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EUROPE
Tuesday May 8 2012
Don’t ask too much
Jens Weidmann on central bank caution, Page 11
Is Iraq returning to
authoritarianism?
Analysis, Page 9
World Business Newspaper
Eurozone in crisis
Madrid U­turn over Bankia
●
Market concern at Greek instability
News Briefing
Repsol threatens
legal action on YPF
Spain’s Repsol, stripped of a
51 per cent stake in oil
company YPF by Argentina,
has written to oil majors
including ExxonMobil,
Chevron and ConocoPhillips
warning it would sue if they
try to invest in YPF or its
assets.
Page 15; www.ft.com/bb
IPOs hunt investors
Zhengzhou Coal Mining
Machinery has asked nearly
a dozen banks to find
investors willing to take
stakes ahead of its $1bn
Hong Kong listing.
Page 15;
www.ft.com/ipos
Piracy risk alert
Clashes between Somali
pirates and merchant ships’
armed guards could become
more common as some
companies have reduced ship
speeds through high-risk
areas to save on fuel, experts
have warned.
Page 15
India delays tax laws
India will delay introducing
tax avoidance laws by a
year, in a move to placate
investors worried about
erratic legal changes.
Page 2
Princelings suffer
The purge of Bo Xilai as
Chongqing Communist party
leader has foiled the chances
for some “princeling”
generals to join China’s top
military body.
Page 2;
Terence McNamee, Page 10
Indonesia pace slows
Indonesia’s growth slowed
slightly last quarter, but
economists were upbeat that
consumption and foreign
investment would keep the
economy stable.
Page 2
Egypt’s reserves rise
Egyptians received good
economic news yesterday
when central bank figures
revealed that foreign
reserves rose slightly last
month.
Page 3
Putin sworn in
Vladimir Putin was sworn in
for a third term as Russia’s
president yesterday in a
ceremony overshadowed by
clashes between riot police
and protesters.
Page 7
EU trade warning
Europe’s top trade official
has warned of a growing
move “toward protectionism”
across Latin America, and
appealed to Brazil to resist
such policies.
Page 7
Gay marriage vote
North Carolina is today set
to pass a constitutional
amendment banning gay
marriage, in a vote that will
put the issue at the top of
the political agenda in a key
battleground state.
Page 2
Malawi drops peg
Malawi has dropped its
currency peg to the US dollar,
causing the kwacha to lose
about half its value, in a bid
to boost the economy.
Page 3
Spain set
to spend
billions on
bank rescue
By Miles Johnson in Madrid
restructuring fund to pump cap-
ital into Bankia and is consider-
ing the use of contingent con-
vertible bonds, or cocos, an
economy ministry source said.
The official would not say
how much money would be
needed. But Spanish press
reports indicated that Bankia
could receive between
€7bn-€10bn of additional capital.
Bankia declined to comment.
Mr Rato, a former finance
minister who was placed in
charge of Bankia in spite of
having little experience as a
commercial banker, announced
that he had proposed José Igna-
cio Goirigolzarri, former chief
executive of rival BBVA, as his
successor.
Mr Goirigolzarri was recom-
mended after consultation with
the Spanish government, one
person close to Bankia said.
Last month, the IMF singled
out Bankia as the largest risk to
the stability of the Spanish
banking sector, with the fund
recommending that it and other
banks take “swift and decisive
measures to strengthen their
balance sheets”.
Part of the bank was listed on
the Madrid stock market last
year, raising €3.3bn from pri-
vate savers and Spanish institu-
tions – a move criticised by
many analysts for failing suffi-
ciently to recapitalise Bankia.
Bankia shares, which slid
3 per cent yesterday to €2.38,
have fallen 36.5 per cent since
their listing last year.
Spain is planning a state bailout
of Bankia, the country’s third-
biggest bank by assets, in a
move likely to involve the injec-
tion of billions of euros into the
troubled lender.
In an abrupt policy reversal,
the Spanish government, which
had previously insisted that no
additional state money would be
needed to clean up the banking
sector, confirmed that an inter-
vention was being prepared.
Soon after the news broke,
Rodrigo Rato, Bankia’s execu-
tive chairman and former Inter-
national Monetary Fund manag-
ing director, resigned from the
bank, formed in 2010 from the
merger of seven Spanish sav-
ings banks, or cajas.
Mariano Rajoy, Spain’s prime
minister, said the government
would consider injecting state
funds into the banking sector if
needed.
“If it was necessary to reacti-
vate credit, to save the Spanish
financial system, I would not
rule out injecting public funds,
like all European countries have
done,” Mr Rajoy said in a radio
interview.
The bursting of Spain’s prop-
erty bubble has seen the level of
bad loans as a proportion of
total lending rise to the highest
level in 18 years, leaving banks
managing vast portfolios of
repossessed and unsold real
estate, and choking off credit to
an economy suffering its second
recession in three years.
The government can deploy
the state-backed Frob bank
Angela Merkel, German chancellor, at a meeting of her Christian Democratic Union party in Berlin yesterday
Reuters
Merkel warns Athens on reform plans
By FT Reporters
is the focus of market concern
with economists at Citi, the US
bank, raising their odds on the
country leaving the euro to up
to 75 per cent.
Greece’s stock market sank
nearly 7 per cent, but the euro
later recovered after falling to
its lowest level since January
and France’s CAC 40 index
closed up 1.65 per cent.
Greece appears to be heading
for fresh elections in mid-June.
An attempt by Antonis
Samaras, the leader of the cen-
tre-right New Democracy party,
to form a national unity govern-
ment with centre-left Pasok was
rebuffed despite offering to
amend the bailout agreed with
the European Union and Inter-
national Monetary Fund.
Christine Lagarde, IMF man-
aging director, echoed other pol-
icy makers in acknowledging the
importance of economic growth
to recovery across Europe.
“There’s no avoiding this brake
of fiscal adjustment,” she said.
“But if calibrated correctly, we
can make sure it doesn’t do too
much harm to growth.”
Conceding the Greek electoral
result was “not uncomplicated”,
Ms Merkel said: “It is of utmost
importance that the pro-
grammes that we agreed on
with Greece continue to be
implemented.” The European
Commission also made clear it
was not willing to reopen the
€174bn programme.
Following Mr Hollande’s vic-
tory on an anti-austerity ticket
in France, resistance to a Ger-
man-inspired EU fiscal treaty
has spread.
Italy’s centre-right People of
Liberty, the largest party back-
ing Mario Monti’s technocratic
government, threatened to vote
against ratification of the euro-
zone fiscal compact unless the
prime minister secured changes
to the treaty.
Mr Hollande will take office
on May 15. He is expected to
travel to Berlin the next day.
Reporting by Ben Hall in
Paris, Kerin Hope in Athens,
Guy Dinmore in Rome, Gerrit
Wiesmann in Berlin, Peter
Spiegel in Brussels and Richard
Milne in London
Angela Merkel, Germany’s
chancellor, yesterday warned
Athens to stick to the reform
plans and budget targets agreed
under its international bailout
plan as financial markets and
EU policy makers grappled with
an anti-austerity backlash
spreading across the eurozone.
The two main Greek parties
suffered a collapse in support in
Sunday’s election, plunging the
country into political turmoil
and raising doubts about its
commitment to the terms of its
rescue programme.
The euro fell and bank shares
came under pressure in early
trading as investors digested the
implications of the Greek vote
and the prospect of a challenge
to Ms Merkel’s eurozone auster-
ity after Socialist François Hol-
lande won France’s election.
Further instability in Greece
‘We can make sure
[fiscal adjustment]
doesn’t do too much
harm to growth’
Christine Lagarde, IMF
Austerity backlash, Pages 4­6
Editorial Comment, Page 10
Gideon Rachman and
Dominique Moïsi, Page 11
Markets, Page 26
Bankia’s woes, Page 6
Jens Weidmann, Page 11
US sanctions force Iran to accept
renminbi in oil trades with China
Powering on
By Henny Sender in Hong Kong
providing
services
such
as
oil purchases from Iran in
rupees, was again urged yester-
day by Hillary Clinton, US sec-
retary of state, to reduce its
imports.
