Aurelia Butler

MADRID (Reuters) -German Chancellor Olaf Scholz gave Spanish Socialist Prime Minister Pedro Sanchez no indication his left-leaning government is ready to support a relaxation of EU fiscal rules, even as the two agreed on Monday to work closer together on European policies.Sanchez had high expectations of Monday’s visit by Scholz, who took over from chancellor Angela Merkel last month, with sources saying he saw their closer “ideological fit” as a chance to rebuild Madrid-Berlin relations.”The Chancellor and I note that we are entering a new phase in our cooperation at European level,” Sanchez told reporters after their meeting, citing a “shared vision with this new German government on social and economic progress.””We coincide (in the opinion) that the fiscal rules are too complex and hard to comply with”, especially in the context of the coronavirus pandemic, he said. But he added that the two countries were not aligned on how to change the rules, known as the European Stability and Growth Pact.Madrid hopes to convince Berlin to support a more relaxed set of eurozone fiscal rules also backed by France and Italy, setting GDP to debt reduction targets at a more realistic level and slowing the deficit reduction drive.But Scholz, who leads a “traffic light” coalition with the Greens and liberal Free Democrats, said that while “Germany and Spain are close friends” enjoying good relations, it was too early to review the fiscal rules.Scholz said the bulk of the 750 billion euro ($855.83 billion) pandemic recovery fund, which was made possible under the existing stability pact, still remains to be spent.European finance ministers were meeting on Monday to discuss when to return to the stability pact suspended during the pandemic.Last month, after talks with French President Emmanuel Macron in Paris, Scholz said growth and solid finances are no contradiction and can be reached at the same time. During the 2010 euro zone debt crisis, Germany was seen in Spain as a leading member of the northern European “frugals” that imposed financial restrictions and looked down on “spendthrift” southern neighbours.Even without immediate progress, the Sanchez government sees Scholz’s visit as a start in breaking up of those two blocs, a Spanish senior government official said.Spain has not joined the EU fiscal reform proposal launched recently by France and Italy, but still wants to change the debt limits set by the current fiscal rules.The latest data shows that the average debt to GDP ratio in the euro zone is at close to 100%, from Greece with a ratio of 207%, to Estonia with 19%. Spain stands at 122% and Germany is close to 70%.”We need a new credible rule. Most of the big euro countries cannot meet the 60% target,” the Spanish source said.Achim Post, the general secretary of the European parliament’s Socialist bloc and a prominent member of Scholz’s Social Democrats in Germany, noted that left-wing parties are now leading Spain, Portugal, Germany and the Nordic countries, and saw new scope for cooperation in Europe. ($1 = 0.8763 euros) More

China’s “common prosperity” drive is not a pursuit of egalitarianism, President Xi Jinping said in a rare international defence of the policy that rattled markets from Hong Kong to New York last year.Xi, often described as China’s most powerful leader since Mao Zedong, was speaking via video link at the World Economic Forum’s annual meeting. The event is being held online this year, rather than at the Swiss resort of Davos.“The common prosperity we desire is not egalitarianism,” Xi said. “We will first make the pie bigger and then divide it properly through reasonable institutional arrangements. As a rising tide lifts all boats, everyone will get a fair share from development, and development gains will benefit all our people in a more substantial and equitable way.”Under the policy, spearheaded by Xi, the Chinese Communist party has been reshaping the country’s business and cultural landscape via a months-long series of crackdowns. This has targeted industries including fintech, education and entertainment as well as perceived societal ills such as celebrity culture, gaming and effeminate fashion trends.The moves, which have wiped billions of dollars from Chinese and foreign investors, have sparked international debate over the political and economic motives of the policy, and made the future of investing in China uncertain.

