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THE FINANCIAL TIMES LTD 2015No: 38,961

Printed in London, Liverpool, Glasgow, Dublin,Frankfurt, Brussels, Milan, Madrid, New York,Chicago, San Francisco, Washington DC, Tokyo,Hong Kong, Singapore, Seoul, Dubai

9 7 7 0 3 0 7 1 7 6 5 3 1

1 4

Two pictures hang on the wall in SajidJavids office: one is a portrait ofMargaret Thatcher, the second is of astreet in Rochdale, where his fathersettled as an immigrant from Pakistan.Together they explain the motivationthat has propelled the son of a busdriver from a childhood in BristolsStapleton Road, once described asBritains worst street, to a seat atDavid Camerons cabinet table.Interview & Export challenge i PAGE 3

Javid from backstreetto business secretary

THURSDAY 17 SEPTEMBER 2015

Briefing

i Facebook atWorkput toworkFacebook is expanding Facebook atWork, its secureoffice-focused product, into hundredsmorecompanies as it tries towin subscription revenuefrom corporate customers. PAGE 17

iPay andprices help households prosperBritishworkers saw their pay increase at its fastestrate in six years, andwith inflation around zero, thewage growth figuresmean households are startingto see strong real income gains. PAGE 2

iCarroll tomake hermining comebackCynthia Carroll is to join VedantaResources, the India-basedminingand oil group, where shewill work onstrategywith TomAlbanese, formerchief executive of Rio Tinto. PAGE 20;LOMBARD, PAGE 24

iCameronplays it cool in CorbynduelDavid Cameronmaintained a sober demeanour inhis first Commons duel with the newLabour leader,as the Tories seek to use JeremyCorbyn to inflictharmon his own party. NEWS & SKETCH, PAGE 2

iNews Corp in114mUnruly offerNews Corp is to pay up to 114m for Londontechnology start-upUnruly, in the biggest UKacquisition byRupertMurdoch since the phone-hacking scandal. PAGE 17

iPrice fall hurts Norways oil capitalThe sometimes fractious relationship betweenStavanger and theNorwegian government has seenfissures openwith the collapse in oil prices havingled to a rise in unemployment in the city. PAGE 10

iHope for emergingmarket currenciesThe view that the bottommay be nearing foremergingmarket currencies is being driven byanticipation of a Fed rate rise, a feeling ofundervaluation and a sense of exhaustion at thescale of the rout. PAGE 32

Global beer consumption

Source: Euromonitor

Litres per capita, 2014

0 20 40 60 80 100

GermanyUSUK

BrazilRussia

MexicoJapanChina

FranceIndia

Indonesia

Datawatch

WORLDBUSINESSNEWSPAPER UK 2.70 Channel Islands 3.00; Republic of Ireland 3.00

Subscribe In print and onlinewww.ft.com/subscribenowTel: 0800 298 4708

JAMES FONTANELLA-KHAN NEW YORKARASH MASSOUDI ANDSCHEHERAZADE DANESHKHU LONDON

Anheuser-Busch InBev, theworlds larg-est brewer, is exploring a takeover ofrival SABMiller in a deal that wouldcreate a $275bn company responsiblefor one out of every three beers pro-ducedglobally.A tie-up between the owner of

Budweiser and Stella Artois and thegroup behind Peroni and Grolsch,dubbedmegabrew,would rankasoneof the six largest takeovers in historyand the biggest in a year that wasalready the strongest for blockbusterdealssince2007.It would mark the latest stage of a

remarkable consolidation in the globalbrewing industry driven by a group ofBrazilian investors led by Jorge PauloLemann. They are the founders of 3GCapital, the Brazilian private equitygroup that has been buying up US foodcompanies such as Heinz, Kraft andBurgerKing sometimeswith the sup-portof investorWarrenBuffett.A series of deals over the past decade

have transformed AB InBev and SAB-Miller into theworlds twobiggestbrew-ers. They, along with Heineken andCarlsberg,makehalf theworldsbeer.Ironically, the industry has consoli-

dated justasconsumertastes inbeerarefragmenting. Big brewers face achallenge from craft beer, popular withmillennial and younger drinkers whoreject what they perceive as the blandofferingsof thebigmultinationals.SABMiller said yesterday that it had

been informed that AB InBev intendedtomakeabidproposal for the companybut it had not received any proposal ordetailsabout its terms.The board of SABMiller will review

and respond as appropriate to any pro-posalwhichmightbemade, it saidaftertheFinancialTimes told the company itintendedtoreport theapproach.Under rules guiding takeovers in the

UK,AB InBevhas until 5pmonOctober14tomakeafirmoffer toSABMiller.

AB InBev confirmed that it hadmadeanapproach,saying its intentionwastowork with SABMillers board toward arecommendedtransaction.Shares in SABMiller shot up 20 per

cent to 36.14 in London, giving it amarket capitalisation of 58.5bn($90.7bn). SABMiller has net debt ofabout7.5bn.ABInBevsharesclosedup6.4 per cent at 100.50, valuing itsequityat161.6bn($182.6bn).AB InBev is being advised by Lazard,

the independent investment bank, and

law firmFreshfields. SABMiller iswork-ing with advisers at Robey Warshaw,JPMorgan Chase, Morgan Stanley andlawyersatLinklaters.Given the size of the two companies,

ABInBevwouldhave toagree todivesti-tures toobtain regulatoryapproval for adeal inmultiple countries, including theUSandChina.SABMiller has a near-30 per cent

share of the US beermarket viaMiller-Coors, its joint venture with MolsonCoors. It also has 23 per cent of Chinas

beer market through a joint venturewith China Resources Enterprise,knownasCRSnow,whileABInBevhasa15percentshareof theChinesemarket.Trevor Stirling, analyst at Bernstein,

said theUSDepartmentof Justicewouldalmost certainly insist on thedisposal ofSABMillers stake in MillerCoors butaddedthatMolsonCoorscouldbeawill-ingpurchaser.Lex page 16News and analysis page 18Lombard page 24

AB InBev eyes SABMiller takeoverto create $275bn megabrewer3Combination wouldmake third of the worlds beers3October 14 deadline for formal offer

Global beer market share by volume (%)Anheuser-BuschInBev

SABMiller

Others69.5

20.89.7

Profits 2015

*estimate Year ending March 31Sources: Bloomberg; Euromonitor

$45.1bn* $13.4bn* Revenues 2015 Profits 2015

$22.1bn $4.8bnRevenues 2015

AB InBev brands SABMiller brands

AB InBev ishoping toworkwithSABMillertowards afriendlytransaction

The last time theFederalReserve raisedits target interest rate, the decision didnot seem such a big deal. It was June 29,2006, US inflationwas running at 4 percent, stock markets had been risingunremarkably for 18 months, andeverybodyknewtherisewascoming.The Feds brief communique, in

which it removed its customary com-mitment to raise again at its nextmeet-ing, was enough to prompt a bigreboundforstockmarkets.This was in the jargon being used

ahead of todays meeting, a dovishhike a rise accompanied by hints itneednotbefollowedbyanother.It is highly unlikely that a rise this

week, after increasingly feverish specu-lation, would be greeted so calmly. Toseewhy, seehow theworldhas changedinthe interveningnineyears.Then, the Feds governors reported,

with fateful understatement, there wasa gradual cooling of the housing mar-ket. That gradual cooling turned into acrash for housing prices that sparkedthedeepest credit crisis in almost a cen-tury, and an unprecedented monetarystimulus in response.Therewereplentyof precedents to guide the Fed then;thereare fewornonenow.US consumer price inflation, double

the2per cent target then,nowstands at0.2 per cent. Unemployment was lowerthen than now. These are the two keytargetsof theFedsofficialmandate,andmakearise farharderto justifynow.The commodity supercycle has

turned since 2006. In the ensuing twoyears oil prices doubled. Then theycrashed. They are now a third lowerthan theywere that June. The pressure,

if anything, is towards deflation. Theeffervescent growth from emergingmarkets isnowlacking.Theyhavegivenup their gains, with investors preoccu-piedbytheriskofaslowdowninChina.A final issue is that bond markets

have changed. Banks near-death expe-rience during the crisis, and the subse-quent imposition of far heavier regula-tion, has left the dealers who drive themarket for bondswith far less capacity,evenas farmoredebthasbeen issued totakeadvantageofpersistent lowerrates.Recent swings inbondyields, for little

apparent reason, emphasise that a dou-bling of rates could create a dispropor-tionate reaction as sellers fail to findwilling buyers. In such circumstances,the fact of a rate rise could overwhelmany reassuring accompanyingmessage.The last rate risewasdovishachiev-ingthesameagainwillbe farharder.Global factors for rate setters page 8Letters page 12Close call on rate rise page 34

US rate rise harder to justify nine years on

JohnAuthers

The Germans arethe heaviestper-capita beerconsumers amonglarge economies.They drink aboutfour times theamount imbibedby the French androughly 50 percent more thanthe British orAmericans

Faith healerCan Pope Francis restore unity tothe US church? BIG READ, PAGE 11

Putins playRussias puzzling foray intoSyria NOTEBOOK, PAGE 12

Unfinished SymphonyBloombergs status as the king of data isunder serious threat JOHN GAPPER, PAGE 13

2 FINANCIAL TIMES Thursday 17 September 2015

NATIONAL

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EMILY CADMAN

British workers are seeing their payincrease at its fastest rate in six years, inthe latest sign that employees areregainingtheirbargainingpower.

Sterling firmed against both the dollarand euro as traders started to bring for-ward expectations of when the Bank ofEngland may raise rates. The bank iswatching the labour market closely forinflationarypressuresbuilding.

John Philpott, director of consultancyThe Jobs Economist, said it was clear thelabour market had changed tack,

reversing a trend of rapid growth inpoorly paid jobs. This provides furtherevidence that the much-neededimprovement in labour productivitymayat lastbeunderway,hesaid.