The renminbi purchases
began some months ago. Ini-
tially the non-barter portions of
the transactions were settled in
Beijing through renminbi
accounts but, as a result of US
pressure, domestic banks such
as Bank of China had stopped
dealing with Iran, the oil execu-
tives and bankers said.
Instead, much of the money is
transferred to Tehran through
Russian banks, which take large
commissions on the transac-
tions, the people said.
Sinopec, Zhuhai Zhenrong and
Iran’s central bank declined to
comment.
Additional reporting Leslie
Hook in Beijing, Monavar
Khalaj in Tehran and James
Fontanella-Khan in Delhi
drilling.
“The global financial crisis
accelerated the shift from the
west to the east,” said the chief
executive of one bank in Dubai.
“Such measures [as the US sanc-
tions against Iran] will now
enhance the acceptability of
the renminbi as a transaction
currency.”
The US applied sanctions on
Zhuhai Zhenrong this year
Sanctions imposed by Wash-
ington force financial institu-
tions to choose whether to do
business with Iran or with the
US, and the US has spearheaded
restrictions on Tehran’s central
bank. The sanctions and a diplo-
matic push have led to a reduc-
tion in Iranian oil imports by
Japan, South Korea, India and
China, which together buy
more than 60 per cent of Iran’s
crude oil exports.
India, which already settles its
Iran is accepting renminbi for
some of the crude oil it supplies
to China, industry executives in
Beijing and Gulf-based bankers
have said, partly as a conse-
quence of US sanctions aimed at
limiting its nuclear programme.
Tehran is spending the
currency, which is not freely
convertible, on goods and serv-
ices imported from China.
Most of the oil that goes from
Iran to China is handled by the
Unipec trading arm of Sinopec,
China’s second-largest oil
company, and through another
trading company called Zhuhai
Zhenrong, according to the oil
executives.
The trade is worth as much as
$30bn annually, according to
industry estimates, but a share
of this is in barter form.
The executives said Zhuhai
Zhenrong paid Iran for oil by
General Electric, the US
industrial group, has linked
with Shanghai­listed XD Electric
in the latest of a series of
alliances with Chinese
companies intended to
strengthen its position in
international markets. GE is to
pay $535m for a 15 per cent
stake in XD. The venture will
sell equipment for power
transmission and distribution in
China and around the world.
Separate sections
Investing in Colombia
Nation shakes off ‘nearly failed’
status
Private Banking
Markets try to regain
equilibrium
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FINANCIAL TIMES
TUESDAY MAY 8 2012
WORLD NEWS
‘Princeling’ generals suffer in
aftermath of Bo’s downfall
India moves to
placate investors
with delay to tax
avoidance laws
China military
Purging of former
Chongqing chief is
affecting the armed
forces’ leadership
succession, writes
Kathrin Hille
Candidates vying for leadership posts in the People’s Liberation Army
Leadership links
By James Crabtree
in Mumbai
eign holders of Indian equi-
ties and private equity
houses, many of which
invest via offshore centres,
including Mauritius, on the
understanding their invest-
ments will not be taxed.
Mr Mukherjee also cut
the capital gains tax on
long-term unlisted invest-
ments from 20 to 10 per
cent, bringing it into line
with that paid by other for-
eign investors.
The GAAR delay was wel-
comed by trade bodies,
which said the pause could
be used to provide greater
certainty to foreign inves-
tors who hold more than
$210bn in Indian equities
and other assets.
“We welcome the delay,
especially if it is accompa-
nied by constructive discus-
sions with the industry,”
Son of Liu Shaoqi
(revolutionary leader
and former president)
Son of Zhang Zhen
(former CMC
deputy chair)
F secretary
to Liang Guanglie
(defence minister)
Son-in-law of Hu
Yaobang (former
party chief)
Former
India will delay the intro-
duction of wide-ranging tax
avoidance laws by one year,
in a move designed to pla-
cate international investors
worried about erratic legal
changes.
In the latest in a series of
delays and policy reversals,
Pranab Mukherjee, finance
minister, confirmed in par-
liament that the introduc-
tion of the general anti-
avoidance rules (GAAR)
would be deferred until
April 2013.
The rules are part of a
package of changes in
India’s March budget that
caused concern among for-
eign businesses and sharply
reduced capital flows at a
time when Asia’s third
largest economy was suffer-
ing from slowing growth
and a widening current
account deficit.
But Mr Mukherjee disap-
pointed investors by
ploughing ahead with plans
to allow the retrospective
taxation of certain interna-
tional transactions, a move
in part designed to recover
more than $2bn of capital
gains tax from UK-based
telecoms group Vodafone.
The GAAR measures are
a widely recognised means
to allow national revenue
departments to investigate
transactions designed solely
to avoid tax, but analysts
and trade groups said India
failed to provide clarity on
how these rules would oper-
ate in practice, worrying
investors.
Dinesh Kanabar, head of
KPMG India’s tax practice
in Mumbai, said: “It is clear
that having met with inves-
tors the government real-
ised there would be lots of
unintended consequences.
It is very positive that they
are rethinking this move.”
Foreign institutional
flows into India fell sharply
after the budget measures,
with investors removing
more than $100m during
April, in contrast to the
more than $8bn brought in
during the three months
before the budget.
Lobby groups claimed
GAAR would hit both for-
Son of Ma Zaiyao
(former dean of
PLA academy)
Son of Zhang
Zongxun (former
GLD director)
Gen Liu Yuan
Commissar,
general logistics
department
Gen Zhang
Haiyang
Commissar,
2nd Artillery
The purge of Bo Xilai as
Chongqing Communist
party leader has thwarted
the prospects for some
“princeling” generals to
join China’s top military
body while giving
President Hu Jintao a
chance to boost his
influence over the armed
forces.
China is preparing for a
generational leadership
transition this year that
will see most top political
and military roles filled
with new people. Two
generals close to Mr Bo
who are also princelings –
descendants of senior
Communist party figures –
are now less likely to be
appointed to the powerful
12-member Central Military
Commission, according to
two senior officers in the
People’s Liberation Army.
“The Bo Xilai case is
definitely having an impact
on the military leadership
succession,” said Cheng Li,
an expert on Chinese elite
politics at the Brookings
Institution. “Before, it
looked like five of the 10
military members of the
next CMC could have been
princelings, but now it’s
more likely to be three or
four.”
The composition of the
CMC, decided by the
Politiburo standing
committee, matters because
it could determine the role
of the armed forces in the
factional battles that are
shaking the party.
The military came under
the spotlight in March
after a rumour spread that
Zhou Yongkang, China’s
top security official, had
staged a coup to “rescue”
the conservative Mr Bo.
“The PLA is not . . . a
kingmaker in the current
situation,” said Cheng Li.
“But in the longer term,
all depends on whether the
civilian leadership
effectively controls the
political situation.”
Mao Zedong, the late
Chinese dictator, once
stated that “political power
grows out of the barrel of
a gun”. True to that
conviction, senior party
officials seek to secure a
power base in the military
through appointments to
the CMC, which commands
and controls the military
and is independent from
the government apparatus.
The composition of the
CMC will also influence
how strong a leader Xi
Jinping, the man expected
to succeed Mr Hu as party
chief and president, can
become.
Chinese leaders have
sought to extend their
influence through the
military beyond the
duration of their political
office. As a result, former
president Jiang Zemin is
still believed to wield more
Lt Gen Zhang
Qinsheng
Deputy chief of
the general sta
Vice-Adm Liu
Xiaojiang
Commissar,
navy
Current CMC
member
Son-in-law of Li
Xiannian (former
president)
Lt Gen
Zhang Youxia
Regional
commander
Gen Ma Xiaotian
Deputy chief of
the general sta
c
Lt Gen Liu
Yazhou
Commissar,
National Defense
University
Adm Wu
Shengli
Navy
commander
‘We welcome the
delay, especially if
it is accompanied
by constructive
discussions’
Central Military
Commission
Highest military
leadership body
Ten military members
to be appointed
Gen Chang
Wanquan
Director,
general
armaments
department
Gen Fan
Changlong
Regional
commander
said Nicholas de Boursac,
managing director of the
Asia Securities Industry
and Financial Markets
Association, a group that
lobbied against the changes.
