing council members agree on the need to raise borrowing costs after inflation hit a eurozone record of 8.1 per cent in May — double the previous all-time high and quadruple the central bank’s target.However, deep divisions remain over how fast and how far it should raise rates to bring inflation back under control. As ECB rate-setters meet in Amsterdam this week to discuss its next move, here are four things to watch for:Interest rates: With the ECB already lagging behind the US Federal Reserve and Bank of England, the key question for investors is whether it will raise rates by a quarter percentage point or a half when it meets again on July 21. Lagarde is expected to leave the door open to a bigger rise, while continuing to signal a preference for starting in a more “gradual” way with 25 basis points.Whatever Lagarde says about the size of the ECB’s first rate rise since 2011 will be closely watched by investors, with any hint of a more aggressive move risking a bond market sell-off. “If the ECB comes out more hawkish than expected, this could spook market participants,” said Allianz economists.  Bond purchases:Lagarde has already said the ECB will stop its remaining €20bn-a-month asset purchases early next month — fulfilling a key condition to start raising rates. Some ECB governing council members want it to stop buying more bonds immediately, but they are not sure this will happen.Another key question is how long the ECB will continue reinvesting the proceeds of maturing bonds. The Fed has already stopped this — shrinking its balance sheet in the process — but the ECB has said it will continue “for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation”. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said this “can hardly be justified any more”, raising the question of how much longer it will last.New instrument:The more important question for investors is what the ECB will say about its plans for dealing with the risk of a bond market panic once it starts raising rates. The difference — or spread — between what Germany and Italy each pay to borrow for 10 years has already risen to its highest since bond markets fell at the start of the pandemic in 2020.Lagarde has said “if necessary we can design and deploy new instruments to secure monetary policy transmission”, which is expected to mean buying the bonds of highly indebted southern European countries to tackle any sudden surge in borrowing costs that threatens to trigger a debt crisis. Several rate-setters support adding a similar commitment to the policy statement it publishes on Thursday without giving more detail on the mechanics.Forecasts:There is broad consensus among economists that the ECB will slash its growth forecasts and raise them for inflation over the next three years. Underlining how badly it has underestimated recent price pressures, Berenberg chief economist Holger Schmieding predicted the ECB would raise its 2022 inflation forecast by almost 2 percentage points for the second consecutive quarter, taking it up to 7 per cent.Investors will also be monitoring whether Lagarde puts more emphasis on the upside risks to inflation or the downside risks to growth. The former will be a hawkish signal that rates may need to rise higher than investors expect, while the latter will send a more dovish message.Chart du jour: Left-field challenge

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Emmanuel Macron’s former far-left challenger in the presidential elections, Jean-Luc Mélenchon, has taken advantage of public disillusionment with traditional politics to forge a leftwing alliance that could win a large share of seats in this month’s National Assembly elections and upset Macron’s legislative agenda.Weakened hand Industry commissioner Thierry Breton was among the first to respond to the disappointment as the European parliament weakened its own position ahead of forthcoming negotiations on legislation that aims to bring down the bloc’s carbon emissions by 55 per cent by 2030, writes Andy Bounds in Brussels.The main piece of legislation the parliament seeks to water down is on extending a current system that makes heavy industrial polluters pay for their carbon emissions. The European Commission had proposed extending that system to cover commercial and private real estate, in a bid to accelerate efforts to increase energy efficiency in buildings. But given the current pressures from rising inflation and record high energy prices, the parliament yesterday voted to exclude housing from the emission trading system (ETS). MEPs also failed to reach agreement on the introduction of a carbon border tax — designed to charge importers to the EU for their emissions — and the establishment of a social climate fund intended to minimise the effects of carbon pricing on poorer households.The French commissioner told reporters he also had “some reservations” on the extension of the ETS to housing (remember the gilets jaunes movement sparked by a climate-related fuel tax?). But in the end, Breton said, he supported the commission’s proposal because “the green deal is extremely important”.While the parliament approved a total ban on internal combustion engines from 2035 onwards, Breton hinted at potential compromises down the road, given that 600,000 jobs in the sector were at stake. Also, Breton pointed to the fact that other parts of the world would continue to buy combustion engines. “Europe should continue to produce some key components for thermal engines you will sell outside of Europe. It is extremely important to help the ecosystem to transition in a smooth way,” he said. Breton also repeated his call on Europe to secure the vital minerals to manufacture batteries, solar panels and wind turbines, including by mining them at home. He will produce a proposal after the summer break. “It is more critical than ever.” In some cases, such as magnesium, the EU is almost entirely reliant on China. “We need 15 times as much lithium by 2030,” he said.What to watch today ECB governing council meets in AmsterdamJustice ministers and, separately, internal market ministers meet in LuxembourgNotable, Quotable