Average weekly earnings, excludingbonuses, increased by 2.9 per cent in thequarter to April, the most rapid increasesince2009,accordingtoofficial statisticsyesterday. Earnings including bonusesalso rose by 2.9 per cent and private sec-torpayroseevenfaster,by3.7percent.

With inflation around zero, the wagegrowth figures mean households arefinally starting to see strong real incomegains, even if it will take a number ofyears toreturntopre-crisispeaks.

Michael Martins, an economic analystat the Institute of Directors, said that itwashardtofindanegativestory inthe

data, adding: Real pay growth hasbecome entrenched and the rate ofunemploymenthasstabilised.

Hours worked fell by 0.4 per cent inthe three months to July, and with theoverall economy growing at 0.7 per centin the second quarter, this implies levelsof output per worker are rising, makingpayrisesmoresustainable.MartinBeck,a senior economic adviser to the fore-castinggroupEYItemClub, said that thefigures point to a Goldilocks jobs mar-ketnottoohotandnottoocold.

On the implications for interest rates,markets had pushed out their expecta-tionsforthefirstrisetoAugustnextyear,butmostCityeconomistsare forecastingthefirstupwardmoveinthespring.

Inasignthat theUKisstill solidlygen-erating jobs, albeit not at the same rapid

pace as previously, the unemploymentrate remained broadly stable at 5.5 percent. It has been within 0.1 per cent ofthis level for thepast fivemonths.

But the number of unemployed roseby10,000, inareminderthatwhileslow-ing employment growth should helpimprove productivity and maintainwage growth, it will make things harderfor those entering the jobs market, par-ticularly at the bottom end. While

recruiters have been reporting formonths that at the skilled end of themarket companies have been strugglingto fill posts, the BoEs latest report, alsoout yesterday, said that lower skilledroleswerestillrelativelyeasytofill.

The big unknown is what the newhigher minimum wage for over-25s inApril will do to the hiring plans of corpo-rates in the retail and hospitality sec-tors, which employ a high proportion oflower-skilledworkers.

In the public sector, the headcount fellto its lowestsincethedataseriesbeganin1999. With the government committedto capping public sector pay, MatthewWhittaker, chief economist of the Reso-lution Foundation, warned pay growthwouldbecomeincreasinglyunequal.Editorial Comment page 12

GEORGE PARKER AND JIM PICKARD

David Camerons first Commons duelwith Jeremy Corbyn was a revealingindication of the tactical respect andcourtesy the prime minister intends todeploy against his new opponent fornowat least.

Mr Camerons allies said the primeminister intended to play the ball, notthe man, focusing on the securitythreatposedbyMrCorbynspoliciesonthe economy and defence, not personalattacks.

On the face of it, Mr Cameronsrestraint at prime ministers questionswas surprising. After all, Mr Corbyn hadspent the previous 24 hours fighting offcriticism of his failure to sing thenational anthem at a Battle of Britaincommemoration.

After a day of criticism from themedia, the armed forces and someLabour figures, Mr Corbyn said he

would take part fully in such events infuture. Aides explained that meant hewouldsingtheanthem.

Meanwhile, Mr Corbyns struggle tomaintain shadow cabinet unity onissues including a welfare cap andEurope continued. He tried to end daysof confusion on the latter by sayingLabour would not campaign for aBrexit under his leadership. No, Idont seethatposition,hetoldtheBBC.

Mr Camerons sober demeanour andthe subdued behaviour of ConservativeMPs does not therefore reflect a lack ofpolitical opportunity; rather, it is thepublic face of a Tory strategy to useMrCorbynto inflictharmonLabour.

The first element is to treat Mr Cor-byn with respect, an acknowledgmentthat the Labour leader is a product of aprofound anti-politics mood in the

country, disdainful of spin and boorishbehaviour intheHouseofCommons.

We dont want him to be seen as thevictim of bullying, said one Tory minis-ter, reflecting advice to Mr Cameron toavoidanyFlashman-styleattacks.

Mr Corbyns courteous style andrefusal to engage in personality politicsmakes him a difficult target in the Com-mons; thepublicmightrespondbadlytohim becoming a target for ridicule ormockery.

Instead, Mr Cameron and GeorgeOsborne are planning to attack theLabour leaders policies, with a focus onthethreat theysayheposes to thesecu-rity of Britain and the economic well-beingof families.

Their strategy is to argue that Mr Cor-byn is not some eccentric aberration tobeattackedasanindividual; rather, that

his overwhelming mandate as leaderproves he now represents mainstreamLabourthinking.

Mr Osborne is particularly deter-mined to make sure that Mr Corbynsfailings damage the entire Labourbrand.

It particularly irks George that whenJohn Majors government fell, it dam-aged the whole Tory party brand, saysoneallyof thechancellor.

That didnt happen in the case ofGordon Brown or Ed Miliband. Theywere viewed as failures by the voters or people thought that Labour wastired and needed a break from power but they didnt tarnish the Labourbrand.

According to Mr Osbornes theory, thelonger Mr Corbyn remains in place, themore damage he will do to Labour. Try-

ing to take out the Labour leader nowwouldbecounter-productive.

Conservative MPs have beeninstructed not to gloat at Labourspredicament and ministers aredeployed to intone gravely that Mr Cor-byn is a credible future prime minister.But, as one senior Tory MP admittedthis week: Thats not what theyre say-ing inprivate.

Mr Corbyns solid performance atprime ministers question time settledsome Labour nerves after a chaotic72 hours of policy divisions, mediamishaps and allegations of a lack ofpatriotism.

Yet, some four days after his appoint-ment, Mr Corbyn was still trying tofinalise his ministerial team. How canwe sign up when we dont know whatourpolicy is?askedoneLabourMP.

Pay levels

Earnings growat fastest rate for six yearsTraders start to bringforward expectations ofwhen BoEmay raise rates

Prime ministers questions. Corbyn debut

Cameron shows respect inploy tokill LabourbrandPremier shuns personal

attacks to focus on policies

backed by leftwing leader

Fresh approach:Jeremy Corbyn,Labour leader,in the Commonsyesterday saidprime ministersquestions hadbecome tootheatricalAFP/Getty

SAM JONES AND PEGGY HOLLINGER

Britains soldiers must become sales-men for UK arms abroad, according toplans drawn up by the Ministry ofDefence to promote exports and help keepthedefence industryafloat.

The armed forces will take the lead onthe governments efforts to sellTyphoon fighter jets and complexmunitions such as advanced missiles toforeign buyers, defence secretaryMichaelFallonannouncedyesterday.

Whats good for our economy is goodforournational security,MrFallontoldattendees at the Defence and SecurityEquipment International exhibition inLondon one of the worlds largestarmsfairs.

The idea of salesmen-soldiers hasbeen floated by British defence manda-rins before largely as part of efforts tocarve out new responsibilities and for-eign engagement roles for officers at atime of fewer military deploymentsabroad and reduced operationaldemandsontheforces.

The concept has until now been metwith stiff resistance from elsewhere ingovernment and in the military itself,however. Foreign Office officials aresceptical as to the diplomatic savvy oftheir military counterparts while oth-ers in government worry over theimplications when it comes to sensitivecommercial contracts and possible con-flictsof interest.

A lot of military officers are also hos-tile to the idea that they should be sales-men for British industry, said James deWaal, senior fellow at the think-tankChathamHouse.

They think of it as a distraction fromwhat they should be doing. From a pol-icy point of view it could also end up dis-torting the priorities of the govern-ments international relationships, Mrde Waal added. The interests of indus-try is in industry. Those are not neces-sarily the same as the interests ofdefence,politicsornationalsecurity.

At the moment, British arms exportsare championed by UK Trade andInvestment, a government body whichhas a number of military and MoD offi-cials embedded within it. Business sec-retary Sajid Javid plans to overhaul theorganisation, which has a patchy recordin promoting sales. Many in govern-ment lament its engagement comparedwith that of rivals that have significantarmsexports, suchasFrance.

The participation of British armedforces in training missions with foreignbuyers of British weaponry has somesupportwithintheforces.

Its a unique calling card, said onesenior army officer. Often the idea oftraining with British forces using somenew piece of kit is as much of a salespointas thekit itself.

One particular country of focus forBritish officers as part of the new dealwill probably be Saudi Arabia: there arestill hopes that the kingdom will put in afurtherorder forTyphoons.

Unquestionably this is a positivestep, said Paul Everitt, chief executiveof ADS, the UK defence industry tradegroup.

The key question for the future,though, Mr Everitt said, would bewhether the government took a simi-larly proactive approach on solely UKdefence projects, as opposed to interna-tionalcollaborations likeTyphoon.

Arms industry

Soldiersmusttake lead inoverseas salesofweapons

We dont want [Corbyn]to be seen as the victimof bullying, one Toryminister said

More on ft.comFT politicaleditor GeorgeParker, Businessfor Britain chiefMatthew Elliottand Labour MPGraham Allentalk to DanielGarrahan aboutwhether a Brexitismore likely nowJeremy Corbyn isLabour leader

ft.com/video

T his was not prime ministersquestions. This was Maries,Stephens, Pauls, Claires,GailsandAngelasquestions.But before Jeremy Corbyn

put to David Cameron six of the 40,000queries emailed to him by members ofthepublic,he lookedaroundatapackedchamber giddy with curiosity. TheLabour leader seemed curious, too. Hisface wore a look of bemusement, as if hehadonly justbeenremindedthathehadentered a competition that he hadendedupwinning.

At the dispatch box, however, Mr Cor-byn was calm, thanking those who hadvoted for him in an enormous demo-cratic exercise. He said that many peo-ple had told him that they thought thatPMQs was too theatrical, before begin-ning his own understated display ofpolitical theatre.

