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This is an audio transcript of the FT News Briefing podcast episode: ‘EY: Breaking up is hard to do’
Marc Filippino
Good morning from the Financial Times. Today is Wednesday, April 12th, and this is your FT News Briefing.
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Europe’s airlines say they’re gonna need a lot of help getting to net zero. And one of the Big Four accounting firms has scrapped a contentious plan to break itself up. But first, a word of warning from the IMF.
I’m Marc Filippino, and here’s the news you need to start your day.
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The International Monetary Fund has warned in a report that global economies are at risk if inflation remains high. To talk more about this, I’m joined by our economics editor, Chris Giles. He’s in Washington DC for the fund’s big spring meeting. Hey, Chris.
Chris Giles
Hi, Marc.
Marc Filippino
So, Chris, what’s your big takeaway from this report? What really jumped out at you?
Chris Giles
Well, I think there’s two things that jumped out at you in the report. One is that the forecast themselves, which is what we normally concentrate on, are really very unchanged. They’re not too bad, they’re not great — showing us sort of a gradual recovery in the global economy, ‘23 will be better than ‘22, ‘24 will be better than ‘23. But none of these years will be bumper years for the global economy.
But then what really jumps out at you is that the IMF say that and then they sort of put that forecast to one side almost immediately and tell you all the reasons that things will go wrong and the outcome will be worse than the forecast. So they’re very worried about risks.
Marc Filippino
Like what? What kind of risks?
Chris Giles
Well, the risks are . . . the big risk is that inflation will stay too high for too long in many, many parts of the world. And then, that then means that central banks will have to keep interest rates high and high interest rates, exactly what, that was the trigger for the recent bouts of banking turmoil and other forms of financial turmoil.
Marc Filippino
Now, Chris, while the IMF is expecting turbulence, it’s also forecasting that the world’s second-biggest economy is gonna hold up pretty well. What can you tell us about China?
Chris Giles
It’s very clear that they are in the middle of a rebound from the zero-Covid policies of last year. So opening up, huge growth in domestic services this year, and that’s going to make the economy grow by probably more than the 5 per cent that the government has as a target this year. And it’s a rebound from a very weak performance last year.
Marc Filippino
And who’s at the bottom of the forecast, Chris?
Chris Giles
Well, sadly for someone from the UK, right at the bottom for the advanced economies, pretty much, is the UK, still suffering from the “mini” Budget of last year. Although the 2023 forecast was pretty dire — a contraction of nought point three per cent — it does get better in the medium term, so it’s not permanent doom and gloom for the Brits, more a really, really difficult period which hopefully will end as global gas and oil prices come down a bit and things get a little bit easier.
Marc Filippino
Chris Giles is the FT’s economics editor. Thanks, Chris.
Chris Giles
Thanks, Marc.
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Marc Filippino
Project Everest — sounds impressive. It was the code name for a plan by one of the world’s biggest accounting firms to break itself up. EY wanted to split its auditing business from its consulting business, and it would have been the biggest shake-up to the industry in decades. Ultimately, EY’s powerful US partners squashed the deal. So is it just back to business as usual?
Stephen Foley
Absolutely not. No. This has been a tumultuous time.
Marc Filippino
That’s the FT’s Stephen Foley, who has been covering all this.
Stephen Foley
And the global executive is making the point that some of the forces in the profession that made them want to conduct this break-up in the first place are still very much alive. Now, if you go back to brass tacks, what they were hoping to do by spinning off the consulting arm is to free the consultants from all these complicated conflict-of-interest rules that prevent consulting firms from selling their services to audit clients. Audit, remember, has to be a very independent process. This is about checking the financial reports of all the companies in the world. EY has a massive share, as you would expect of a Big Four firm, of all the global companies. So that audit work is very, very important. But it means that the consultants have one arm tied behind their back and can’t sell their services to those audit clients, whereas as an independent firm, they believe that they would have more growth on their own. And the leadership yesterday in putting out this message to partners said that they still believe that some kind of break-up is important, which means they are now going to move into a new phase of trying to come up with a different idea for how to achieve that basic principle.
Marc Filippino
So, Stephen, I’m wondering, is this a bad look for EY? I mean, what are other accounting firms thinking as EY backtracks on this plan?
Stephen Foley
Well, I mean, look, EY is a very large consulting firm. You’ll notice from the comments under our stories over the last six months, there’s been plenty of people saying that if the consultants can’t get their own deal through, then what does that, what does that mean for the advice they’re giving their own clients? But listen, more importantly than that, there is this question about the shape of the profession and EY has opened up a huge debate across the profession. But so far, the other big firms have been watching this debacle, and that’s what it is ultimately at EY, this debacle, and saying they don’t want to follow in EY’s footsteps. Deloitte’s CEO, for example, put out a video message only a few weeks ago explaining exactly why, in excruciating detail actually, why it wasn’t going to do the same thing as EY and why it believed that having consulting and tax and accounting all in one firm was actually a good thing for clients and for the firm itself.
Marc Filippino
Stephen Foley is the FT’s US accounting editor.
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European airlines have pledged to reduce carbon emissions to zero by the year 2050, but it’s gonna be pretty pricey. A new report from the industry estimates it’ll cost more than €800bn. Here’s our transportation correspondent, Philip Georgiadis.
Philip Georgiadis
Well, it’s so expensive because the industry is relying on a host of completely unproven new technologies and the most expensive and really, the way that they plan to get to net zero, is to use new and cleaner fuels. And these are not made from fossil fuels, but they’ll be made from completely new feedstocks such as animal fat, cooking oil, even household waste. And burning them emits up to 70 or 80 per cent less carbon dioxide over their lifecycle. So you’re not pulling up fossil fuels out of the ground, you’re burning new material. And that really is the only way that the industry thinks it can get to net zero because other technology, you might have heard of electric planes or hydrogen planes, they admit that they’re not gonna get there at scale by 2050. So it’s very expensive. It’s a big punt on new technology and most of it is gonna be new fuels.
Marc Filippino
So that’s one message of the report, that it’s gonna be expensive. What’s the other message, Philip?
Philip Georgiadis
So this report is essentially saying this is difficult, but it’s do-able. Trust the process. But it’s also very much saying we need help and they want help from European governments, from the EU Commission particularly, to get those sustainable aviation fuels available at scale and cheaper. So they want price support to help encourage oil majors to make more of these, and they want more tax incentives as well. So they really think the European government and they actually look to the US a lot where the Biden administration, through its policies, are really pushing sustainable aviation fuels. And they say we want a bit of that as well and we need help from governments. Otherwise this is gonna get very expensive and consumers are gonna have to pay even more.
Marc Filippino
Philip Georgiadis is the FT’s transportation correspondent.
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Before we go, Germany’s biggest lender Deutsche Bank has relied on Russian IT expertise for more than two decades. Fifteen hundred workers staffed Deutsche’s Russia technology centre in Moscow and St Petersburg. They developed and maintained software for the bank’s entire global trading business. But last year, after the war on Ukraine started, Deutsche quietly moved nearly half of those workers to Berlin. And yesterday, according to FT sources, Deutsche offered severance packages to the remaining workers. It’s part of the bank’s bigger plan to shut down its Russian IT operation.
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You can read more on all of these stories at FT.com. I’m taking a few days off for a vacation, but I’ll be back on April 24th. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.
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