“But this is only half the
solution, and we remain
very concerned over the
continuing uncertainty
regarding the indirect
transfer rules that could
badly affect broader portfo-
lio investment instead of
just affecting situations like
the Vodafone case,” he said.
Investors said they would
continue to press for
greater clarity on this sec-
ond set of taxation con-
cerns, while suggesting that
the postponement of GAAR
alone was unlikely to
restart capital flows.
Mr Mukherjee also said
the burden of proof in any
suspected case of tax eva-
sion would fall on India’s
tax department, rather than
companies. The move
prompted a 0.5 per cent rise
in India’s benchmark
Sensex index, while the
rupee strengthened slightly.
Gen Xu
Qiliang
Air force
commander
Lt Gen Fang
Fenghui
Regional
commander
n
Vice-Adm
Sun Jianguo
Deputy chief of
the general sta
Lt Gen Wei
Fenghe
Chief of sta,
2nd Artillery
Gen Deng
Changyou
Commissar, air
force
Current
CMC
member
F secretary to
Liang Guanglie
(defence minister)
Lt Gen Hou
Shusen
Deputy chief of the
general sta
Former
Lt Gen Jia Ting'an
Deputy director,
general political
department
Gen Chi Wanchun
Commissar, general
armaments
department
Current
CMC
member
F secretary to
Chen Bingde (chief
of general sta)
Former
F secretary to Jiang Zemin (former
party chief, president and CMC chair)
Former
influence in the military
than Mr Hu. He remained
as CMC chairman for two
years after Mr Hu became
president, giving him the
opportunity to place his
protégés in the body.
Similarly, it is unclear
when Mr Hu, who is due
to retire as party chief this
autumn and as president
next spring, will be
replaced as CMC chairman
by Mr Xi, now one of three
vice-chairmen. Among the
remaining 10 CMC
members, seven are due to
retire, and about 20 officers
are competing for those
seats. Military experts say
the two officers most
affected by the Bo scandal
are General Zhang
Haiyang, the commissar of
the Second Artillery Forces
– the home of China’s
nuclear weapons arsenal –
and Gen Liu Yuan, the
political commissar of the
general logistics
department. His father, Liu
Shaoqi, was Mao’s chosen
successor until he fell out
of favour and was purged.
“It is hard to imagine
how Zhang Haiyang could
not be affected,” said a
source familiar with the
Second Artillery Force.
“His family has close ties
to Bo Xilai, they have long
been friends, and they got
even closer when Bo Xilai
was in Chongqing and
Zhang Haiyang headed the
[neighbouring] Chengdu
military region.”
Li Jun, a Chongqing
tycoon who was a victim
of Mr Bo’s “Smash Black”
campaign – a controversial
crackdown on crime – told
the Financial Times he
was pressed to admit
bribing rivals of Gen
Zhang in a land deal
during the officer’s tenure
in Chengdu.
Gen Liu, known as a
nationalist hardliner, also
faces problems because of
his connection to Mr Bo.
Their families have been
close since their fathers –
Bo Yibo and Liu Shaoqi –
served together as
revolutionary leaders.
While some officers close
to Mr Bo may be sticking
to their guns, others are
quickly abandoning the
charismatic politician who
has not been seen since his
purge. “Those in the
military who were seen as
close to Bo Xilai have now
dropped him,” said Bo
Zhiyue (no relation), an
expert on “princeling”
generals at the National
University of Singapore.
“But Liu Yuan could still
[potentially] be a liability
to Xi Jinping, so it is not
clear whether he would
continue to support him.”
Some observers question
the loyalty to the party
leadership of Lieutenant
General Zhang Youxia. A
princeling who commands
the Shenyang military
region, Gen Zhang served
in the 14th Army, which
was once led by Mr Bo’s
father, in Yunnan.
Military experts said
some non-princeling CMC
contenders were closing
ranks in a bid to convert
Mr Bo’s downfall into an
opportunity to strengthen
their prospects. In addition,
princeling generals seen as
closer to Mr Hu than to Mr
Xi are also seeking a
higher profile. For
example, Vice-Admiral Liu
Xiaojiang, the commissar
of the navy, and Lt Gen
Liu Yazhou, the commissar
of the National Defense
University, both pledged
their allegiance to the
party leadership in party
media last month.
Vice-Adm Liu is the son-
in-law of Hu Yaobang, the
reform-minded party chief
toppled in 1987. Gen Liu is
the son-in-law of Li
Xiannian, a former
president, and one of the
most pronounced
campaigners in the PLA
for political reform.“Some
could well be angling for
promotions,” said Bo
Zhiyue. He added that Mr
Hu might use the upheaval
to strengthen his influence
in the military.
Indonesia growth
slows but outlook
for economy stable
By Sarah Mishkin
in Hong Kong
still has some firm legs to
run on for the rest of the
year.”
That growth has bol-
stered the job market.
Unemployment fell to 6.3
per cent compared with
6.8 per cent a year ago.
Economists expect
Indonesia’s central bank to
leave the benchmark
interest rate unchanged at
a record low of 5.75 per cent
when it meets on Thursday.
Inflation is beginning to
cause some concern, how-
ever, according to Leif
Eskesen, an economist with
HSBC. Consumer inflation
last month edged up to
4.5 per cent, the highest
since last September.
“Eventually the expected
pick-up in inflation will per-
‘Those in the
military seen as
close to Bo Xilai
have dropped him’
Bo Zhiyue, National
University of Singapore
Indonesia’s growth slowed
moderately last quarter, but
economists remained posi-
tive that consumption and
foreign investment would
keep the country’s economy
stable, in spite of weaker
overseas demand.
The economy expanded
6.3 per cent in the first
quarter of 2012, down from
6.5 per cent in the previous
three-month period but in
line with most forecasts.
The slight drop is the first
slowdown in a year.
Indonesia, which has a
population of 240m, has
long been buoyed by domes-
tic consumption. The coun-
try is among the Asian
nations least reliant on
exports and it is therefore
less exposed than nations
such as Singapore to falling
demand from Europe.
Economists do caution,
however, that a slowdown
in China, a significant con-
sumer of Indonesia’s com-
modities, remains a poten-
tial risk.
Consumption and grow-
ing foreign direct invest-
ment, which jumped 30 per
cent in the first quarter,
buoyed the economy,
despite export growth slow-
ing to 7.8 per cent. In the
third quarter of last year,
exports had been growing
at 17.8 per cent.
Overall investment
increased 9.9 per cent, down
from 11.5 per cent in the
previous quarter, according
to the country’s statistics
bureau.
“We’ve seen a much
sharper slowdown in coun-
tries like India and China,”
said Aninda Mitra, Asia
economist with ANZ in
Singapore.
“The overall growth story
China­Africa ties, Page 10
Vote on gay marriage to test Obama
Issue rises up the
political agenda
US president to move from
his position backing greater
rights for gay couples into
full-fledged support for mar-
riage equality.
“This is a national discus-
sion we are having about
the rights of loving and
committed couples. The
president needs to take a
stand,” he said.
Public Policy Polling, a
Democratic pollster based
in North Carolina, pub-
lished a survey yesterday
showing 55 per cent of
respondents supported the
amendment, which declares
that “marriage between one
man and one woman is the
only domestic legal union
that shall be valid or recog-
nised”.
It found that 39 per cent
of respondents opposed it.
North Carolina has a
statutory ban on same-sex
marriage but, unlike most
other southern states, has
not yet changed its consti-
tution to ban it outright.
Still, supporters were
concerned that the vote –
which takes place amid a
series of primaries, includ-
ing the Republican presi-
dential nomination that
has been all-but-won by
Mitt Romney – might fail.
“If we don’t win it, we’ll
probably never get it in
the constitution,” Christine
Steele Gates, a married
mother campaigning for
the amendment, told the
Charlotte Observer. “The
gay activists will win and
then we’ll have Massachu-
setts[-style] anything goes
here in the Bible Belt.”