Merkel backlash: Former German chancellor Angela Merkel has spoken publicly about the war in Ukraine for the first time since she left office, defending her Russia stance in statements that prompted a fierce reaction from Ukrainian officials.Regrets, but not sorry: During his first trip to Kinshasa, Belgium’s King Philippe has expressed “deepest regrets for the wounds of the past” but refrained from a formal apology for his country’s decades of brutal colonial rule in what is now the Democratic Republic of Congo. More

BlackRock is betting that a flagging economy will curb the European Central Bank’s ability to raise interest rates over the next 18 months as soaring food and energy prices squeeze consumers in the eurozone.Faced with record-high inflation, the ECB is on Thursday expected to lay out plans to end eight years of bond-buying and negative interest rates as it charts a course away from coronavirus pandemic-era stimulus policies. However, investors have gone too far in anticipating a series of aggressive rate increases that would take the ECB’s deposit rate to 2 per cent by the end of 2023, from the current all-time low of minus 0.5 per cent, said Michael Krautzberger, who oversees active fixed income strategies in Europe at the $10tn asset manager.The ECB is right to address inflation, said Krautzberger, after consumer prices climbed to 8.1 per cent in May — but a fragile economy and the sensitivity of government borrowing costs in highly indebted eurozone members to higher interest rates are likely to slow the pace of tightening.“I would say this is a good opportunity for the ECB to end [its bond-buying programme] and negative rates,” he said. “But after that I think they may need to slow down. The situation argues for going quite carefully.”BlackRock has entered money-market wagers that the pace of rate increases will slow in 2023 following lift-off this year. The group is also considering buying two-year German bonds as a bet on a slower rate of tightening, Krautzberger said.He added that cracks appearing in the economy even before borrowing costs have begun to rise suggest the eurozone will have a limited tolerance for higher interest rates, which will drive up mortgage costs.“Consumer confidence in the eurozone is almost at all-time lows,” Krautzberger said. “So are forward-looking components of sentiment surveys. Hikes will have a massive impact on the property market.”The expectations component of the Sentix survey of investor sentiment fell to its lowest level in a decade in June, according to figures published this week.“The underlying problem in [the past] 15 years was that Europe was not able to sustain growth of 2 per cent,” Krautzberger said. “Inflation has increased much more than the market expected and much more than I expected.”He added: “If you look at the reasons why inflation is so high the majority are really bad for growth — an increase in oil and food prices, and broken supply chains. I don’t think there is anything signalling that the European growth malaise has been overcome for good.”In a sign that the ECB is concerned about the potential for higher rates to provoke a bond market sell-off, the central bank on Thursday is set to strengthen its commitment to a new scheme to support the debt of vulnerable countries such as Italy with fresh purchases. The gap between Italy’s 10-year borrowing costs relative to Germany’s — a closely watched barometer of bond market stress — has doubled over the past eight months to more than 2 percentage points. More