Xi tried to ease some concerns, insisting to the Davos audience that China remained committed to being open to foreign business.“All types of capital are welcome to operate in China, in compliance with laws and regulations, and play a positive role for the development of a country.”The speech comes as China faces criticism for eroding democratic freedoms in Hong Kong, mistreating the Uyghurs of Xinjiang and posturing expansively in military affairs. In response, Beijing regularly rebukes the US and its allies and partners for interfering with China’s domestic interests.On the global economy, the Chinese president warned of “serious negative spillovers” if “major economies slam on the brakes or take a U-turn in monetary policies” as they grapple with accelerating inflation. Developing countries would also “bear the brunt” of the changes.

Problems with industrial supply chains, tight energy supplies and rising commodity prices also posed challenges, he cautioned. “These risks compound one another and heighten the uncertainty about economic recovery,” he said.“The global low-inflation environment has notably changed, and the risks of inflation driven by multiple factors are surfacing,” he added.On the Covid-19 pandemic, Xi said countries should “fully leverage vaccines as a powerful weapon, ensure their equitable distribution, quicken vaccination and close the global immunisation gap”.“Strong confidence and co-operation represent the only right way to defeat the pandemic,” he said. “Holding each other back or shifting blame would only cause needless delay in response and distract us from the overall objective.” More

OTTAWA (Reuters) -Canadian firms see labor shortages intensifying and wage pressure increasing, with strong demand growth and supply chain constraints putting upward pressure on prices, a regular Bank of Canada survey said on Monday.The central bank’s Business Outlook Survey Indicator reached its highest level on record in the fourth quarter, which was conducted before the Omicron coronavirus variant began spreading widely.The data will play into the Bank of Canada’s calculations as it ponders when to raise rates. The bank, which has said it is paying close attention to wage inflation, is scheduled to make its next announcement on Jan 26.Last October it said it could start raising rates as soon as April 2022, but some investors expect a hike this month. [BOCWATCH]”The combination of strong demand and bottlenecks in supply is expected to put upward pressure on prices over the next year,” said the survey.”In response to capacity pressures, most businesses across sectors and regions are set to increase investment and plan to raise wages to compete for workers and retain staff.”Last month the central bank said slack in Canada’s economy has been substantially diminished.Inflation expectations for the next two years continued to increase, with two-thirds of firms now expecting inflation to be above the central bank’s 1-3% control range over the next two years.Most firms, in response to a special question, said they expected the currently elevated inflationary pressures to dissipate over time, with inflation returning to the 2% target over 1-3 years.Canada’s annual inflation rate was at an 18-year high of 4.7% in November. The December data will be released on Wednesday, with analysts surveyed by Reuters expecting it to hit 4.8%.The Canadian dollar was trading 0.4% higher at 1.2504 to the greenback, or 79.97 U.S. cents. More

Speaking to reporters in Brussels before his first Eurogroup meeting with counterparts from other euro zone member states, Lindner said that the fiscal rules of the EU’s Stability and Growth Pact had proven their flexibility during the crisis.”But now it’s the time to build up fiscal buffers again, we need resilience not only in the private sector, but also in the public sector,” Lindner said. “That’s why I’m very much in favour of reducing sovereign debt.”Fighting inflation is the objective of central banks, but governments can also do their part in sticking to fiscal rules, Lindner said, adding that there were already a lot of exemptions included in the EU’s Stability and Growth Pact.Germany is open to listening to any suggestions on how the EU’s fiscal rules can be improved, but Berlin expects the real debate about the Stability and Growth Pact to start in June when the European Commission’s propsals are expected, Lindner said.Germany wants work closely with France, which is holding the EU presidency in the first halve of this year, and also use its own G7 presidency this year to improve resilience also in the banking sector, Lindner said.Berlin is willing to complete the EU’s banking union which includes tackling the problem of the state-sovereign-nexus, he said, referring to the high concentration of bonds of a single sovereign in the balance sheets of banks in the same country.”This year 2022, we will have a comprehensive approach to all these issues: Stability and Growth Pact, banking union and fiscal-monetary stability as a whole,” Lindner said. More

