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July 11, 2016

Towards Brexit outside the EEA

The domestic political events in the UK are mercifully outside our reservation, so we don't need to discuss the appalling comments by one of the two Tory candidates for the party leadership - and, by extension, the job of PM. It looks to us that Theresa May, the interior minister, will win this contest. This means that Brexit will happen ahead of the elections scheduled for 2020, for the simple reason that this is the only scenario around which she can unite her party. 

There is one scenario that might give hope to those who are betting on a second referendum, or some other miracle to undo the vote. This could happen if Andrea Leadsom becomes PM, Jeremy Corbyn remains Labour leader, and moderates from both parties leave and join the LibDems in a new political party to be called the Democrats, a pro-EU party. But even if all these conditions become true, this scenario is also unlikely to produce a pro-EU majority, at least not within the short timeframe necessary to stop Brexit. In this case, I would expect Leadsom to call a no-confidence vote, which she would probably lose. This would trigger new elections, which she would win by a landslide - as Ukip would damage Labour, while the new party would not have had enough time to set itself up. Britain's first-past-the-post electoral system does not favour new parties, not even pro-establishment parties. Despite the Tories' deep divisions over Europe for the last 30 years, the Brexit vote has actually united the party around a common position. There is debate about what kind of relationship the UK should have with the EU post-Brexit, and of course a debate about who should be PM. But the party now does not want a return to the EU. Given the state of Labour, and the weakness of the Libdems, we think the Tories will be calling the shots. 

Also note Angela Merkel's comments in a ZDF interview, in which she said - in response to whether Brexit might not happen in the end - that she was dealing in political realities, and that in this reality Brexit is happening. She expects the new PM to trigger Article 50 once elected. And she added that Britain will not be able to cherry-pick.

We note that pro-EU sentiment picked up in Germany after the vote - or rather that sentiment towards the AfD, the anti-EU party, has fallen. The AfD is now polling at 10-12.5% - though we think this is not related to Brexit but to the inner warfare among the party's central figures. The AfD is in a very similar position to the British Labour Party.

In the Netherlands the latest Ipsos poll puts Geert Wilders' Freedom Party PVV at 28%, narrowly in the lead, but the Ipsos poll had similar numbers in the past - so there is no trend. The most recent Peil poll has the party at 35% with an 11-point lead. Again, we do not think that we can make inferences from Brexit, even though this Guardian article tries to do precisely that. The intent is clear to demonstrate Britain's isolation by misconstruing statistical evidence. 

Most of the British commentary over the weekend related to the Tory and Labour Party leadership contests. We will leave this aside for today, focusing on two comments directly connected to Brexit itself.

Wolfgang Munchau argues in the FT that the idea of an EEA-minus is absurd. It reminds him of John Major's ridiculous idea of a hard ecu. Munchau favours a straight-EEA deal, which would respect the result of the referendum formally, though not in spirit. If the new British prime minister, however, decides that she wants freedom over immigration policy, then she will invariably have to give up on the EEA, and negotiate an FTA instead. There is nothing wrong with that. Munchau thinks Britain's negotiating position is far from weak, given the impact of Brexit on the eurozone (see our lead story today), and given the eurozone's and especially Germany's large trade surplus with the UK. And he notes that the latest MiFid/MiFir rules have an opening for single market access by third countries with equivalent regulatory regimes. 

And finally, Margaret MacMillan offers a grand historical sweep about the interconnectedness between the UK and continental Europe. This will not change, she says. She looks at the following scenario: On Brexit, Scotland will declare independence, and over time, Wales might leave as well if they are unhappy to be dominated by the English. 

"History never repeats itself but a future, smaller Britain might look uncomfortably like the England of the 15th and 16th centuries, with trouble at home and an uneasy relationship with the continent, at once needing trade with it yet fearing its influence. And that doesn’t even begin to think about what might be developing on the other side of the Channel. Europe could well also splinter along national lines and institutions long taken for granted, such as the European Union or Nato, disappear from the scenes. Whatever happens these will affect Britain, because there is no escaping the reality that the ties that bind these islands to the rest of Europe are many and longstanding, and will continue to exist."

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July 11, 2016

On the EU's deteriorating relationship with Russia

The Nato summit in Warsaw highlighted one of the many existential threats the EU is facing at the moment: relations with Russia are deteriorating fast. The Russians regard the choice of Warsaw as a provocation. We are selecting two interesting comments, both from Carnegie, on this standoff. Alexander Baunov argues the real problem is not overt Russian aggression against a Nato member, like Latvia or Poland, but the possibility of a technical incident between Nato and Russian ships or planes in the Baltic or Black Seas. In a more detailed analysis of Russian policy and the its implications for Nato, Eugene Rumer agrees that Russia will not test Nato's Article 5 guarantee directly. Russia will instead continue to rely on its hybrid warfare methods to undermine Nato member states' confidence in the alliance. Western policymakers should have no illusions that the recent decision to deploy four battalions of 1,000 soldiers each in four east European countries will have a stabilising effect. The decision will trigger a disproportionate Russian response. Only a political solution will ultimately solve the problem. This is his conclusion:

"Absent major changes in Russia’s (or NATO’s) outlook, this adversarial relationship will remain a key feature of the Euro-Atlantic security order for the foreseeable future. Eventually, it will take a political, not a military, solution to resolve this standoff."

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