The UK is expected to have the highest inflation in the G7 not just this year but also in 2023 and 2024, according to economists, reflecting how Britain is struggling with a toxic combination of price rises recorded in Europe and North America.A Financial Times analysis of the causes of price increases across the world’s leading economies shows that Britain — where the inflation rate hit a 40-year high of 9 per cent in April — combines the worst aspects of other G7 countries.The UK is contending with a huge rise in the price of energy, like many countries in mainland Europe. But Britain is also grappling with a broad rise in the prices of other goods and services, like North America.Energy prices, combining electricity, gas and road fuels, contributed 3.5 percentage points to the UK’s 9 per cent inflation rate in April, much the same as in Germany and Italy. It highlights how Europe has been badly exposed to rising energy prices as the global economy reopened following the Covid-19 pandemic, and Russia’s invasion of Ukraine has magnified the problem.Meanwhile, other goods and services contributed 5.5 percentage points to UK inflation in April, similar to the US and Canada. As the pandemic has eased, goods and services have increased in price as consumer spending has outstripped companies’ ability to meet demand. This combination of inflationary factors from Europe and North America puts the UK in the unenviable position of having the highest inflation across the G7 in April, and economists expect the situation to persist until 2024.It highlights how Britain’s inflation rate risks being well above the Bank of England’s 2 per cent target for a protracted period.Ben Nabarro, economist at Citigroup, said the government’s plan to compensate households for increases in the cost of living was “increasing the risk of more persistent [UK] inflation”, as well as intensifying the BoE’s dilemma in deciding how far to raise interest rates to curb price rises.“This suggests the trade-off faced by monetary policy between [economic] growth and inflation is likely to become more challenging,” he added. The UK shot to the top of the G7 inflation league table last month when the April figures included a 54 per cent rise in the regulated energy price cap that determines the level of most British households’ gas and electricity bills.This pushed the annual rate of energy inflation including petrol to 52 per cent in the UK, higher than any other G7 country. It rose at an annual rate of 39 per cent in Italy in April.

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France has placed strict limits on rises in household energy bills, while the US, Canada and Japan — by either being self-sufficient in gas or relying on it much less for electricity generation compared with many European countries — have not experienced soaring price increases.Petrol has been the source of the largest price rises in the US, which were 44 per cent higher in April, compared with 31 per cent in the UK. Road fuels have increased more in the US because it has much lower taxes on petrol and diesel, so the cost fluctuates more with the global oil price than in most European countries. Japan, which has contended with problematically low inflation since the early 1990s, had a rate of 2.5 per cent in April, of which 1.4 percentage points was because of energy price rises.

Andrew Bailey, BoE governor, last month suggested global forces such as Russia’s invasion of Ukraine and China’s zero Covid policy were behind the UK’s surging inflation — which the central bank expects to reach 10 per cent in the fourth quarter.“To forecast 10 per cent inflation and then say . . . ‘There’s not a lot we can do about 80 per cent of it’ is, I can tell you, an extremely difficult place to be,” he told MPs last month, blaming the price rises on “energy and traded goods”. The FT analysis of the drivers of inflation in G7 countries pinpoints how the UK combines the negative factors found in both mainland Europe and North America. Energy price rises contributed only 38 per cent of UK inflation in April, compared with 50 per cent in France and Germany and almost 60 per cent in Italy and Japan. It meant other goods and services provided 62 per cent of UK inflation, compared with 74 per cent in the US and 75 per cent in Canada.

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High inflation is prevalent across a wide range of goods and services in Britain. More than 80 per cent of the UK’s goods and services that are included in the official inflation calculation have risen more than 3 per cent over the past year.This suggests an imbalance between levels of UK consumer spending and the ability of companies to supply, partly as a result of additional trade barriers that accompanied Brexit.Different spending habits by UK consumers compared with their counterparts elsewhere in the G7 are not obviously responsible for the higher level of inflation in Britain.The FT recalculated G7 nations’ inflation figures using UK spending patterns, which are typically less focused on food and more on restaurants and leisure activities, but it made little difference to the overall comparisons between nations.