Conservative activists
had rallies planned around
the state yesterday to whip
up more support for the
amendment.
Although the presidential
election will revolve around
the economy, such social
issues could hurt the presi-
dent in conservative swing
states.
Mr Obama’s re-election
campaign is working hard
to try to hold North Caro-
lina, with the president
making visits to the state
and the Democratic
National Committee hold-
ing its convention in Char-
lotte in September.
A Gallup poll of 12 swing
states, including North
Carolina, released yesterday
found that Mr Obama
was slightly ahead of
Mr Romney, leading 47 per
cent to 45 per cent among
registered voters.
Public opinion on same-
sex marriage is shifting
rapidly, with a number of
states legalising the unions
and opposition to them
waning.
Mr Obama, who says
he supports greater rights
for gays and lesbians
but opposes marriage equal-
ity, says his position is
“evolving”.
6.3%
Expansion of economy
in first quarter of 2012
By Anna Fifield
in Charlotte
North Carolina is today
expected to pass a constitu-
tional amendment banning
gay marriage, in a vote that
will put the thorny social
issue at the top of the
political agenda in a crucial
battleground state.
This is creating problems
for Barack Obama, who
won North Carolina by
the narrowest of margins
in 2008 and has avoided
discussing the amendment
during visits to the state
aimed at securing victory in
November.
It also compounds the
difficulties created by vice-
president Joe Biden’s state-
ment at the weekend that
he was “comfortable” with
same-sex marriage.
“I think it becomes very
hard for the White House to
finesse this much longer,”
said Richard Socarides, a
former Clinton administra-
tion adviser on gay rights
who has been urging the
suade the [central bank] to
tighten monetary policy,”
wrote Mr Eskesen.
Inflation has proved a
problem for Indonesia’s
markets in the recent past.
In January, similar
concerns that the central
bank was too dovish led to
a slide in equities as infla-
tion veered towards 7 per
cent. Inflation could again
climb that high, say econo-
mists, including those at
HSBC and Capital Econom-
ics.
The government is dis-
cussing plans to cut fuel
subsidies, which could
cause prices to rise by
about a third.
Indonesia also reported
stronger foreign exchange
reserves. These rose to
$116.4bn at the end of April
from $110.5bn at the end of
March.
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Joe Biden: ‘comfortable’ with
same­sex marriage
    FINANCIAL TIMES
TUESDAY MAY 8 2012
★
3
WORLD NEWS
Syria’s silent majority
happy to live in denial
Large crowds still
frequent popular picnic
spots around the city, even
as adjacent suburbs are
exploding.
“I can’t understand
Damascus, or people and
their attitude, as there are
Syrians who are being
killed half an hour from
the centre,” said one
Damascene. “People in
Damascus are either still
in denial – or they want to
make the best of their time
before the time comes
[when] they can’t leave
their homes.”
Even the violence in the
capital’s heart has an
elusive feel, with carnage
from bombs quickly
cleared up and sites
returned to something like
normality. Hours after the
alleged suicide bombing of
a military vehicle in the
Midan area late last
month, only some
bloodstains high on the
bridge stanchions and the
ball-bearing shaped holes
pocking the pavement and
road offered visual
testament to anything
having happened there
earlier in the day.
Damascenes have little
hope of getting any reliable
reports on what is going
on around them from local
broadcasters and
newspapers – and not just
because they
overwhelmingly support
the regime. During visits
to protest areas with UN
monitors last month,
Syrian journalists hung
back from entering
opposition neighbourhoods
because of hostility from
local residents, who in one
case called out: “Syrian
media. Liar! Liar!”
Starved of detailed
information and fed
instead vague and ominous
warnings of the chaos to
come should the uprising
succeed, it is perhaps no
surprise to see people who
are not necessarily regime
stalwarts either swing
behind it or preserve an
awkward neutrality.
As one young woman
who has witnessed mass
protests and violence put
it: “I am involved and I
don’t want to be. So I
believe and don’t believe
everything I hear.”
Additional reporting by
Abigail Fielding-Smith in
Beirut
Damascus
Conflicting news
leads some people
to retreat from
the realities of the
conflict, writes
Michael Peel
At Rumours nightclub in
the Sheraton Hotel in
Syria’s capital, an array of
sparklers burnt into life
next to a dance floor
where the music boomed
and the dry ice pumped as
Friday night tipped into
Saturday morning.
“Life is good in
Damascus,” exclaimed a
young woman named
Rahima, straining against
the surrounding noise to
scorn the idea that her
country was in turmoil.
“Where is the revolution?
There is no revolution.
They are crazy,” she
concluded, briskly wiping
her hands together to
denote a problem
emphatically solved.
Rahima’s wishful
thinking is not so unusual
in Damascus these days.
As polls opened yesterday
in a parliamentary election
that opponents of President
Bashar al-Assad have
dismissed as a sham, a
mixture of fear, confusion
and complacency is
turning some Syrians away
from the more than year-
long bloody conflict around
their country and into a
state of denial.
Bombarded by a mass of
conflicting information
from the two sides, these
people suspect they are not
being told the full story
but feel the safer option is
to retreat from the reality
and let the fight go on
around them. Members of
this so-called silent
majority of Syrians, who
are neither regime zealots
nor opposition diehards,
are staying quiet for now –
even if some secretly want
to know more.
“We have been looking
for the truth since March
last year,” said one young
female professional who
supports the regime but
wants to know more about
those challenging it. “Until
now we didn’t find it.”
Analysts say the latest
elections – like a
referendum on a new
constitution in February –
Supporters of President Bashar al­Assad chant slogans while
waiting to vote in elections in Damascus yesterday
AFP
are part of a broader
illusion the government is
trying to create that
Syria’s conflict is ready for
a political solution.
While the centres of
Damascus and the second
city of Aleppo remain
mostly calm, reports of
further killings adding to
the more than 9,000
estimated to have already
died are coming in daily
from opposition areas
around the country, despite
the work of a small but
growing team of UN peace
monitors.
Government officials in
Damascus routinely play
down the scale and impact
of violence that has largely
come from regime security
forces, with one comparing
the turmoil to the
upheaval experienced while
renovating a house.
Another says: “In a year’s
time it will be finished –
Syria will be safe.”
These arguments play
into a broader day-to-day
doublethink in Damascus
about a crisis that seems
simultaneously remote and
too close for comfort. One
Damascene confided to a
western observer that they
told themselves the sounds
of bombs were thunder.
In­depth, www.ft.com/syria
Small rise in Egypt’s foreign reserves
buys time for settlement of IMF deal
By Heba Saleh in Cairo
during April, with reserves
rising to $15.2bn. Some
economists attribute the
rise to the transfer of $408m
from Iraq to Egyptian work-
ers owed salary arrears
from 1990, when they were
forced to flee the country at
the start of the 1991 Gulf
war. But up-to-date figures
on trade and tourism –
which could signal a longer-
term trend – are not yet
available.
“This is good news and
hopefully will persist in
the coming months,” Nidal
Assar, central bank sub-
governor, told Bloomberg
News. He said the improve-
ment reflected the “phasing
out” of capital flight and
increased tourism spending,
not external financing.
However, Mohamed Abu
Basha, Egypt economist at
EFG-Hermes, the regional
investment bank, and other
economists say that capital
outflows have slowed
because foreign investors
have largely abandoned
Egyptian stocks.
Last year’s uprising
scared away tourists and
investors. Periodic erup-
tions of violence and linger-
ing political uncertainty
as the country approaches
presidential elections this
month have depressed the
appetite for business.
Egypt’s reserves are
enough to cover three
months of imports – the
level usually regarded as
critical. The slowdown in
the rate of decline gives
officials some breathing
space as they negotiate a
deal with the IMF.
Analysts have been fore-
casting a disorderly devalu-
ation of as much as 50 per
cent if Egypt fails to secure
an IMF loan of $3.2bn.
Although the sum will
not cover all Egypt’s needs,
other donors are waiting
for Cairo to commit itself to
the IMF programme before
advancing credit.
