Poland rules out ‘rule of law’ demands for EU cash

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Poland’s Prime Minister Mateusz Morawiecki. (AFP)
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A street in Krakow, Poland. The country has been pilloried for years for undermining EU values. (Shutterstock/File)
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Updated 21 July 2020

Poland rules out ‘rule of law’ demands for EU cash

  • Deadlocked European leaders try to save marathon virus rescue conference

BRUSSELS: Polish Prime Minister Mateusz Morawiecki on Monday said he would not allow the EU to put “rule of law” conditions on Poland receiving EU budget cash.

Morawiecki spoke as he arrived to the fourth day of an EU summit that has seen the bloc’s 27 leaders unable to agree a post-coronavirus rescue deal.

“For (the compromise) to be acceptable to Poland, we must obtain what we’ve asked for from the beginning: No discretionary powers for EU bodies, EU institutions regarding the rule of law,” Mateusz Morawiecki told Polish media in Brussels.

Like Hungary, Poland has been pilloried for years for undermining EU values such as freedom of the press and independence of the judiciary.

Meanwhile, EU leaders cautiously tried to get the summit back on track.

They began to gather for another session after three days and nights of prolonged wrangling failed to agree a €750 billion ($860 billion) bundle of loans and grants to drag Europe out of the recession caused by the pandemic.

Arriving for the session, France’s President Emmanuel Macron said he saw “the possible hopes of a compromise,” but added: “Nothing has been agreed yet, so I will remain extremely cautious.”

Germany’s Angela Merkel was also careful not to inspire hopes of a rapid result. “Last night ... we put in place a framework for a possible agreement,” she said. “This is a step forward and it gives hope that an agreement can be reached today — or at least that an agreement is possible.”

The wrangling pits a coalition of “frugals” — the Netherlands, Sweden, Austria, Denmark and Finland — which wants to cut the package back and impose strict rules on how it is used, against virus-ravaged powers like Italy and Spain seeking EU support.

France and Germany are backing efforts by European Council president Charles Michel to broker a compromise by cutting the grant portion of the deal to €390 billion — down from his initial proposal of €500 billion — and increasing the loan part.

But a European source said the new proposition might not reach Michel’s initial total target of €750 billion target and that the host had managed to convince the frugals to start negotiating the recovery grants only by putting a “knife to their throats” in a showdown late Sunday.

“Until we agree to define the amount of the recovery fund, we can’t advance,” he said. France had been holding out for at least €400 billion in grants, already less than the €500 billion in the first draft.

After Sunday’s raucous dinner Macron clashed personally with the Netherlands’ Mark Rutte and Austria’s Sebastian Kurz, accusing them of putting the entire European project in danger through “egotism” and threatening to storm off if they do not listen to his and Merkel’s advice.

Rutte told reporters he was in Brussels to take care of his own country, not to befriend leaders and “go to each other’s birthdays” — Merkel turned 66 on Friday, the first day of the talks, and received gifts from some fellow leaders. But he also said that, despite the tension, a deal was “very close.”

“We haven’t yet found the way through, and it could still fail, but I’m more optimistic than I was last night when, at one moment, I told myself, ‘It’s over’,” Rutte told reporters.

According to witnesses, at one point Macron thumped the table, berated Kurz for leaving to take a call and accused Rutte of behaving like former British Premier David Cameron — who took a hard line at EU summits and ended up leading his country into a referendum to quit the bloc.


Turkey’s tumbling lira tests Erdogan’s rate resolve

Updated 07 August 2020

Turkey’s tumbling lira tests Erdogan’s rate resolve

  • Erdogan believes high rates cause inflation and sacked his previous central bank chief for not following his instructions

ISTANBUL: Turkish central bank head Murat Uysal has stuck to the rate-cutting script since President Recep Tayyip Erdogan hired him to lift Turkey out of a recession and currency crisis.

A year later with the COVID-19 pandemic now crushing the lira, some traders and analysts say they think Uysal will instead hike rates to head off a deeper crisis.

Erdogan, whose 17 years in power have been marked by cheap credit and booming growth, has repeated the unorthodox view that high rates cause inflation and sacked Uysal’s predecessor for not following his instructions.

The central bank did not immediately comment on expectations of higher rates or on political pressure. Uysal said last week that policy was in line with the central bank’s inflation forecasts and he has said in the past it has policy independence.

Investors, analysts and sources close to Turkey’s central bank say that the most direct solution to the lira’s costly slide, in the form of a rate hike, would only happen as a last resort.

Erdogan’s office was not available to comment, while a spokesman for the Treasury did not immediately respond.

After the central bank slashed rates to 8.25 percent from 24 percent in less than a year, such a quick policy turn-around would likely need the government’s tacit approval, analysts say.

Nevertheless, money market traders have been adding to bets in recent days that Uysal, who halted an aggressive year-long easing cycle in June, has little choice but to tighten policy soon to avoid a second currency crisis in as many years.

HIGHLIGHTS

Lira hits historic low vs dollar as volatility returns.

After aggressive easing, traders bet on policy reversal.

Previous central bank head sacked for ignoring Erdogan.

The lira hit a historic low on Thursday and is down nearly 20 percent versus the dollar so far this year, despite the greenback’s own weak performance.

While the central bank’s policy rate is 8.25 percent, the November money market pricing for three-month lending is at 10.75 percent, implying 250 basis points of tightening by year-end.

Some fear that in a worst-case scenario, interventions to stabilize the lira lose steam as the central bank’s reserves run thin, prompting further depreciation, inflation and a ballooning current account deficit.

“We have a lot of ingredients here to have a full blown crisis,” said Nikolay Markov, senior economist at Pictet Asset Management. “The hope is to have a more proactive policy response from the central bank.”

Turkish annual inflation is high at near 12 percent, leaving real rates deeply negative for depositors in lira, a factor which has hastened the currency’s slide.

Economists polled by Reuters before the latest lira selloff expected more rate cuts once things cooled down.

But after two weeks of volatility, Goldman Sachs now expects 175 points of hikes by year end. Pictet’s Markov said that Turkey boasts the biggest gap among major emerging markets between the current policy rate and where it should be based on inflation and other factors.

Ankara is running out of alternatives to monetary policy.

The central bank’s gross FX reserves have dwindled to $51 billion from $81 billion this year, official figures show.

Data and the calculations of traders show the drop is in part due to the central bank and state banks selling some $110 billion in dollars since last year, including an acceleration in recent weeks, to stabilize the lira.

Ankara’s appeals for funding from the US Federal Reserve and other central banks have only yielded a deal with Qatar.

Rate hikes are only an option if more foreign funding cannot be found, a senior Turkish banker said, adding: “We do not anticipate a rate rise unless there is no other option.”