Critical to Mr Corbyns victory is thathe allowed Labour members and sup-porters to project on to the leader theirown political identities. Labour sup-porters were voting for themselves asmuchastheywerevotingfor theman.

They are the we that the Labourleader refers to in his speeches. They arealso the reason why Mr Corbynannounced that he would do PMQs in aslightly different way. With all thegenuine regret of a man who enjoysfour-hour meetings about communityallotments, he admitted that there isnt

time to ask 40,000 questions today buthedidselecthalfadozen.

Marie, via the hirsute medium of MrCorbyn, asked the prime minister whathe intended to do about a chronic lackof affordable housing and the extortion-aterentschargedbysomeprivatesectorlandlords in this country? Stephen alsoinquired about housing. Paul and Claireprobed Mr Cameron on his cuts to taxcredits. Gail and Angela, present inspirit if not in person, asked what theprime minister was doing to improvemental health. All of these are impor-

tant questions on important issues.Unfortunately for those expecting MrCameron to be lulled into error by per-sistentsombreness, it ispartof the jobofprime minister to have answers toimportant questions on importantissues. He rattled off all of the ways hisgovernment was not in fact evil and wasdoing lotsofnicethings.

And being the professional politicianthat he is, Mr Cameron of course madesure he played along. Let me answerMaries question, he said. Later: What

I would say to Stephen is . . . Mr Cor-byns shortcoming was that while Marie,Stephen, Paul, Claire, Gail and Angelaare presumably lovely people, they arenot particularly good at asking ques-tionsthatwillholdtheprimeminister toaccount. Perhaps they will be content toreceive answers that could have beenread from a departmental press release,but, in time, Labour supporters maywant to see Mr Cameron being seriouslytestedbyrigorous,detailedqueries.

But that time is not now. Those whosupported Mr Corbyn took part in amass exercise in what political scientistscall expressive voting, or the politicalequivalent of the selfie. By voting forhim they reclaimed their political ego, amore important result than any thatmightoccur inageneralelection.

At PMQs yesterday, the Labour leadercontinued to use himself as a means tothat end. Mr Corbyns approach was idi-osyncratic but it was as much a displayof gesture politics as anything that heandhis loyalistshaveslammed.

The question for Mr Corbyn is that hemay speak for six or even 40,000 peopleat PMQs, but will he be willing and ableto speak to those outside the we? TheLabour leaderwonbecausemanyontheleft feel that Labour has becomeunrootedfromitsnaturalplace inpoliti-cal life. Unfortunately for those in theLabour party who seek power, that nat-uralplace isopposition.

Veteran bringsnew kind ofgesture politics

Cameron rattled off alltheways his governmentwas not in fact evil andwasdoing lots of nice things

SketchJohnMcDermott

The figures point toaGoldilocks jobsmarket not too hotand not too cold

30 global locations www.efginternational.com

EFGslogan - 112x50mm - Generic ad - Q - Publication : Financial Times advert 2014 (20.08.2014)

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SEPTEMBER 17 2015 Section:World Time: 17/9/2015 - 00:00 User: quinnt Page Name: UKNEWS1-LON-03, Part,Page,Edition: LON, 2, 3

Thursday 17 September 2015 FINANCIAL TIMES 3

NATIONAL

FERDINANDO GIUGLIANOECONOMICS CORRESPONDENT

Now that the Bank of Englands powersextend well beyond interest rates toareas such as bank supervision, the gov-ernment is grappling with a tricky ques-tion: who will guard Britains monetaryguardians?

The latest answer is in the Bank ofEngland bill, which the Treasury is con-sulting on. It is expected to reach parlia-ment in the autumn. In its present form,the law would allow the National AuditOffice to conduct value-for-moneystudiesonpartof thebanksoperations.

Britains state auditors oversee allareas of government, including the Pru-dential Regulation Authority, which willbe folded into the bank as part of thesame bill. But never in its history has theNAO been allowed through the doors ofThreadneedleStreet.

The reason is the banks much-cov-eted independence, widely seen as vitalfor competent economic management.While the Treasurys consultation docu-ment explicitly mentions an exemptionfrom auditors supervision for thebanks policy decisions, BoE officialshave expressed fears that the bill couldstill leadtoexcessive interference.

In a parliamentary hearing last week,Anthony Habgood, chairman of the BoECourt of Directors, said that unless the

exemptionwassufficientlywide, thebillposedapotential threat to thecarefullyconstructed independence of the policyfunctionsof thebank.

Central bank-watchers say the con-troversy reflects a tension between theindependence of technocratic institu-tions, such as central banks, and theiraccountability to the public. Independ-ent central banks need to be accounta-ble in a democratic system, said RosaLastra, professor of international finan-cial and monetary law at Queen MaryUniversity in London. Such accounta-bility should be diversified, encompass-ing parliamentary accountability, judi-cial reviewandauditcontrol.

Bank officials are subject to severallayers of accountability. The first is thecourt, which acts as a unitary board ofdirectors and oversees the banks corpo-rate strategy, taking the most importantdecisions on appointments and resourc-ing. The bank is also accountable to par-liament, with the Treasury committeeholding regular hearings, including withnewly appointed members of the Mone-taryPolicyCommittee.

Most importantly, the chancellorappoints the governor and sets the man-date the MPC has to meet on a yearlybasis currently a 2 per cent inflationtarget. The governor has to write a letterof explanation whenever the rate devi-

ates by more than 1 percentage pointfromthisobjective.

The Treasury also holds a reservepower to give the bank orders on mone-tary policy in the case of extreme eco-nomic circumstances, but these ordershave to be backed by a parliamentaryvotewithin28days.

The Bank of England is a well-designed central bank because its remitis set by the government, said GrgoryClaeys, a research fellow at Bruegel, athink-tank. The BoE is not independ-ent of government, but independentwithinthegovernment.

The case for central bank accountabil-ity has become more pressing after thefinancial crisis, when global monetaryinstitutions unleashed extraordinarymeasures, such as large-scale asset pur-chases, which took them beyond tradi-tional policy boundaries. Some centralbanks, including the BoE and the Euro-pean Central Bank, have also enteredmore directly the area of supervision,leaving in some cases what experts havedubbedanauditdeficit.

A key point is what exactly auditorsare allowed to scrutinise. According tothe Treasury consultation, the NAO willnotbeabletoconductafinancialauditofthe bank; that will continue to be thepreserve of a large accountancy firm.Experts believe it is vital that policy iskept separate from auditing just as theTreasuryisproposing.

While in principle it may be reasona-ble for the NAO to question whether acertain area of the bank is overstaffed,this could be seen as interfering with thejudgmentofrate-settersorsupervisors.

DANIEL THOMAS, ROBERT COOKSONAND HELEN WARRELL

Britains largest internet providers andUS technology groups are being con-sulted as the Home Office seeks sup-port for surveillance legislation thathas beendubbeda snoopers charterbycritics.

The proposals, to be set out in the com-munications data bill, are intended tohelp police and security services com-bat terror threats and serious crime bycompelling companies to collect andretain information about internet users.

Attempts by Theresa May, home sec-retary, to introduce this legislation inthe last parliament collapsed due to Lib-eral Democrat concerns about civil lib-erties infringements and unresolvedquestionsaboutsafeguards.

However, Ms May is determined torevive the plans and on Tuesday sum-moned companies including BT, Voda-fone,VirginMedia,EEandTalkTalktoameeting ahead of the new draft legisla-tionbeingpublishedlater thisautumn.

Technology groups including Googlehavebeencalled intoaseparatemeetingtoday, and civil liberties campaignersarealsobeingconsulted.

One source familiar with the discus-sions said the government was tryingto prevent the sort of fiasco last timearound, when the bill was attempted toberushedthrough.

The person added: Theresa May hasa very narrow window to do it. Theywant to put a bill in front of the house in

October that is workable in its firstdraft.

During Tuesdays meeting, the com-panies were asked their views on how tomake the bill work in practice. It isexpected to require internet groups andtelecoms companies to record and holddetails of internet history, voice calls,andmessagingservices for12months.

Whilecivil libertiescampaignershavewarned this legislation would infringecitizens privacy, the companies beingrequired to gather and store data havewarnedaboutpracticaldifficulties.

Executives at telecoms groups

expressed worries about the cost of stor-ing such large amounts of data, as wellas the impact on customer trust giventhe extent of the information they hold.Discussion also raised questions aboutcivil liberties,andexecutives flaggedtheneedforstrong judicialoversight.

One person close to the talks saidservice providers were ready to agree tothe proposals in principle, but raisedquestions about the timeframe, costsand compliance. There are larger ques-tions about whether it will be possiblefor technology groups such as Google,FacebookandWhatsApptocomply.

ELIZABETH RIGBY AND GEORGE PARKER

Sajid Javid is tooverhaulBritains tradearminanattempttoenergise thecoun-trys export drive, amid claims of poormorale and unstable leadership at UKTradeandInvestment.

The business secretary admitted theexport market remained a challengeand said he was taking a fresh look atUKTI, whose staff were invited yester-day to apply for a voluntary exitscheme.

Mr Javid, who is also leading the gov-ernments new export task force, is sig-nificantly redistributing the work ofUKTI as sectoral exports are reassignedto individualgovernmentdepartments.

The government wants to whittleback the 450 staff in London and insid-ers admitted morale in the body wasvery poor, exacerbated by a lack ofstable leadershipforanumberofyears.

Dominic Jermey abruptly quit as chiefexecutive last month after less than twoyears in the post. He was replaced byCatherine Raines, the director-generalfor UKTI in China, who has a back-groundinthepharmaceutical sector.

Francis Maude, the trade minister, is

looking to bring more private sectorexpertise totheorganisation.