So far, the IMF agreement
has been held hostage to a
tussle between the ruling
military council and the
Muslim Brotherhood, which
won parliamentary elec-
tions and expects to lead
the next government.
The IMF has made the
deal conditional on the sup-
port of the main political
forces, but the Brotherhood
says an outgoing adminis-
tration should not borrow
funds that must be repaid
by the next government.
Egyptians received a rare
piece of economic good
news yesterday, when cen-
tral bank figures revealed
that foreign reserves rose
slightly last month, in an
unexpected reversal of the
relentless downwards trend
since last year’s revolution.
The country’s foreign
reserves have dropped by
more than half in the past
16 months, from $36bn at
the beginning of 2011 to
$15.1bn at the end of March.
The drop has prompted
forecasts of an imminent
devaluation of the currency
unless Egypt can find fresh
sources of foreign financ-
ing, including a deal with
the International Monetary
Fund. The latest figures
indicate a modest increase
Malawi ends currency peg to dollar
By Andrew England
in Johannesburg
with the pegged rate of 165.
The move is one of the
sweeping changes intro-
duced by Joyce Banda since
she took over the presi-
dency following the death
of her predecessor, Bingu
wa Mutharika, at the begin-
ning of April.
Last month, Ms Banda,
who was sworn in on April
7, replaced the central bank
governor, the police chief
and reshuffled her cabinet.
The impoverished coun-
try has been plagued by
fuel and foreign exchange
shortages for almost two
years – problems that
helped spark anti-govern-
ment protests last July in
which at least 18 people
were killed.
The economic situation
has been exacerbated by
tensions with international
donors and institutions that
had been important sources
of foreign exchange, includ-
ing the IMF, which sus-
pended a $79m aid pro-
gramme.
A year ago, Mutharika
became embroiled in a dip-
lomatic spat with Britain,
Malawi’s biggest bilateral
donor, after the leaking of a
British cable that accused
him of “becoming ever
more autocratic”.
The UK later suspended
budgetary support, com-
plaining of poor economic
management and human
rights abuses.
Yvette Babb, Africa
research strategist at Stand-
ard Bank, said the devalua-
tion of the kwacha was wel-
come because it would help
unlock aid, but said the
country would still need to
do more to diversify its
economy and generate
sources of foreign exchange.
“It’s something we had
been anticipating for quite
a long time and obviously it
was expedited when the
president was deceased and
a new president came into
office who had a far more
constructive stance on
engagement with donors,”
she said.
“It’s obviously only an
initial step – there will be a
lot of adjustments required
in the overall economy to
deal with the shortages of
foreign exchange moving
forward, but the devalua-
tion will definitely address
some of the competitiveness
issues,” Ms Babb added.
Malawi has dropped its cur-
rency peg to the US dollar,
causing the kwacha to lose
about half of its value as
the southern African
nation’s new president
seeks to boost the flagging
economy and mend rela-
tions with donors.
The central bank said yes-
terday’s decision, combined
with the liberalisation of
the foreign exchange mar-
ket, should lead to the
country reaching an agree-
ment with the International
Monetary Fund and
“unlocking donor flows in
the next few months”.
The kwacha was yester-
day selling at more than 250
to the dollar compared
   4
★
FINANCIAL TIMES
TUESDAY MAY 8 2012
AUSTERITY BACKLASH
Merkel opens door to Hollande
Berlin shrugs
and prepares
for pragmatic
partnership
Co­operation ‘is
vital for Europe’
Hint of growth
annexe to fiscal deal
many would welcome Mr
Hollande “with open arms”,
with a first visit to Berlin
pencilled in for a week
today – the day of his inau-
guration. With markets
nervous after anti-austerity
votes in France and Greece,
Ms Merkel tried to play
down apparent differences
with the French Socialist,
who had campaigned for a
concerted growth push.
She said leaders of the
crisis-stricken eurozone
knew it was “completely
obvious we need both” fis-
cal discipline and growth,
although she conceded
there was still a “discus-
sion” about whether the lat-
ter required “debt-financed
economic programmes” or
reforms to make industry
more competitive – as pre-
ferred by Berlin.
But with the election
result in Greece throwing
reform into question, the
mood in the German capital
is that now, more than
ever, Berlin and Paris must
demonstrate they can work
together to extract the
region from its debt crisis.
Ms Merkel said she had
spoken to Mr Hollande at
length by phone on Sunday
night, when they agreed to
“co-operate well and inten-
sively”. She said: “German-
French co-operation is vital
for Europe, and since we all
want Europe to succeed,
this co-operation will start
very quickly.”
While she rejected any
changes to the eurozone’s
tough new fiscal compact –
an early campaign demand
by Mr Hollande – signs
emerged that her govern-
ment could live with a
growth-oriented annexe to
that agreement.
France’s president-elect is
pushing for redirecting EU
structural funds into more
growth-stimulating pro-
jects, as well as giving the
European Investment Bank
more clout, be it through a
capital increase or by allow-
ing it to issue bonds to raise
money for specific public-
works programmes.
While Mr Hollande would
meet stiff resistance to his
suggestion to make the
European Central Bank
lender of last resort to euro-
zone nations, Berlin is
warming to some form of
joint investment pro-
gramme out of economic
and domestic necessity.
To secure parliamentary
approval of the fiscal com-
pact by June, Ms Merkel
needs a two-thirds majority
– and thus the support of
the opposition Social Demo-
crats, who have threatened
to delay the vote to secure
growth measures. But signs
of a deal with Mr Hollande
could save this timetable,
Berlin believes.
Germany’s approach to
crisis management was
underscored by Jens Weid-
mann, Bundesbank presi-
dent, in an article for the
Financial Times, in which
he warns that the European
Central Bank cannot help
failed banks – something
that could become an issue
if Greece’s financial system
collapsed
By Gerrit Wiesmann
in Berlin and
Ralph Atkins in Frankfurt
amid
political
turmoil.
“The funding of banks
that are not financially
sound or against inade-
quate collateral would shift
substantial risks between
national taxpayers. Such
implicit transfers are there-
fore beyond the mandate of
the eurozone’s central
banks,” says Mr Weidmann.
Angela Merkel pledged to
stand firm on austerity but
to aim to boost eurozone
growth as she sought to put
relations with François Hol-
lande, the French president-
elect, on a sound footing
without compromising her
credo of fiscal rigour.
The German chancellor,
who had openly backed
Nicolas Sarkozy, said Ger-
up a “growth pact” to run
alongside it, linked
perhaps by an annexe to
the original treaty. She
wants it to be financed by
money already committed
– not new borrowing.
At least two of the
ideas floated by the
European Commission in
recent months – a €10bn
increase in European
Investment Bank capital,
and the issuing of jointly
guaranteed “project
bonds” to finance
infrastructure projects –
are getting a fair wind in
Berlin.
There may be German
conditions, such as
insisting that everyone
contributes pro-rata to
the EIB top-up, including
the most debt-strapped,
and not wasting money
on extravagant
infrastructure white
elephants.
German officials insist
this is simply moving to
“phase two” of a crisis
management programme
in which “phase one” was
GLOBAL INSIGHT
Quentin Peel
in Berlin
Editorial Comment, Page 10
Comment, Page 11
Lex, Page 14
François Hollande’s
victory in the French
presidential election was
greeted in Berlin with a
Gallic shrug – at least in
government circles.
“Oh well,” was one of
the more revealing
responses to the
Socialist’s success. It was
neither heartily welcomed
nor cursed, but seen as
something one has to live
with.
It was not what
Chancellor Angela Merkel
had wanted. Indeed, she
had publicly and rather
rashly thrown her
political weight behind
Nicolas Sarkozy, the
centre-right incumbent in
the Elysée palace. She
had even agreed to go
and campaign for him –
until he withdrew the
invitation.
In recent weeks,
however, it had been
obvious that Ms Merkel
had become reconciled to
a victory for Mr Hollande.
The German government
machine went very quiet
on the subject. “It is too
sensitive to comment,”
was the official line. But
behind the scenes,
diplomatic feelers were
being put out to the
Hollande team to work
out a new
modus vivendi
.