Are Europeans doomed to spend the 21st century being pushed around by outside powers? In Brussels, they like to argue that the collective power of the EU is the only way of saving the old continent from that ignominious fate. Although no single European country can stand toe-to-toe with America or China, the EU collectively ranks as one of the world’s three largest economies.But the idea that the EU’s economic weight can be easily converted into geopolitical power is undergoing a brutal reality check. The Ukraine crisis has seen the EU sidelined. Meanwhile China has imposed unofficial economic sanctions on Lithuania, an EU member — and Brussels is struggling to find an appropriate response.If things go badly for the EU over the coming weeks and months, talk of a “geopolitical” Europe will sound increasingly ridiculous. But it is also possible that the current crises — in particular the Lithuanian challenge — will lead to a leap forward in the EU’s ability to defend its interests in the global arena.The crisis over Ukraine is a matter of war and peace on the European continent, so some EU officials feel humiliated that they did not take part directly in recent negotiations. Yet it should not be a huge surprise that Brussels was sidelined. The EU is not a military power and may never be. And Ukraine is not an EU member. Lithuania, by contrast, is one of the EU27. It is also involved in a trade dispute — and trade is one of the few areas where the EU is already a global heavyweight. So the Europeans have both an opportunity and an obligation to get their act together.The Lithuanian government has been singled out for punishment by China for upgrading its relationship with Taiwan, a self-governing democratic island that Beijing insists is a rebel province. Lithuania had earlier pulled out of the 17+1, a talking shop set up by Beijing. In response, Beijing has applied methods that Gabrielius Landsbergis, the Lithuanian foreign minister, compares to the “Spanish Inquisition”. (In a possible tribute to Monty Python, Lansbergis adds that “nobody had expected” the Spanish Inquisition.)China is not just blocking all trade with Lithuania. It is also blocking all products containing components made in Lithuania, causing a huge headache for foreign investors in the country. Beijing has chosen a clever tactic. German investors in Lithuania are believed to be urging the government to back down, while polls suggest that Lithuanian public opinion has turned against the Taiwan gambit.But China’s policy also contains risks that Beijing may not have fully reckoned with. By targeting the EU’s supply chain, the Chinese are taking aim at the integrity of the European single market, which is central to the EU’s economy and strategic aspirations. As Janka Oertel of the European Council on Foreign Relations puts it: “By Europeanising the problem, China has turned this into a test for the entire EU.” This is not just a theoretical issue. Some Europeans fear that the next country in China’s sights will be the Czech Republic, whose government and politicians have also been friendly towards Taiwan. Czech factories play a central role in the EU supply chain, so targeting Czech-made components could create havoc inside the single market.Some European politicians are privately irritated that the Lithuanians acted without consulting the rest of the EU. But the Lithuanians have not broken with the EU’s “one China” policy. And support for democracy and the protection of small nations are meant to be core European values. EU officials have pledged support and solidarity with Lithuania. A case will probably be taken out against China at the World Trade Organization, but could take years to come to fruition. So instead, the French, who currently hold the EU presidency, are looking at accelerating the adoption of anti-coercion legislation. This would allow the EU to retaliate against coercive trade measures, from China or any other nation, with a range of measures that could include blocks on investment and tariffs. The beauty of these instruments, as far as Brussels is concerned, is that they are trade measures. Unlike pure foreign policy questions, which require unanimity, decisions on trade can be taken by majority vote. That would mean that China’s friends within the EU — notably Hungary and Greece — would not be able to prevent the adoption of anti-coercion legislation or its deployment.Reinhard Bütikofer, an influential member of the European Parliament who has been personally sanctioned by China, believes that the Lithuania crisis may therefore lead to a leap forward in Europe’s ability to project power. As he puts it: “The interconnection between trade and foreign policy all of a sudden allows us to use trade policy for a more effective pursuit of foreign policy.” But the EU’s legislative processes is tortuous, making it unlikely that anti-coercion instruments can be agreed before the summer. By then Lithuania may have been forced to back down.In their own interests, the Europeans need to stop that happening. If China successfully bullies Lithuania while the EU watches impotently from the sidelines, that lesson will be noted — not just in Beijing, but in Moscow and Washington, [email protected] More