The restructuring comes amid warn-ings that the pledge by ChancellorGeorge Osborne to double annualexports to 1tn by 2020 is off track. TheBritish Chambers of Commerce esti-mates thatmilestonewillnotbehituntil2034atcurrentgrowthrates.

The general goal is how do you makeit more efficient? How can you make itmoretargeted?MrJavidsaid.

Why is it that in some countries theirSMEsector, ifyoutakeItaly,France,Ger-many, export a lot more than the BritishSME sector? Thats a particular chal-lengeforus.

I cant tell you what [UKTI] is goingto look likeat theend,but itwillbemorefocusedandmoreefficient.

Mr Javid, who is joining a trade mis-sion to China next week with MrOsborne, saidhewantedall governmentdepartments to play a bigger role in pro-motingtrade.

That might mean aligning UKTI peo-ple fromvarioussectorsmorewithotherdepartments, he said. If thats what weneedtodo,thatswhatwewilldo.

Mr Javid said that Mr Maude was theperfect man to overhaul the organisa-tion because of his background in bothbusinessandthepublicsector.

Bank of England. Independence fear

State auditors eye supervisory role onThreadneedle Street

Ascentral bankpowers expand,

theTreasury is consultingon

whowill guard the guardians

Data bill revival

Mayseeks surveillance lawbacking from internet groups

Departmental shake-up

Trade armfaces overhaulin attempt totackle exportschallenge

ELIZABETH RIGBY AND GEORGE PARKER

Two pictures hang on the wall in SajidJavids office: one is a portrait of hispolitical heroine, Margaret Thatcher,the second is of an old street scene ofRochdale, where his father first settledasanimmigrant fromPakistan.

Together they explain the motivationthat has propelled the 45 year-old son ofabusdriver fromachildhoodinBristolsStapleton Road, once described as Brit-ainsworststreet, toaseatatDavidCam-erons cabinet table as business secre-tary.

Rochdale is a reminder of his fatherAbduls modest beginnings when hecame to Britain in 1961 with 1 in hispocket, earning the nickname MrNightandDaybecauseofhisworkrate.As for Thatcher, it was her privatisationprogramme of the 1980s that gave theformer banker his appetite for capital-ism, borrowing money from his fathersbankmanagertobuyshares.

A deregulatory Conservative who is apassionate believer in free enterprise,this self-made millionaire at first glancelooked like a far more likely bedfellowfor big business than Vince Cable, whobegan his tenure as business secretarywith an attack on City spivs and gam-blersandcorporateexcess.

But in reality it has been a less com-fortable partnership. Already big busi-

ness and Mr Javid have traded blowsover the impending EU referendumwhile decisions to introduce a new9-an-hour national minimum wageand apprenticeship levy have alarmedmanyintheprivatesector.

Sitting on a deep brown sofa in hisoffice, Mr Javid pits himself as adefender of business against those in hisgovernment who argue that many com-panies have not done enough to raiseproductivityandwages.

Two million jobs created, a growthrate today which is the highest of anymajor advanced country. This has hap-pened not just because of a governmentthat understands what it needs to do tostabilise the economy, but because busi-ness has actually taken on the chal-lenge.

But he has very different ideas fromhis predecessor about how to supportbusiness. While Mr Cable was instinc-tively interventionist, Mr Javid is ideo-logicallyasmall-stateThatcherite.

On deregulation, Mr Javid is an enthu-siastic exponent of the coalition govern-ments efforts to reduce red tape: he has

putcuttinga further10bnofregulationat the heart of his enterprise bill andplans to extend deregulation targets toregulators.

He is far more circumspect when itcomes to Mr Cables expansive indus-trial strategy, the cornerstone of theformerLiberalDemocratministers ten-ure, to champion key sectors such as themotorandaerospace industries.

I dont particularly like the wordstrategy coupled with industrial, heexplains.I thoughtitcreatedanimpres-sion that there are certain sectors thatthe government wants to do well andother sectors it couldnt care about, andof course thats not the case . . . inter-nallyIuseindustrialapproach,headds.

Business figures are confident thebusiness secretary is in a better placeover industrialpolicy,butonEuropetherelationshipremainsstrained.

Business is unsure where Mr Javidsits in the debate after he pointedlyrebuked the CBI employers organisa-tion this year for its slavish enthusiasmfortheEU.

Mr Javid is unrepentant: My key

message was to say if you agree with methat we should have reform and youwant to stay in a reformed EuropeanUnion, then one way to help us in thatprocess is to focus on the reforms andhow you can bring those about, notmove forward to the referendum andwhichwayyoumightvote.

But while Mr Cameron and GeorgeOsborne, the chancellor, are expected tocampaign to stay in the EU, the businesssecretary pointedly refuses to be drawnonwhichwayhemightgo.

The camp Im in is working for thesereforms and putting them to the Britishpeople and letting them decide, MrJavidsays.

Well work hard for these reformsand hope that they bring about thechanges that we want, but ultimatelynothing isoff thetable.

What Mr Javid is clear about is thatthe relationship between his depart-ment and the wider business commu-nity will have to change in the next fiveyears as he models for cuts of 25 per centand 40 per cent in his 18bn budgetahead of Novembers spending review.

We are absolutely committed tomaking sure the governments booksare balanced, says Mr Javid, who has inhis sights further education funding andarms length partner bodies such asresearch councils, the insolvency serv-iceandUKTrade&Investment.

After the absolute right decision tosay were going to protect defencespending, my department became thelargest unprotected department. So ofcourse being in that position I have tolooktomakesavings.

I have to look at making tough deci-sions. I dont relish that in any way, hesays.

Business secretary after only fiveyears in parliament and a key ally of MrOsborne, Mr Javid is viewed by some asthe next chancellor-in-waiting shouldMr Osborne succeed Mr Cameron asprime minister and party leader aheadof the2020election.

From Stapleton Road to No 11, wouldhe like that job? Its not up to me, saysMrJavid.Imreallyhappydoingthe jobImdoing.Thatllbeadecisionforsome-oneelse.

Small-stateThatcherite Javidpledgestomakederegulationhis businessCables successor shies away from interventionandhas rocky relationshipwith employers lobby

Sajid Javid:I dontparticularlylike the wordstrategy coupledwith industrialAnna Gordon

The camp Im in isworking for these reformsand putting them to theBritish people

I cant saywhat [UKTI] isgoing to look like at theend, but it will bemorefocused andmore efficient

Instinctivelyinterventionist:Javidspredecessor,Vince Cable

Mark Carney has defended theoperational independence of the Bankof England, following the appointmentof a Labour shadow chancellor whoadvocates ending its autonomy.The BoE governor told the

Commons Treasury select committeethe UK had the right model.His comments come after John

McDonnell was appointed shadowchancellor by Jeremy Corbyn. MrMcDonnell would like to end the BoEsindependence, granted in 1997.The construct here, with a central

bank that has operationalindependence to achieve a mandate

that is defined by parliament, is theright model, Mr Carney told MPs.The governor acknowledged that

the Bank of England Act allowed thechancellor to instruct the BoE toundertake certain monetary policyoperations. But he said this was onlypossible under extreme economiccircumstances and did not happeneven during the financial crisis.Mr Carney also opposed the idea

that the BoE should adopt a moreaggressive approach to quantitativeeasing. It bought corporate bonds inthe early stage of the crisis, but hassince taken a more orthodox stance,only purchasing gilts. Mr Corbyn hasmade the case for Peoples QE:printing money for a nationalinvestment bank to fund capitalprojects. Ferdinando Giugliano

Labour appointmentCarney defendsBoEs autonomy

One person close to thetalks said providerswereready to agree to theproposals in principle

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4 FINANCIAL TIMES Thursday 17 September 2015

The finding puts into context a bitterHouse of Commons debate over thepurdahrules thatwill stopthegovern-ment campaigning on Brexit in theimmediaterun-uptoareferendum.

If theUKstays intheEU, justaquarterof FSB respondents want the terms ofmembership to remain unchanged,while more than a third want powerstransferredbacktotheUK.

As in the countdown to the referen-dum on Scottish independence lastautumn, the boundaries between pri-vate and professional views wereblurred. Verve Partners, which under-took the research on behalf of the FSB,said that factors influencing small com-pany owners voting decisions were notexclusivelybusinessrelated.

For many, the business and the per-sonal viewpoint are hard in practice toseparate, it said.

than a fifth think remaining insidewould be worse. More than a third ofmembers believe either staying or goingwillhavenoeffectontheirbusiness.

Mr Cherry says that a consistenttheme of the research was a lack ofunderstanding among small business ofthe costs and benefits of membershipand a demand for better and more unbi-ased information. Everybody has a col-lective responsibility to ensure that a lotof the hype around remaining in or leav-ing issiftedthrough,hesays.

Fewer than half the FSB memberssurveyed said they felt informed aboutthe referendum from the point of viewof their business, and many expressed adesire formoreneutral information.

Nearly three-quarters said televisionandradiohelpedinformtheirview,withonly a third saying the government pro-videduseful information.

SARAH GORDON BUSINESS EDITOR

I think the word I would use about it istrepidation, says Eric Simpson, whoruns a small business just outside Leedsproviding new and recycled furniture toofficesandcharities.

Theit inquestion is the loomingref-erendum on Britains membership ofthe EU, and Mr Simpsons trepidation isnot unusual. Research commissionedby the Federation of Small Businesseshas found deep divisions among theUKssmallercompaniesabout thecoun-trys place in Europe, as well as concernsabout the lack of impartial informationonthesubject.

The fundamental point is [that]what the EU is about for your business,[and] the wider economy, isnt there.That information needs to be provided,saysMikeCherry,FSBpolicydirector.

Findings from 6,300 of the FSBsmembers nationwide in June and Julysuggest that while 47 per cent wouldvote for the UK to remain a member ofthe EU, 41 per cent would vote No, andnearly11percentareundecided.