This is not only because
of Ms Merkel’s
pragmatism, but it is
also in the strange nature
of the Franco-German
partnership to be flexible.
The double-act often
works best when the two
leaders belong to opposite
political persuasions:
Helmut Schmidt and
Valéry Giscard d’Estaing,
and Helmut Kohl and
François Mitterrand are
classic examples.
On the other hand, Mr
Kohl and Jacques Chirac,
two conservatives, never
hit it off. As for Ms
Merkel and Mr Sarkozy,
for all the talk of a
“Merkozy” axis, theirs
was always an uneasy
partnership – a forced
marriage, caused by the
eurozone crisis.
Ms Merkel has already
sketched the outline of a
sensible compromise with
the new French president.
Mr Hollande must accept
that the fiscal pact agreed
by 25 of the 27 EU
members – setting out the
rules of budget discipline
to be enshrined in
national legislation –
cannot be renegotiated.
Like all international
treaties, says Berlin, it
cannot be rewritten for
every national election.
In exchange, Ms Merkel
will be flexible in beefing
Seeking partners for next round
State of parties
Parties and
Seats
percentage
of vote
New Democracy
108
18.9%
Syriza
52
16.8%
Pasok
41
13.2%
Independent Greeks
33
10.6%
Communist party
26
8.5%
Golden Dawn
21
7.0%
Democratic Left
For all the talk
of a ‘Merkozy’
axis, theirs was
always an uneasy
alliance
19
6.1%
Source: Greek interior ministry
77
Structural reforms due to
be completed in June
fiscal consolidation. They
also stress that growth
must be “sustainable”.
But the combination of
austerity and growth was
always part of the
German agenda, they say.
Ms Merkel expects Mr
Hollande to be equally
pragmatic, although she
recognises that he cannot
simply ditch all his
election promises of
spending on growth – and
certainly not before next
month’s French
parliamentary elections.
But she knows that he
will face the discipline of
the financial markets,
restraining him from a
rush to debt-financed
stimulus.
Germany is certainly
not going to transform
overnight from its mantra
of austerity to a new
Keynesian gospel of
growth. Ms Merkel has to
beg the Bundestag to part
with a single euro of
increased German
guarantees for the rest of
the eurozone.
Yet the advent of Mr
Hollande may prove to be
more of a blessing than a
curse for the chancellor.
It will allow her to relax
a little on the austerity
message and lean more
generously towards
growth, just when she
needs to for domestic
electoral reasons.
She will be stealing the
policies of her centre-left
opponents in Germany –
the Social Democrats and
Greens – with re-election
looming in 2013.
Merci,
François, for the excellent
opportunity.
The happy few: supporters
of Alexis Tsipras’s Syriza
celebrate outside the party’s
election tent in Athens on
Sunday evening
Bloomberg
Greece prepares for another round of elections
premier, prepares to leave
office next week, making
way for a caretaker admin-
istration.
Mr Papademos, a former
European Central Bank
vice-president, called for
political stability “so that
the sacrifices of the Greeks
don’t go to waste . . . after
we have already covered a
large part of the difficult
journey towards rebuilding
the economy”.
Decision-making on fur-
ther reforms, including
finalising a €11.5bn medi-
um-term austerity package,
will be stalled until a new
administration is in place.
“Only non-political meas-
ures can go ahead,” the offi-
cial said, admitting that it
will be hard to push for-
ward with 77 structural
reforms due to be com-
pleted during June.
The stalemate puts at risk
the timetable for disburse-
ment of Greece’s next loan
tranche from its second
€174bn bailout. Despite a
recent transfer of €3.5bn to
cover financial emergen-
cies, the country faces
being unable to meet its
pension, salary and debt
commitments next month.
The EU and International
Monetary Fund have
warned they will block fur-
ther loan disbursements
until the next Greek parlia-
ment approves the medium-
term package, which would
include deep cuts in health-
care spending and in public
sector employment – meas-
ures that triggered parlia-
mentary rebellions under
the two previous govern-
ments.
Antonis Samaras, whose
centre-right New Democ-
racy party finished first but
fell well short of a parlia-
mentary majority, yester-
day proposed a coalition of
pro-reform parties to ensure
Greece remains in the euro-
zone, while also seeking
softer terms for the bailout
agreement – a move that
would have triggered strong
reaction by international
lenders.
But Alexis Tsipras, on a
roll after his leftwing coali-
tion Syriza vaulted into sec-
ond place, almost quadru-
pling its share of the vote,
rejected the offer saying
such a coalition would
bring “tragedy not salva-
tion”. However, his ambi-
tion to form his own coali-
tion of leftwing parties
appears doomed to fail,
with the Greek Communists
preferring isolation. The
Democratic Left split from
Syriza several years ago
and shows no sign of want-
ing to team up again.
Final election results
gave New Democracy 108
seats, followed by Syriza
with 52 and Pasok with 41.
The remaining seats were
shared among four smaller
parties including the
extreme-right Golden Dawn,
which is entering parlia-
ment for the first time with
21 seats.
With anti-austerity par-
ties capturing almost 70 per
cent
Greeks appeared to have
expressed anger and frus-
tration over high jobless
rates, wage cuts and fore-
casts of another 18 months
of recession.
“This was a vote against
reform . . . We saw pro-Euro-
pean socialists who used to
be popular losing their
seats after years in parlia-
ment,” said Taki Michas, a
political commentator.
Among prominent social-
ists who were voted out was
Anna Diamantopoulou, the
development minister and a
former European Commis-
sioner who launched a
crackdown on corruption
while in office and also
managed to unblock EU
funds left unspent by her
predecessors.
But it was not clear
whether New Democracy
and Pasok would be able to
regroup quickly after their
worst showing at the polls
in more than 30 years.
Some analysts doubted
whether a second election,
following on so quickly,
would trigger a more mod-
erate voter response.
Athens politics
New Democracy
party fails to win
leftwing support for
a ‘national salvation
government’,
writes
Kerin Hope
Greece is bracing for a
repeat general election after
its centre-right leader failed
to win leftwing support to
form a “national salvation
government” in the wake of
Sunday’s inconclusive out-
come at the polls.
“We are now heading for
a second vote next month
in a deeply polarised atmos-
phere,” said a disappointed
government official. The
repeat election would prob-
ably take place on June 17,
he said.
The failure of Greece’s
two main pro-bailout
parties to win a majority
compounds a deteriorating
economic situation as the
government of Lucas
Papademos, the technocrat
Seeing red – the rise of Syriza
The rise of Syriza, a radical
leftwing party, highlights
Greek fury at the prospect
of years of stagnation.
Middle­class voters flocked
to support a party that
insists Greece can remain in
the euro while rejecting the
terms of its bail­out.
Alexis Tsipras, a 38­year­
old civil engineer from a
comfortably off family, has
created a party in his own
image. It took first place in
several constituencies in
Athens and Piraeus, taking
most votes from Pasok but
also attracting young
centre­right voters.
Unemployed university
graduates who may have
to emigrate to find work
are supporters, as jobless
rates for workforce entrants
have soared above 50 per
cent.
Syriza has also attracted
self­employed professionals,
who oppose the opening­up
of their closed shops under
reforms demanded by the
EU and IMF.
in
Sunday’s
vote,
EU economy chief hints at
move to revise deficit targets
Monti urged to amend fiscal compact
Left shift
Italians voting in local
elections have given
stronger than expected
backing to leftwing parties
and protest candidates,
according to exit polls that
forecast substantial losses
for Silvio Berlusconi’s
centre­right party,
writes
Guy Dinmore in Rome.
According to the interior
ministry, the turnout after
polls closed yesterday was
about 67 per cent, down
from 74 per cent at the
previous local elections.
Commentators saw this as
further evidence of voters
registering displeasure with
the main parties that have
been racked by corruption
scandals, as well as their
support for the austerity
policies of Mario Monti’s
unelected technocrat
government appointed last
November.
Beppe Grillo, a stand­up
comic and activist who
has railed against the
political elite and would
take Italy out of the euro,
was one of the main
beneficiaries of the protest
vote, with his Five Star
Movement making inroads
in Parma and Genoa.
party’s agreed line, dis-
missed the possibility of
that happening unless the
pact was amended.