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The broad nature of UK inflation raises the question of whether the BoE has the appetite to take sufficiently tough action to tame it.While economists expect inflation to begin to fall later this year, there is increasing concern among business leaders that excessively high price rises will persist.The Institute of Directors, a business lobby group, found in a survey that only 28 per cent of those questioned last month thought inflation would fall to the BoE’s 2 per cent target by the end of 2023, down from 33 per cent in April. Kitty Ussher, IoD chief economist, said: “Disappointment in the performance of the UK macroeconomy, in particular around inflation but also in the everyday impact of Brexit, is affecting the very real investment decisions of business leaders.” More

The IMF said in a statement that the country had met all quantitative targets in the first quarter and that annual objectives remained unchanged, “specifically those related to the primary fiscal deficit, monetary financing, and net international reserves.” “Such an approach provides a vital anchor for economic stability and growth in uncertain times,” the IMF said, referencing the effects of the large external shock from the war in Ukraine on Argentina’s economy.The agreement is subject to approval by the IMF Executive Board, which the Fund expects to occur in the coming weeks. More

The world’s stock of wealth is set to keep growing, despite the effects of rising inflation, financial market turmoil and the Ukraine crisis, according to an influential study that says “wealth growth has proven extraordinarily resilient to extreme events”.The total value of financial and real assets, including property, rose to $530tn at the end of 2021, according to research by BCG, the corporate adviser. In its forecasts for the five years to 2026, it said financial wealth alone is likely to increase at about 5 per cent a year, adding $75tn-$80.6tn to that total.The prediction takes account of the impact of the recent sharp drops in financial markets, which the authors expect to bounce back. It would come in addition to a 10.6 per cent rise seen last year, the largest increase in a decade, as markets extended their recovery from the March 2020 pandemic shock.BCG’s base case assumes that Russia halts its invasion in 2022 and its gas and oil exports resume, though other sanctions remain in place until 2025. Economic growth suffers in the short term but recovers from next year onwards. In this event, global wealth is forecast to rise by 5.3 per cent a year to the end of 2026.

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But BCG argues that even if the war goes on well into 2023 and sanctions get tougher, then the outlook for wealth accumulation still remains positive, assuming there is no military escalation or Nato involvement. World wealth then grows at 5 per cent a year, resulting in $5tn less in the wealth stockpile by the end of 2026 than under the 5.3 per cent outlook.“To our surprise,” write the BCG analysts, “the difference is smaller than was expected . . . In both scenarios, the overall trajectory remains positive”. One reason for the optimism is that with inflation worrying investors, institutions and individuals might shift more cash into equities to counter the effects of rising prices. Property prices could increase on similar grounds.Also, a big share of the world’s wealth is concentrated in centres away from the crisis, notably in North America and in the fast-growing Asia-Pacific region. “While not immune to market volatility, global wealth portfolios have rebounded from recent shocks including the Great Recession and the pandemic,” says the report.As a result, BCG expects the rise of Hong Kong and Singapore as global wealth management centres to continue unabated. It forecasts that by 2026, Hong Kong will overtake Switzerland as the world’s biggest centre for cross-border assets, in a historic shift.The authors allow for a moderate exodus of money from Hong Kong to Singapore (and elsewhere) because of Beijing’s political squeeze on the former British colony. But they anticipate continuing large inflows from the mainland into Hong Kong.The UAE is forecast to climb to fifth place as a cross-border wealth management centre, pushing the Channel Islands and the Isle of Man into sixth place. The UK mainland will remain seventh.However, BCG argues that Old World wealth managers in Zurich, London and New York still have plenty of opportunities, notably in capitalising on digital technology and applying it to transforming client services. But Anna Zakrzewski, BCG’s global leader for wealth management, warns established wealth companies to move quickly because clients “are in no mood to wait for next-generation offers and next-generation service. They want them now . . . if not from their current wealth advisers, then from others.” More

The paper said the offer – which in some cases would amount to six months’ salary – was aimed at the 200 people working at the Nizhny Novgorod plant.Volkswagen announced in March that production at its Kaluga and Nizhny Novgorod sites would be suspended until further notice because of Western sanctions, and vehicle exports to Russia will be stopped with immediate effect.Kommersant cited union sources as saying that employees who agreed to the company’s offer before June 17 would receive six months’ salary. The deal would also include medical insurance until the end of 2022, the paper said. More