If the undecideds all voted one way,and the results were replicated acrossthe electorate, this would be enough toswingtheoutcome.

The survey is published as businessslowly comes to terms with a Conserva-

tive government that has, so far, seemedkeener on shifting costs to the privatesector than in cosseting its support basethere.

FSB members opinion is split in otherways as well. Women were more likelyto vote for continued membership, aswere exporters to or importers from theEU, those who employ non-UK EUnationals or were based in Scotland,London or Northern Ireland. Theresearch also found, if voting today,small businesses in three regions wouldchoose to leave the EU: the West Mid-lands, the East Midlands and Yorkshireand the Humber. In all regions, unde-cided voters would be able to swing theresult ineitherdirection.

While more than 40 per cent of mem-bers expect that withdrawing from theEU would have a very or somewhatdamaging effect on their business, more

NATIONAL

HELEN WARRELLPUBLIC POLICY CORRESPONDENT

Universities are to face a new legal dutyto stop students being radicalised and totackle gender segregation on campuses,under a government drive to make aca-demic institutions responsible for pro-tecting impressionable young mindsfromthelureofextremism.

The announcement comes as DavidCameron is preparing to chair a meeting

of his extremism task force, set up twoyears ago to combat the threat of radi-calisation after the murder of FusilierLee Rigby by two Islamist terrorists insouth-eastLondon.

All public institutions have a role toplay in rooting out and challengingextremism, the prime minister saidahead of todays summit. It is not aboutoppressing free speech or stifling aca-demic freedom, it is about making surethat radical views and ideas are notgiventheoxygentheyneedtoflourish.

Schools, universities and colleges,more than anywhere else, have a duty toprotect impressionable minds andensure that our young are given every

opportunity to reach their potential.The measures, which are to come into

force this month, will require universi-ties to vet speakers and ensure thatthose espousing extremist views arecountered by an alternative argumentput forwardat thesameevent.

Higher education bodies will alsoneed to train staff to identify and sup-port youngsters at risk of radicalisation.Any institutions resisting will be com-pelledtocomplybyacourtorder.

At least 70 events featuring so-calledhate speakers were held on universitycampuses last year, according to thegovernments Extremism Analysis Unit.Downing Street said that most of these

occurred at four London institutions:Queen Mary University, Kings College,the School of Oriental and African Stud-ies, and Kingston University. Eventsincludedthehostingof sixspeakerswhoare on record as expressing views con-trarytoBritishvalues.

Earlier this summer, ministers intro-

duced wide-ranging powers to ensurethat public bodies including councils,prisons, health trusts and schools wereplacedunderastatutorydutytopreventpeoplebeingdrawnintoterrorism.

However, under the coalition TheresaMay, home secretary, was forced toabandon proposals that would haveforced universities to ban extremistsfrom speaking on campuses, after theLiberal Democrats raised fears that thiswould impedefreedomofspeech.

Concerns over the radicalisation ofstudents at school and university havegrown as increasing numbers of young-sters from Britain have joined terroristsin Syria and Iraq. Some reports have

also suggested that MohammedEmwazi, the suspected Islamist mur-derer known as Jihadi John, mayhave been radicalised while studying inLondon.

Responding to the prime minister,Nicola Dandridge, chief executive ofUniversities UK, said that higher educa-tion institutions had an important roleto play in both preventing violentextremismandpromotingfreespeech.

Universities have strong partner-ships with the police and security serv-ices and have engaged with the govern-ments Prevent strategy for a number ofyears, Ms Dandridge said. This newduty isacontinuationof thatwork.

Higher education

Universities face legal duty to counter radicalisationPrimeminister in drive tocompel institutions to vethate speakers on campus

Brexit. Referendum

Small companies dividedoverBritains place inEuropeOf 6,300 groups quizzed, 47%

say theywill vote to stay in

the EU, while 41%want to quit

Everybody has a collectiveresponsibility to ensurethat a lot of the hype . . .is sifted through

JOSEPHINE CUMBOPENSIONS CORRESPONDENT

The Treasury is relinquishing its roleoverseeing the government-backedPension Wise guidance service, as itsminister facesscrutinyovertake-up.

Giving evidence to an MP probe yester-day, Harriett Baldwin, economic secre-tary to the Treasury, said that responsi-bility for the service would transfer tothe Department of Work and Pensionsthis financialyear.

Pension Wise was launched in April tooffer free guidance to over-55s as theywere given freedom to spend theirdefined contribution pension savings asthey wished. But its launch has beendogged by concerns that not enoughpeoplewerebookingappointments.

Ms Baldwin told the pensions com-mittee that supervision of Pension Wise

was shifting to the DWP as the servicemovedintoasteadystate.

The government established Pen-sion Wise to ensure that people who areable to access their pension flexiblyhave the information and guidance theyneed to make considered decisions, shesaid.The launchof theservicehasbeena success, with over 90 per cent of cus-tomers who completed the exit surveyreporting that they are satisfied or verysatisfiedfollowinganappointment.

In line with the committees previousrecommendation, Pension Wise will betransferredfromtheTreasurytoDWP.

The news came as the ministerdefended the Treasurys delivery of theservice, which has seen only 20,000people take up appointments sinceApril. This was in contrast with evi-dence given to the committee by theFinancial Conduct Authority, that more

than 200,000, or 70,000 a month, hadtaken up pension reforms since April,with120,000saversaccessingcash.

Ms Baldwin disputed a suggestionfrom the committee that only a smallnumber had used Pension Wise, sayingthe website, which provides informa-tion but not guidance, had received1.5m visits since April. The FCA said itwould do more work on charges in thedrawdown market, which has seenrapid grown since the reforms, andtakeactionwherenecessary.

The comment from David Geale,directorofpolicywiththeFCA, followeda question from the committee aboutcomplex charging structures for draw-down products. Our rules require firmsto set out clearly charges, so thereshouldnt be any surprises for consum-ers, said Mr Geale. Clearly, some firmsdothatbetter thanothers.

Website advice

Treasury loses role inpensionsguide service

There are 56 words in the LordsPrayer, 297 in the Ten Commandmentsand 1,300 words in the AmericanDeclaration of Independence. And fromBrussels, there are 27,000 words in adirective on duck eggs.The words are those of the late

industrialist Lord Hanson, butbusinessman Eric Simpson thinks theyare as relevant now as when he heardthem 30 years ago.Any entrepreneur [prays] that the

government, any government, will stayaway from your business, says MrSimpson, who runs an office furniturerecycling business just outside Leeds.He bemoans how top-heavy the EU

has become and the heavy hammer ofpaperwork for companies such as his.Hills Office Furniture employs 22, andMr Simpson says he simply does not

have the facilities to comply with all theEU form-filling.We just get lots and lots of directives

asking us to provide this, and providethat. And if we dont fill the forms in, weget fined.Mr Simpson says that, if Britain left

the EU, he would like to see the countryfollow the example of Switzerland,which is doing a fantastic job.But, like many other small business

owners, he says he can see thearguments for both sides on EUmembership and believes that, whilestaying may not benefit companies likehis, it would be better for the country asa whole.We should stay because its better to

be a team rather than an individual; itsbetter to party with your neighbours.Sarah Gordon

Owner ofofficefurniturecompanylamentsmyriaddirectives

Were going at it at half-cock, notknowing what the true facts are, saysRichard Higginbottom. We need tohave some form of impartial advice.Mr Higginbottom says his business

as a fuel merchant and road haulagecompany near Northampton would notbe affected one way or another ifBritain left the EU, but the future stateof the economy would.He does not feel he is getting

information he needs about thepotential costs and benefits of a Brexitbefore deciding what to vote.Its so easy to make a knee-jerk

reaction to this whole thing,particularly with what is going on withmigration, but thats the wrong way tomake a decision, he says. We all knowthe anecdotes about the EU, about thestraight bananas, but thats not theright way to make a decision.Even in the absence of more

information, though, Mr Higginbottomsays there is no doubt that the EUneeds drastic revision.His company employs three people

and he says the implementation andmonitoring of the working-timedirective generates an unbelievableamount of work for him.The governments perceived gold

plating of regulations is similarlyburdensome. The EU gets the blamefor it when to a certain extent our owngovernment is to blame, he says. Butwere lumbered with unwieldybureaucratic taxation. Sarah Gordon

Haulage chief bemoanslack of information

Casestudy

Casestudy

What helps inform your view on the EU?% of UK FSB respondents

Source: survey of 6,263 Federation of Small Business members, Jun-Jul 2015

Press/printed media

Digital media

Government

Business groups

Family/friends

Work colleagues/peers

Social media

Other

Not interested in EU

0 10 20 30 40 50 60 70TV, radio

London

North-East

South-East

Eastern

South-West

North-West

West MidlandsYorkshire &the Humber

East Midlands

34.3 55.4

38.3 51.3

41.3 47.6

42.6 47.2

42.0 45.9

42.3 44.7

47.0 41.3

47.8 40.1

48.7 37.8

No Undecided

Small businesses in the regionsbelow would vote to leave the EU

Yes (stay in)

* Excluding those not planning to vote/not eligible/rather not say * Excluding those responding dont know

England dividedHow would you vote in an EU referendum today?* (%)

The UKeconomy

Mybusiness

Me as anindividual

21.4 13.0 17.6 32.9

29 11.6 14.0 20.9

31.2 12.0 15.5 23.3

The UKs membership ofthe EU is beneficial for*Per cent

AgreeDisagree Neither

11.3

22.1

15.6

Schools, universitiesand colleges have aduty to protectimpressionableminds

Chris Ratcliffe/Bloomberg

CHRIS TIGHE AND SARAH GORDON

Novembers spending review is anopportunity for the government tomake its northern powerhouse rheto-ric a reality by tackling obstacles togrowthasaneconomicpriority, say theregionschambersofcommerce.