In another sign that
Italy’s main parties are dis-
tancing themselves from Mr
Monti’s government, Mr
Brunetta launched a scath-
ing attack on the unelected
premier’s domestic policies
and said he had to stop
playing the role of “Ger-
many’s representative”.
“Monti and the techno-
cratic government can get
to 2013, if they are in syn-
thesis with a Europe that is
not a German Europe, and
demand of Europe a strong
response to this crisis. Oth-
erwise it is better to go to
[early] elections,” Mr Bru-
netta said.
He denied that his party
wanted to bring down the
technocratic government
that replaced the PDL-led
coalition in November. But
Mr Brunetta warned that
the government risked
“imploding”. “Monti has
done nothing for growth,”
he said.
Mr Brunetta accused Mr
Monti of allowing himself to
be “co-opted” into the
Merkel-Sarkozy alliance but
that the defeat of the
French president by
François Hollande demon-
strated that Europe had to
change course.
The former minister was
speaking as polls closed
after two days of local elec-
tions in Italy which were
expected to see a drop in
support for the PDL as a
result of the chaotic col-
lapse of Mr Berlusconi’s
coalition last year and the
party’s subsequent support
of Mr Monti’s unpopular
austerity measures.
Mr Brunetta said it was
“intolerable” that Germany
could finance its debt at
costs below the level of
inflation, while the rest of
Europe was paying an aver-
age three percentage points
more. “We cannot give
. . . this competitive advan-
tage to Germany. This is
provoking the destruction
of the [European] club,” he
said. “If there is not a com-
mitment by the European
Council [made up of leaders
of EU states] in June to
amend the fiscal compact, it
won’t be ratified,” Mr Bru-
netta said. He expressed
doubt that Ireland would
back the compact in its ref-
erendum on May 31.
Without the support of
the PDL, which is likely to
be joined by the Northern
League, Mr Monti would
struggle to win ratification
of the fiscal compact in
parliament.
Mr Monti’s government
had no immediate comment
on Mr Brunetta’s remarks.
A senior official, who asked
not to be named, said the
PDL realised that after Mr
Hollande’s victory there
would be a reassessment of
the fiscal compact but he
felt it was unlikely that this
would lead to a new role for
the ECB or eurozone bonds.
Italy
By Guy Dinmore in Rome
when Brussels releases new
forecasts that are expected
to show several eurozone
nations veering off-track.
Although the new budget
rules include fines and
other sanctions if govern-
ments miss targets, they
also give Mr Rehn leeway to
extend the timetables for
meeting those goals.
According to the regula-
tions, if a country has taken
“effective action” to cut its
budget and reform its econ-
omy but has been hit by
“unexpected adverse eco-
nomic events with major
unfavourable consequences
for government finances”,
he can recommend that
budget targets are delayed
“by one year as a rule”.
“The pact is not a blind
one or a stupid one; it does
take into account the eco-
nomic climate of the coun-
tries of the eurozone,” said
Amadeu Altafaj Tardio, the
commission’s economic
spokesman. “They [the tar-
gets] are not subject to
political
targets unilaterally. EU fin-
ance ministers must author-
ise his recommendations,
which have so far largely
been rubber-stamped.
The country that could
most quickly be aided by
such a shift is Spain, which
is implementing wrenching
austerity measures to get
its budget deficit down to 3
per cent of economic output
by the end of 2013. Delaying
the 3 per cent target by a
year would give Mariano
Rajoy, prime minister, more
time to soften the blow.
Mr Rajoy’s government
has already announced
€27bn in tax increases and
spending cuts this year, but
it is likely to be forced into
more measures in order to
hit the 2013 target – a fiscal
adjustment rivalling any-
thing done in Greece.
A year-long delay has also
been considered for the
Netherlands, whose govern-
ment collapsed last month
over the need for more cuts
to hit a 3 per cent deficit
target in 2013 after projec-
tions showed it would bal-
loon to 4.7 per cent.
Budget rules
Italy’s centre-right People of
Liberty (PDL), the largest
party backing Mario
Monti’s technocratic gov-
ernment, has challenged
the prime minister over his
commitment to a speedy
ratification of the EU’s fis-
cal compact.
The PDL says Mr Monti
must change his economic
policies to avoid early elec-
tions. Renato Brunetta,
former minister for public
sector reforms in Silvio Ber-
lusconi’s previous govern-
ment and PDL spokesman
for economics, told the
Financial Times the fiscal
compact had to be amended
to give the European Cen-
tral Bank the authority to
take part in government
debt auctions and allow for
commonly issued debt, or
eurozone bonds.
Mr Monti’s government is
in talks with German offi-
cials to stage a synchro-
nised ratification of the fis-
cal compact in both coun-
tries’ parliaments.
Mr Brunetta, insisting
that his position was the
By Peter Spiegel in Brussels
Much of the “growth
compact” being cobbled
together by European lead-
ers following François Hol-
lande’s victory may boost
eurozone economies in the
long term, but many econo-
mists argue that only one
thing can do that in the
short term – easing tough
new EU budget rules.
The exacting deficit tar-
gets set by the European
Commission have forced
governments from Madrid
to The Hague to slash
spending in the face of
deepening recessions. Many
analysts say the measures
are becoming self-defeating
by driving down economic
activity and causing even
bigger deficits.
Olli Rehn, the EU’s top
economic official who was
given broad new powers
this year to set the targets,
has hinted that he may
loosen those budget stric-
tures as soon as Friday,
bargaining,
but
economic analysis.”
Mr Rehn cannot change
Renato Brunetta said Italy
could face early elections
In full, www.ft.com/europe
   FINANCIAL TIMES
TUESDAY MAY 8 2012
★
5
AUSTERITY BACKLASH
Socialist needs growth pact to cement support
doubts about how well the
Socialists and their hard
left and Green allies would
perform.
“It looks a bit tight. Cal-
culations based on the pres-
idential results suggest we
won’t have a big majority,”
said a member of Mr Hol-
lande’s election team.
It is vital for an incoming
president to cement control
over parliament – to ensure
that he has freedom to
implement
Busy diary
France
President­elect has
little room for
manoeuvre before
National Assembly
elections, writes
Hugh Carnegy
May 15
Inauguration of François
Hollande as president of
the French republic
May 16 or 17
Expected to fly to Berlin
for talks with Angela
Merkel, the German
chancellor
The joy across the French
left at François Hollande’s
victory over Nicolas
Sarkozy on Sunday inevita-
bly evokes comparisons
with 1981 when François
Mitterrand became the first
postwar socialist president
of France, amid similar
scenes of wild celebration.
Mr Hollande, a rather
modest figure who remains
an unlikely object of public
fervour, will now enter
Socialist legend as the man
who restored the party to
power after 17 years.
“For the people of the left,
2012 has restored life and
colour to the old, sepia
images which seemed con-
demned to the history
books,” wrote Nicolas
Demorand, editor of Libéra-
tion, the leftwing daily
newspaper.
But Mr Hollande knows
only too well that there is
no time for indulging in
nostalgia – much less in the
sort of “old left” policies
adopted by Mr Mitterrand
30 years ago.
With France at the centre
of Europe’s struggle against
crushing sovereign debt
and feeble growth, Mr Hol-
lande has precious little
room for manoeuvre as he
forms a government and
sets out to win next
month’s National Assembly
May 18­19
G8 summit at Camp David.
First meeting with US
president Barack Obama
his
policies
unhindered.
The alternative is the
paralysis of “cohabitation”
where the prime minister
and government are drawn
from a different party from
the president.
Mr Hollande’s vulnerabil-
ity in the assembly elec-
tions almost certainly lies
in his commitment to hit-
ting budget deficit targets
promised to Brussels. He
does not like to call the
required savings pro-
gramme “austerity”. But
however labelled, tough
decisions on taxes and pub-
lic spending that so many
on the left campaigned
against during the presiden-
tial election will have to be
made.
That is why it is impor-
tant for Mr Hollande to get
an agreement on his growth
proposals as early as at an
informal EU summit at the
end of May.