Ina jointsubmission, theninechambersrepresenting most of northern Eng-lands population centres argue that inmany crucial areas policy is gearedtowards economic priorities in thesouth-east.

We see a big opportunity in thenorthern powerhouse concept, saidRoss Smith, policy director at the NorthEast Chamber of Commerce, one of thenine. We want to encourage the chan-cellor topushitas farashecan.

Thenorthseconomy,accordingtothechambers, represents one quarter of the

UKs, and the issues hampering itsgrowth must not, they insist, be left in aregionalpolicyniche.

The chambers recommendationsinclude more investment in transportinfrastructure, which they argue mas-sively favours London because of anexcessive emphasis on relieving conges-tion. On energy, they recommend con-nection charges to the National Grid beequalised.Present transmissionchargesforconnectionarecheaper inthesouth.

Because of the older populations ofmany parts of the north, the chambersadvocate skills funding for over-25srather than emphasising people aged 16to18.

They also want to lift restrictions oninternational students staying to workin disadvantaged areas where there islesspopulationpressure.

Other issues included funding for

social housing, property tax, air passen-gerdutyandinwardinvestment.

The nine chambers jointly represent16,000 businesses, together employing1.4m people. They cover areas includingLiverpool, Manchester, Yorkshire andnorth-eastEngland.

The CBI, in its submission to the gov-ernment, says spending on infrastruc-ture, innovation, education skills andexportsmustbeprotectedfromcuts.

The employers group said it hadidentified 16.3bn of savings over thenext five years that could be imple-mented by government. The CBI sug-gested ministers should strengthen theGovernment Property Unit and bringmore commercial acumen to buildingand land sales; extend shared servicesamong government departments andseek productivity improvements in theNationalHealthService.

Chambers of commerce

Regionspush fornorthernpowerhouse

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JAMES CRABTREE MUMBAI

A UN human rights report has foundevidence strongly indicating crimesagainst humanity were committedduring Sri Lankas two-decade civilwar, and called for a hybrid courtinvolving international judges to inves-tigatetheclaims.

The UN Human Rights Councils call foran investigation integrating interna-tional judges, prosecutors, lawyers andinvestigators marks an implicit rejec-tion of plans by Sri Lanka to launch apurely domestic probe into warcrimesallegations.

Global human rights groups have longaccused Sri Lanka of covering up evi-dence of atrocities committed duringthe closing stages of the conflict, whichended in a crushing victory for govern-ment forces over the Tamil Tiger rebelsin 2009, when as many as 40,000 civil-ianswereestimatedtohavebeenkilled.

The US and other western powersrepeatedly pressed Mahinda Rajapaksa,Sri Lankas former president wholost in elections earlier this year toinvestigate the claims before asking

the UN to launch an independent inves-tigation.

Zeid Raad al-Hussein, UN high com-missioner for human rights, said thereport, published yesterday, revealedserious crimes of concern to the inter-nationalcommunityasawhole.

Our investigation has laid bare thehorrific level of violations and abusesthat occurred in Sri Lanka, includingindiscriminate shelling, extrajudicialkillings, enforced disappearances, har-rowing accounts of torture and sexualviolence, recruitment of children andothergravecrimes,hesaid.

The report details crimes committedby both sides during the conflict, andaccuses the government of years ofdenialsandcover-ups.

However, it stops short of referringthose involved to the InternationalCriminal Court in The Hague, as the UNdid inareportconcerningNorthKorea.

It also does not provide details ofnames of individuals involved in allegedwar crimes, or the role played by MrRajapaksa as commander-in-chief of SriLankasarmedforces.

The UN report is viewed as a global

test case for the ability of western pow-ers to enforce human rights normswhile establishing precedents on therules of warfare, including the role ofhumanshields inconflictzones.

Hopes have been raised that SriLanka will move forward with a fullinvestigationof itswartimepast, includ-ing allegations that government troopsshelled civilians sheltering in no firezones during the final days of fighting claimstheUNreportbacks.

This week, Sri Lankas new govern-ment, led by President MaithripalaSirisena, pledged to set up a South Afri-can-style truth, justice, reconciliation

and non-recurrence commission andintroduce a new constitution to pave thewayforthebodys introduction.

Yesterday, Sri Lanka issued a formalresponse noting the UN report but mak-ing no mention of its hybrid proposalor war crimes allegations. Until, now SriLanka has rejected suggestions of inter-national participation in the running ofits investigation.

The UN rejects the suggestion that SriLanka can carry out a domestic inquiry,citing problems of witness protection,along with an inadequate legal frame-workandjusticesystem.

The unfortunate reality is that SriLankas criminal justice system is notyetready, thereportsaid.

Jehan Perera, director of the NationalPeace Council of Sri Lanka, said callsfor an investigation involving inter-national judges would cause politicalcontroversy.

My sense is the government will notaccept a hybrid model in which interna-tional judges are decision makers ratherthan observers or advisers, because it ispolitically and legally very difficult to dothat,hesaid.

ANNE-SYLVAINE CHASSANY PARIS

Franois Hollande is ramping up taxbreaks and public spending cuts forFrance next year, cementing theSocialist presidents conversion to sup-ply-sidesolutionsasheseekstorekindlegrowth in the eurozones second-largesteconomy.

Frances budget for 2016, to bedetailed in a fortnight, will include 2bnin tax breaks for the middle class on topof 3bn already doled out over the pasttwo years. About 8m households, repre-senting two-thirds of French taxpayers,

would see their tax bill decrease nextyear, Michel Sapin, finance minister,saidyesterday.

The measures will come on top of9bn worth of tax breaks and other giftsfor companies that were part of a 41bnpackage that runs from 2014 to 2017,when the next presidential electiontakesplace.

These initiatives and any extracosts that may arise, including a pledgeto take 24,000 refugees from the MiddleEast would be funded through cuts inother parts of government to meet defi-cit targets previously agreed with theEuropean Commission, Mr Sapinvowed. Were meeting our commit-ments.Wearestayingthecourse.

The measures reflect the realisationby Mr Hollande of the political and eco-

nomic cost of his decision to raise leviesby 11bn immediately after beingelected in 2012. Economic stagnation,record high unemployment and mount-ing discontent over taxes have trans-lated into repeated electoral beatingsfor theSocialists sincethen.

Mr Hollande abruptly shifted coursein 2014 when, to his own camps sur-prise, he embraced 41bn worth of taxbreaks to restore businesses bruisedmargins. The latest batch of cuts forhouseholds is designed, less than twoyears before the presidential elections,tosoothe lowtomiddle-classvoterswhostill resent the initial taxrises.

To some extent Mr Hollande appearsto be following in the footsteps of hismentor, Franois Mitterrand, who in1983 embarked on a sudden austerity

shift after a two-year public spendingfrenzy.

In the beginning, the belief in thestates almighty power to revive theeconomy underpinned Franois Hol-landes decisions, said Philippe Waech-ter, chief economist at Natixis AssetManagement. In the past two years,theresarealisationthatyouneedtogivecompanies and households more free-dom, more financial margins to fuelgrowth, something that seemed to havebeenforgottensince1983.

The government is betting on 1.5 percent growth next year, an estimateMr Sapin described as prudent, andbuilding on the at least 1 per cent it isforecasting this year. Public spending,which stands at 56 per cent of grossdomestic product, is expected to

decrease to 55 per cent in 2016, still wellabovethe48percenteurozoneaverage.

Mr Sapin indicated he was countingon lower interest payments andincreased efforts to fight tax evasion tohelp pay for the measures. He saidFrance would narrow its deficit to 3.8per cent of GDP this year and 3.3 percent in2016.

Some analysts said the budget failedto get to grips with deeper problemsafflicting the French economy. Theresan effort to be more efficient . . . buttheres no structural changes, saidGilles Moec, chief European economistat Bank of America Merrill Lynch. Thegovernment is delaying tough choicesonFrancessprawlingwelfarestate.Thisis no surprise two years before the presi-dentialelections.

DEMETRI SEVASTOPULO AND GINA CHONWASHINGTON

President Barack Obama has warnedthat his administration is preparingmeasures to counter Chinese cybercommercial espionage, in a shot acrossthe bow as President Xi Jinping pre-parestovisit theUS.

Speaking to the Business Roundtable inWashington, Mr Obama said cyber espi-onage would probably be one of thebiggest topics that I discuss with Presi-dent Xi. The US president said heaccepted that China and other nations,including the US, would pursue tradi-tional espionage, such as trying toobtain transcripts of his conversations,but stressed that stealing commercialsecrets was an act of aggression thathastostop.

We are preparing a number of meas-ures that will indicate to the Chinesethat this is not just a matter of us beingmildly upset, but is something that willput significant strains on the bilateralrelationship if not resolved and that weare prepared to take some countervail-ing actions in order to get their atten-tion,MrObamatoldbusiness leaders.

Mr Obamas comments come a weekbefore Mr Xi will make his first statevisit to the US. In recent weeks, US offi-cials have signalled that the WhiteHouse is preparing to sanction Chinesecompanies that have gained from cybercommercial espionage. But there hasbeen a tough debate inside the adminis-tration about whether to unveil themeasuresbeforetheXivisit.

Proponents of imposing the sanctionsahead of the visit argue that it wouldshow China that the US is serious aboutthe issue. But some officials have arguedthat announcing sanctions in advancewould be seen as an aggressive movethatwouldembarrassMrXi.

This month, officials suggested thatMr Obama would approve the sanctionsbefore the visit, but the impetus for thattiming seems to have waned in recentdays. A top-level delegation of Chineseofficials visited Washington last weekfor cyber-related talks, which followedan earlier visit by Susan Rice, the USnationalsecurityadviser, toBeijing.

Josh Earnest, White House press sec-retary, earlier this week described thetalksashavingbeenprettyblunt.

People familiar with the debate saidthe state department had been vocal inpushing for such a move to be delayeduntil after the visit, while law enforce-mentagencieswanttoseeactionbefore-hand. However, a final resolution on thetiminghasnotyetbeenreached.

GEOFF DYER WASHINGTON

Themost seniorUSgeneral in theMid-dle East said yesterday that the Penta-gon did not knowwhat Russias inten-tions were in Syria even as Moscowbuilds up what the US believes to be anewairbase inthecountry.

General Lloyd Austin, of US CentralCommand, told a Senate hearing thePentagon was still trying to assess whatthe objective was behind the increase inRussiasmilitarypresence inSyria.

The admission shows that, at the veryleast, Russian leader Vladimir Putin hassucceeded in keeping everyone guessingabout the military and diplomatic goalsbehind the upsurge in Russian equip-mentgoingtoSyria.

US secretary of state John Kerry saidlater yesterday that the administrationwas considering a Russian proposal fordirect military talks about the conflictin Syria. The purpose would be todeconflict with respect to any potentialrisks that might be run and to have acomplete and clear understanding as tothe road ahead and what the intentionsare,hesaid.

US officials are concerned about thepossibility of an accident involving Rus-sianandUSaircraft inSyria.

The enhanced Russian presencecomes as the US plan to develop a forceto take on jihadi groups is in disarray.Also, the White House is debatingwhether Barack Obama should meet MrPutin when both presidents are at theUN this month, which would end a yearofpersonalestrangementoverUkraine.

The Pentagon reckons Russia is build-

ing a forward-operating air base nearLatakia in western Syria and that therehas been a steady flow of equipmentfor two weeks. Defence officials also sayRussia has brought in armoured vehi-clesandartillery.

Putin may be more nervous aboutthe stability of the Assad regime andthey may be trying to shore it up, saidChristine Wormuth, undersecretary fordefence policy. She added that the US did not believe the regime is in imme-diatedangerof falling.

John McCain, the Republican senatorwho chairs the armed services commit-tee, said the reported Russian build-upin Syria was an expansion of Russianpower in the Middle East that we havenot seen in four decades and wouldallow Moscow to prop up Assad andplaykingmaker inanytransition.

He added: As in Ukraine and else-where, he perceives the administra-tions inaction and caution as weaknessandis takingadvantage.

Andrew Weiss, a former White Houseofficial now at the Carnegie Endowmentfor International Peace in Washington,said: Putin is a serial opportunist andthis isclassicPutinopportunism.

He was sceptical about Russias will-ingness to begin fighting on the ground,giventherisks involved.

Inthe latestadmissionabout themea-gre state of US efforts to train a force ofmoderate Syrians to take on IslamicState of Iraq and the Levant (Isis), Gen-eral Austin said there were only four orfivesuchsoldiers involvedinfightingatthemoment inSyria.

He acknowledged that the Pentagonhad opened an inquiry into claims thatofficers manipulated intelligence toshowthecampaignwasgoingwell.Notebook page 12

Xi state visit

ObamawarnsChinese oncyber spying

France

Hollande seeks growthwithmore taxbreaksPresidents initiativewillbe funded by spendingcuts tomeet deficit targets

Human rights

UNcalls for judges toprobe Sri Lankawar crimes

Military build-up

Pentagonuncertainabout Putinsaims in Syria

Putin is a serialopportunist and thisis classic Putinopportunism

On patrol: government soldiers in north-eastern Sri Lanka during the two-decade civil war John Moore/Getty

MahindaRajapaksa:was pushedto look intoclaims

JIM BRUNSDEN BRUSSELS

Jean-Claude Juncker will today appearbeforeaEuropeanParliamentcommit-tee for a prosaic session meant toexplore ways of improving corporatetaxtransparencyintheEU.

But the bigger news is that Mr Juncker,commission president, is not expectedto receive much of a grilling over thesweetheart tax deals Luxembourggranted to hundreds of multinationalcompaniesduringhis leadership.

His apparent success at putting thescandal to rest after 10 months in hisnew job is a testament to Mr Junckerspolitical alliances, nurtured over a longEuropean career, and the parliamentsown backroom power-sharing agree-ment.

It was always part of the plan of thelarge political groups [in the European

Parliament] . . . to avoid having MrJuncker in the line of fire, said MarkusFerber, a German MEP from the samecentre-right political family as MrJuncker. The parliaments hearing, headded, would not seriously damage thecommissionpresident.

The so-called LuxLeaks revelationsemerged just days after Mr Junckerbecame commission president inNovember, and dogged his early days inoffice. They documented how, duringhis two decades as Luxembourg primeminister, as many as 340 multinationalcompanies, ranging from Ikea toPepsiCo, funnelled profits through thetiny country to lower their tax bills to aslittleas1percent.

Thescandalwasparticularlyresonantat a time of rising populist anger inEurope.

Mr Juncker has always denied being

the architect of Luxembourgs tax sys-tem. Although he met tax experts fromUS technology companies, he hasinsisted any deals were signed off by anindependent authority and that the taxregime was part of a trend for countriesseekingtobecompetitive.

Mr Ferber and some other MEPs havepushed for the committee, whose man-date covers corporate tax avoidanceacross the EU, to be given formal powersto probe the political decision-makingbehind tax arrangements that, in thecase of Luxembourg, also benefited thelikesofAmazonandApple.

But leaders of the largest parliamen-tary groups, the centre-right EuropeanPeoples party, which includes JunckersChristian Social Peoples party, and theSocialists and Democrats, declined tosupport this.

The EPP and the Socialists are loosely

attached in what Brussels calls itsgrand coalition, an understandingthat was personally cemented by MrJuncker and parliament president Mar-tin Schulz, the German social democrat.

MrSchulzhas insistedthatamoreUS-style committee investigation would bebeyond the assemblys powers. How-ever,hisdecisiontobackMrJunckerhasruffledfeathers inBerlin.

Senior members of his own partybelieve the tax affair is a legitimatepolitical issue that raises questionsabout the centre-rights close ties to cor-porate interests.

EU antitrust authorities are probingLuxembourgs agreements with bothAmazon and Fiat as part of an investiga-tion into whether they broke the EUsstrict stateaidrules.Additional reporting by Peter Spiegel inBrussels

Luxembourg grilling

Juncker expected to avoiddamageover sweetheart taxdeals

INTERNATIONAL

Contracts & Tenders

SEPTEMBER 17 2015 Section:World Time: 16/9/2015 - 23:59 User: quinnt Page Name: WORLD1-LON-03, Part,Page,Edition: LON, 6, 3

Thursday 17 September 2015 FINANCIAL TIMES 7

8 FINANCIAL TIMES Thursday 17 September 2015

INTERNATIONAL

SAM FLEMING WASHINGTON

When JanetYellen last spoke in July, shesounded like a Federal Reserve chairwho was ready to take action. Americawas on course for higher interest ratesthis year, in a move that would under-score itsrecovery, shetoldCongress.Since then global factors have made

the outcome of todays meeting moreclouded. Futures prices suggest a 25 percent likelihood of a quarter-point raterise, as investors argue that lastmonthsupsurge in financial markets, a higherdollar,weakinflationandwagenumbersand worries about a Chinese slowdownwill convince the Federal OpenMarketCommittee todonothing.

WhatcouldconvinceFedtorise?

The case hangs on the domestic USeconomy. The Fed has set itself twintests of seeing continued improvementin the jobs market and having confi-dence in inflation returning to targetbefore it starts to lift rates.The jobs front is strong. The labour

market is at full employment, judgedbyFed estimates, with unemploymentclosing in on 5 per cent, the bottomendof the estimate for the long-term joblessrate of 5-5.2 per cent. The Fed thinksunemployment is thebest single indica-tor of labour market slack, and that isfast disappearing. Wages and inflationmay not be that far away from pickingup, suggest the Fed models, and thatmeans interestratesneedtostartrising.While inflation and wages have

remained low, Ms Yellen has said shedoes not need to see them accelerate inorder to be confident that inflation isheadingbackto2percent.

WhydotradersthinkFedwillhold?

Givenmultiple uncertainties, the waitand see option is undoubtedly attrac-tivetosomeFedofficials.Recentmarketdevelopments including the fall inequity prices, rise in the dollar andwid-ening of credit spreads have led to atightening of financial conditions thatcoulddragonUSgrowthandinflation.Tighter financial conditions were

enough to stop theFed fromtapering itsbond purchases in September 2013.They could be enough to swing thedebate today. Further, Beijings mis-management of its exchange rate policy

and stock market interventions hasfanned worries that China is facing aserious slowdown. This has already ledto lowercommodityprices,whichcouldweigh further on US inflation, as, cru-cially, could thedollars strength.Ontopof this,MsYellenhas suggested that shewould takenote ifmarket-implied infla-tion expectations sank, something thathashappenedinrecentweeks.As an ancillary issue, US government

shutdown worries weighed on theFOMC in September 2013, but in theevent theeconomydidnotsufferbadly.

WhatsignalsmayFOMCgive?

Investors will welcome some clarity.The most likely outcomes are that theFedstaysonholdwhilekeepingariseonthe table in 2015, or that it raises ratesstating that further tightening will begradual.If a hawkish hold, the FOMCwould

keep rates at near-zero but signal that apossible move in October or (morelikely)December remains on the cards.If a dovish rise, rates will rise by aquarter-point but the FOMC may sug-gest no more moves will come in 2015,andthat furtherriseswillbegradual.This could be signalled via the so-

called dot plot showing Fed policy-makers interest rate expectations, cou-pledwithsoothing language.

WhatabouttheFeds forecasts?