“He needs something
from his European part-
ners, including Germany,
before the legislative elec-
tions,” says Prof Laidi.
May 20­21
Nato summit in Chicago
End of May
Informal EU summit to
discuss growth and jobs
June 10 & 17
First and second rounds of
French parliamentary
election
End of June
Special report by the Cour
des Comptes, France’s
public spending watchdog,
on the public finances
New wave: French president­elect François Hollande greets supporters in Paris yesterday
AFP
elections. Satisfying both
the expectations of his
party and its leftist allies –
to whom he has promised
an alternative to austerity –
and the demands for
fiscal rectitude from Angela
Merkel, the German chan-
cellor, and the financial
markets, will require con-
siderable political adroit-
ness.
Winning his much trum-
peted demand for a serious
growth pact to go alongside
the European Union’s new
fiscal discipline treaty is
central to Mr Hollande’s
ambitions.
“He needs to obtain an
agreement on the growth
side so he can say to his
constituency that he has
something to justify
taking tough budgetary
measures,” says Zaki Laidi,
a professor at Sciences Po
university.
“That is his message to
Merkel: ‘If you want me to
ratify the treaty, you have
to give me something in
exchange’.”
Laurent Bouvet, professor
of political science at the
University of Versailles-
Saint-Quentin, adds: “If he
loses the battle over real,
concrete growth measures
in Europe, it will be very
difficult for him. All the left
will protest and say we
have given in.”
Mr Hollande’s quest for a
growth
launched after his
inauguration on May 15,
when he will travel to Ber-
lin to see Ms Merkel. The
French president-elect plans
to send a pre-prepared
memo to all France’s EU
partners setting out his
growth plan.
In the meantime, he at
least has the momentum of
his win over Mr Sarkozy to
help him exert authority
over his traditionally frac-
tious party.
There was speculation in
Paris yesterday that his
choice of prime minister
would be Jean-Marc
Ayrault, head of the social-
ist group in the National
Assembly who is a long-
time close associate of Mr
Hollande’s and has the
important asset of being a
German speaker with close
ties to Berlin.
Like the new president,
Mr Ayrault has no ministe-
rial experience. But the
assumption was that Mr
Hollande would choose him
over Martine Aubry, the
party first secretary and
former labour minister. Mr
Hollande defeated Ms
Aubry in the socialist pri-
maries and has had fraught
relations with her.
A looming priority is the
National Assembly election
held over two rounds in
mid-June. Mr Hollande’s
narrower-than-expected win
on Sunday raised some
For more news, comment
and analysis on the French
election,
www.ft.com/france
pact
will
be
Potential prime ministers
Martine
Aubry
Jean­Marc
Ayrault
Manuel
Valls
The
departing
head of the
Socialist
party, who is
also mayor
of the
northern city
of Lille, is
probably the most
experienced candidate for the
prime minister’s job.
Polls suggest that the 61­
year­old daughter of Jacques
Delors, the former European
Commission president, would
also be the most popular.
A tough former social
affairs minister, who oversaw
the introduction of the 35­
hour maximum working
week, she would give the
Hollande presidency a
leftward tilt. But she is also
Mr Hollande’s biggest rival,
having lost out to him in the
race for the Socialist
nomination and critical of his
record as party boss, once
branding him the “soft left”.
The leader
of the
Socialist
group of
deputies in
the National
Assembly is
a close ally
of the
president­elect and the hot
favourite to occupy the Hôtel
de Matignon, the prime
minister’s official residence.
Mr Ayrault, 62, who is also
mayor of the western city of
Nantes, is pragmatic and
rather dour.
An experienced
parliamentarian, he would be
a safe pair of hands steering
government business through
parliament, but like the
president he has no
ministerial experience.
A former teacher of
German, he would be a
welcome interlocutor for
Berlin.
The Spanish­
born mayor
of a tough
town south
of Paris is
the rank
outsider for
prime
minister’s
job. Mr Valls, 49, is firmly on
the right of the party – the
closest a French Socialist
gets to Britain’s New Labour
– and once advocated
changing its name.
He has also pushed for the
party to be tougher on crime
and more hawkish on public
spending.
A former spokesman for
Lionel Jospin when he was
premier, Mr Valls is familiar
with the prime minister’s
office and served Mr
Hollande well as campaign
spokesman. But he lacks
ministerial experience and
would be too right wing for
many in the party.
Ben Hall
Defeat raises question of
future of centre­right UMP
Marine Le Pen said she
would vote for neither can-
didate. Pollsters expected a
60 per cent transfer rate.
The immediate challenge
for the UMP is to hold
together for next month’s
parliamentary elections.
Wasting no time, Jean-
François Copé, UMP leader,
called a meeting of the
party’s leadership at its
Paris headquarters yester-
day to agree on a legislative
campaign strategy.
Mr Sarkozy has said he
will play no part, because
he intends to quit politics.
Alain Juppé, his foreign
minister and a former
prime minister, said yester-
day he would not defend his
parliamentary seat, leaving
Mr Copé and Francois
Fillon as the prime rivals
for control of the party and,
further ahead, its next pres-
idential candidate.
The UMP is expected to
lose its majority in parlia-
ment to the Socialists in the
June elections but wants to
save as many as possible of
its 313 seats in the 577-seat
National Assembly.
The dilemma for the UMP
is how to save seats and
prevent a Socialist triumph
in the assembly without
resorting to deals with
National Front candidates.
Yet pressure to work with
the far-right group comes
from the party’s own sup-
port base, with polls show-
ing 60 per cent of centre-
right voters favour some
kind of alliance.
The National Front
secured 17.9 per cent of the
vote in the first round of
the presidential election – a
record for the anti-euro,
anti-immigration party.
Although it does not hold
a single seat because of its
relatively poor showing in
the 2007 presidential elec-
tions, Ms Le Pen has big
ambitions this time around.
To be elected in the initial
round, a candidate needs to
win 50 per cent of the votes
cast and at least 25 per cent
of the eligible electorate. In
most constituencies, there
will be a run-off between all
candidates who secured the
votes of at least 12.5 per
cent of the electorate.
Ms Le Pen hopes to force
the UMP into cutting deals
whereby the parties’ candi-
dates do not stand against
each other, to block a
Socialist victory.
Mr Copé held the party
line last week in a newspa-
per interview, saying:
“There has never been, and
there will never be, an alli-
ance with the far right.”
He was speaking after
Gérard Longuet, defence
minister, raised the possi-
bility of Ms Le Pen being an
“interlocutor” since there
was “a big difference”
between her and her father.
Already recriminations
have started flying about
Mr Sarkozy’s emphasis on
security, immigration and
protectionism in his elec-
tion campaign, which was
guided by Patrick Buisson,
an adviser with former ties
to the far right.
“A complete failure,” said
David-Xavier Weiss, the
UMP’s national secretary
yesterday. “It’s especially to
Mr Buisson that the right
owes its defeat.”
Political fallout
By Scheherazade
Daneshkhu in Paris
The victory of Socialist
François Hollande in
France’s presidential elec-
tions raises an immediate
question about the future of
the political right in
France, cast out of the
Elysée after 17 years of
power.
Commentators wondering
whether the outgoing presi-
dent Nicolas Sarkozy’s UMP
centre-right party can hold
together, or splinter under
the twin pressures of defeat
and the rise in support for
the far-right National Front.
“It is difficult to see after
this defeat, inflicted in
these conditions, how the
UMP can escape a strong
backlash, even an implo-
sion,” said Paul Bacot, a
professor at Sciences Po in
Lyons, who argues that Mr
Sarkozy’s lurch to the far
right during the campaign
deprived him of “precious
support from the centre and
sealed his defeat”.
François Bayrou, leader
of a centrist party and a
former centre-right minis-
ter, ditched Mr Sarkozy last
week, saying he would vote
Socialist for the first time
and criticising the president
for becoming “obsessed”
with immigration.
Moreover, only 51 per
cent of those who voted for
the National Front in the
first presidential round
transferred their second
round votes to Mr Sarkozy,
after National Front leader
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