Growthfigures for2015maybebumpedup a little after a run of strong data,while run-up in the dollar since JunemayhitGDPgrowth in2016,pullingFedpolicymakers median estimates downto 2.4 per cent growth, suggests JPMor-gan Chase. Jobless figures should bestronger across the Feds forecast, giventhe rapid pace of jobs market gains,while core inflationmay be a tad softernextyearbecauseof thedollar.Thekeyforecasts towatchareFedpol-

icymakers interest rate projections. Intheir June forecasts, only two officialsexpectedtowaituntil2016toraiserates.If the Fed stays on hold and that

number swells to four ormore, itwouldsendadovishsignal,aswouldsharpfallsin rate predictions. Policymakersexpectation for the longer-run interestrate is expected to be shaved back a lit-tle, from3.75percent to3.5percent.

Howwouldmarketsreact?

Fed officials have done little in recentweeks to prepare themarkets for a Sep-tember rise. This is partly because thecentral bank wants to avoid explicitlypre-committing itself on rate policy(although that has not stopped MsYellen from suggesting there will be arise in2015).That said, theFedalsodoesnot like to

shockmarketswith anunexpected rise,or be dictated to bymarkets. Andwhatmatters more than the quarter-pointmove is the subsequent trajectory ofinterest rates. If the Fed increases butindicates that subsequent tighteningwillbe shallow, theremaybesomereliefthat uncertainty over the first rise hasfinallybeendispelled.

BEN MCLANNAHAN NEW YORK

Lloyd Blankfein has added to a chorusof voices advising the US FederalReserve to hold off from pushing upinterest rates, saying that the data didnot justify any tightermonetarycondi-tions.

The advice from the Goldman Sachschief executive, among the longest serv-ing at the biggest US banks, comes onthe eve of one of the most keenlyawaited policy decisions by the centralbank since it last raised rates nearly adecadeago.Amid recent market wobbles and

mixed economic data, bank economistshave mostly pushed back predictionsfor a rise in theFeds target rate, but stillsome expect Janet Yellen, Fed chair, tofinallyachievelift-off today.At a breakfast event at a hotel over-

looking Central Park in New York, MrBlankfein said that such amove wouldbeamistake, as itwouldundermine theFeds insistence that economic data areitsprimarypolicyconsideration.Everybody has visibility on every-

thing; if a decision [to increase rates]gets made, its not because theres atsunami of evidence of a quickening oftherecovery,ora tighteningof labouroranaccelerationof inflation; it is almostaquestionofwanting togetover thathur-dle,hesaid.Such soft factors should not trump

hard data evaluation, he added. Andthe data evaluation isnt compelling aninterest-rateriseat thispoint.Just under half of economists polled

by the FT this week expect the UScentral bank to shift the current near-zero band for overnight rates higherwhen it concludes its two-day policymeetingtoday.The decision comes against a back-

drop of faltering global growth, led by aslowdown inChina, andheightenedvol-atility in financialmarkets.Butmany argue that theUS economy

is strong enough to withstand the firstrise in rates since 2006, making it thefirstmajor economicbloc to set out onapath of policy normalisation after theglobal financialcrisis.ButMr Blankfein urged caution, not-

ing that there had been plenty of effec-tive tightening in theUS in recent years,suchasthroughincometaxrisesandthenarrowingof thebudgetdeficit.The consequences of going too soon

and hurting the recovery are vastly dis-proportionate to the consequences oftaking a bit more incremental inflationrisk, especially when youre dealingwith deflationary risk like now and youdonthavea lotof tools,hesaid.Mr Blankfeins view is in line with

economists at Goldman, themost prof-itable among the big six US banks. InJune they pushed back their expecta-tions forwhentheFedwill lift rates fromSeptembertoDecember.In a conversation with Gerry Baker,

editor-in-chief of the Wall Street Jour-nal, theGoldman chief also said theFedneednot take recent turmoil inmarketsas a sign of potentially dangerousexcessesbuilding inthesystem.The big summer drop in Chinese

stock prices, for example, was a conse-quence of a bubble built by ham-handed policymakers, he said, whilesoftness in commodity prices was con-sistentwithexcess supplymeetingweakglobaldemand.

BARNEY JOPSON WASHINGTON

TheWhite House is digging its heels inaheadof expectedbudget talks onCapi-tol Hill this year, insisting Republicanshelp forge a deal that ends automaticcuts togovernmentspending.Both parties dislike the painful cuts,

known as sequestration. But theywillcontinue into the final leg of theObamapresidency unless Congress can over-come partisan differences on how toreplacethem.The US faces a possible government

shutdown in three weeks as conserva-tives try towagewar over abortion, butif that threat is averted with a stopgapextension of public funding it will pavethe way for a more substantive budgetdebate,withsequestrationat itscore.The automatic cuts are a long-term

worry for theWhiteHousebecause theycould undermine Barack Obamas poli-ciesonmanyfronts.The onlyway to eliminate them is via

the kind of budget deal that has eludedCongress many times amid the badbloodofrecentyears.However,administrationofficials fear

that if they arenot ended this year, theywill remain in place for the rest MrObamas presidency because all deal-

making in Congress will be frozen in2016bythepresidentialelection.MrObamawasyesterday expected to

make the case for Republicans to pass abudget that reversed sequestrationwhenhe spoke to chief executives at theBusiness Roundtable, a Washingtontradegroup.Already thismonth the president has

bemoanedhow sequestration just lopsthingsoffwhether itsgoodornot for theeconomy. The budget cuts weredesigned to deliver $1.2tn of savingsover 10 years frommilitary anddomes-

tic spending, but they are not based onanypolicyplanning.HarryStein,directorof fiscalpolicyat

the Center for American Progress, athink-tank close to the White House,said: The sequester doesnt onlymakethese really bad cuts. It constrains anypossibility to do something new andinnovative because youre just trying tokeepthe lightson.Both Republicans and Democrats

want to lift defence spending above thesequestration caps via a budget deal.But the big dividing line is overdomestic spending, saysMrStein.Dem-ocrats want equal dollar-for-dollar

increases in defence and discretionarydomestic spending which includeseducation, infrastructure, environmen-talprotectionandunemploymentbene-fits. They are also ready to fund themwithhighertaxes.Republicans do not want more

domestic spending or tax rises. Theywould like cuts in mandatory pro-grammes such as Social Security andMedicare. Weve always been open tohaving a conversation to replace thesequester, said a spokesman for JohnBoehner, theRepublican Speaker of theHouse of Representatives. But in themeantimeDemocrats are going to haveto get serious about cuts to mandatorydomesticspending.Sequestration was never meant to

happen. Congress created it in 2011 asa back-up strategy for reducing the USbudget deficit, one designed to be socrude itwould force politicians to find abetterapproach.However, theyfailedtodoso.Cuts began gradually in March 2013,

then crashed into the spotlight the nextmonthwhen travellers suffered days ofdelays as airportworkers and air trafficcontrollersweretemporarily laidoff.Since early last year someof themost

painful cuts have been in abeyancethanks to the Ryan-Murray budget, adeal struck by Congress, which raisedspending caps for two fiscal years. Butthatexpiresat theendof thismonthandlower sequestration limits come backintoforce inthenewfiscalyear.

US Congress. Spending

Obamadigs inoverbudget dealPresident increases pressure

onRepublicans for agreement

to end automatic cuts

Global factorsweighonFedrate settersFutures prices suggest one-in-fourlikelihood of quarter-point increase

Fed funds interest rateprojections from June

Source: Federal Reserve

Forecasts of individual policymakerson the FOMC (%)

Median

5

4

0

1

2

3

2015 16 17 Longerrun

Goldman Sachs

Blankfeinwarns againstmonetarytightening

Illuminating: the Federal Reserve building inWashington where the FOMC is meeting Andrew Harrer/Bloomberg

It just lops things offwhether its good ornot for the economyBarack Obama

FERDINANDO GIUGLIANOLONDON

The combination of a sharp contractionin China and a shock in the financialmarkets has the potential to derail theglobal recovery, the OECD has cau-tioned, as it trimmed its forecast for glo-balgrowth.The Paris-based body also warned

that theeurozonewas failing to reap thefull benefits from the steep fall in com-modity prices and depreciation of theeuro, cutting itsmedium-termforecastsdespiteasmall improvementthisyear.Thewarning followsa summerof tur-

moil on global markets, which haveswung wildly over worries about theChinese economy. The US FederalReserve isset todecidetodaywhethertoincrease interest rates for the first timein nearly a decade, a choice that is add-ing to the climate of uncertainty. In its

Interim Economic Outlook, the OECDonlymarginally lowered its projectionsfor global growth from three monthsago, cutting its 2015 forecast from 3.1per cent to 3 per cent and its 2016 pre-dictionfrom3.8percent to3.6percent.US growth forecast for this year was

significantly increased from 2 per centto 2.4 per cent, while there was a steepdowngrade of the projection for Brazil,which is now expected to contract2.8percent in2015and0.7percentnextyear, about twopercentagepoints lowerthanpredicted inJune.The OECD believes that the Chinese

authorities will be able to avoid a hardlandingandhasreduced itsgrowth fore-casts for China both this year and thenext only marginally. However, itwarned that a sharp contraction in Chi-nese internal demand, combinedwith alarge andwidespread correction in glo-balmarketswouldhave thepotential toseverelyaffectglobaleconomies.The key risk to global growth is a

larger than expected slowdown inChina. Combined with financial tur-moil, potentially exacerbated by thefirst tighteningstep inUSmonetarypol-

icy, this would have serious repercus-sionsontheglobaleconomy, itwarned.Adecline in thegrowth rateofChinas

domestic demand by two percentagepoints for two years, combined with areductionby10percent inglobal equityprices, would reduce global growth byhalf apercentagepointboth in2015andin 2016. The simulation does not, how-ever, take into account second-roundeffects, including a further decline in oil

prices and a possible