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July 22, 2016

The Brexit compromise

If you think through the various Brexit choices for Theresa May, there are in fact not that many good real-world options. She can't go back on the referendum without simultaneously destroying her premiership and her party. She can't possibly want a hard Brexit in 2019, and risk a major economic recession one year before an election. She cannot opt for the pure Norway model, given the promises made during the election campaign. And free-trade agreements will take a lot longer than two years to negotiate. That leaves a single feasible option we highlighted before: a transitional EEA memberhip to be followed by an FTA later.

We haven't often cited the conservative Adam Smith Institute in our briefing, but they are spot on in their analysis of the situation. The transitional EEA is really a no-brainer. The transition deal respects the referendum result. Britain would no longer be in the EU after two years. It would be outside many EU policy areas, including agriculture. It would avoid a sudden rupture and respect existing trade relationships; it would give time for trade negotiations, and for companies to adjust to the new situation. There is one piece of information we would like add: we are confident that the EU would offer Britain a transitional EEA simply because this would minimise the economic fallout - which is at least as big for the eurozone as for Britain given the eurozone's extreme vulnerability to even the smallest shocks. While free trade agreements require a full ratification procedure, we are fairly confident that a transitional EEA agreement can be concluded within the Art 50 parameters, which would only require a qualified majority in the European Council to take effect. It is, in fact, the only deal that can be negotiated in two years because there are not many details to negotiate.

The ASI paper is probably wrong in one important aspect: the transitional EEA agreement does not, in practice, provide the power to curb excessive migration volumes. Even if it included an emergency break - which we doubt - it would trigger immediate reprisals if those were used. There is no way the EU would allow Britain complete membership in the single markets for goods, services, and capital, but with controls over the free movement of labour. We find it interesting that British discussants always get back to this point, hoping that there is some kind of a technical fix to the immigration problem. The FTA will allow Britain to control immigration, but would leave the UK outside the single market. President François Hollande also made that clear in his talks with Theresa May yesterday.

Kevin O'Rourke makes the point that even erstwhile Remainers seem to have accepted the argument that there are too many Europeans in Britain - an argument that does not stand up to scrutiny. That mindset will lead to a hard Brexit because it is not consistent with EEA rules (he does not discuss interim arranagements, but the final outcome). He concludes that

"...for Remainers not to make the case for EEA membership, when they had previously been in favor of remaining in the EU, is an astonishing abdication of responsibility." 

Paul de Grauwe urges the EU to provide clarity on what potential leavers should expect - which is a straight choice between the Norwegian model or a stand-alone position in which the exiting country would negotiate its own trade agreements. Clarity is essential for those wishing to leave the EU. Clarity can only happen if the EU categorically excludes a privileged trading relationship.

The transitional EEA option is consistent with all of the above in the sense that you get one regime, and then the other regime, but nothing in between. But don't count on lower costs. Currently the annual per capita contribution to the EU's budget are £130 for Norway, and £220 for the UK. We don't think the EU would agree to a cut in the UK's net contributions during the transitional phase. If a transitional EEA were agreed, it would be on the basis of existing agreements. 

The decision on the future of Britain's relationship with the EU is essentially one for May and her Conservative Party. The opposition is nowhere, and is not going to resurface in time to influence the outcome of this debate. It is worth reading Denis McShane who notes that the Labour party has a record of a long opposition spells after a period of government. He predicts the worst of all outcomes from a pro-European perspective: Jeremy Corbyn will remain leader. He will lose the 2020 elections. And the party will not split given the prevailing contempt for the LibDems after they decided to join the Tories in a coalition in 2010. The only good news is the UKIP will probably not eat into the Labour share of the vote, unless Europe is a major election issue. We would add that, in this scenario, Labour is unlikely to challenge Britain's EU exit in 2020 out of fear of an electoral backlash.

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July 22, 2016

EU concerned about Turkish state of emergency

The main news in Turkey is the parliamentary approval of the state of emergency. We commented yesterday this would be a litmus test for the opposition. The ruling AKP - which has an absolute majority - and the right-wing minor opposition party MHP voted for the measure, while the centre-left main opposition party CHP and the radical left and pro-Kurdish HDP voted against.

The deputy Prime Minister Numan Kurtulmus is quoted as saying that the European convention on human rights will be suspended for the three-month term of the state of emergency in accordance with article 15 of the Convention. President Recep Tayyip Erdogan has been defending his decision to call for a state of emergency by comparison with France, where the state of emergency declared after the Paris terror attacks last autumn has just been extended for a further months shortly before expiring.

The European Commissioners for external action and neighbourhood policy Federica Mogherini and Johannes Hahn expressed the usual concern in a joint statement where they criticised the crackdown on education, the judiciary and the media. The statement does not pass judgement on the purge of the Turkish military and police. It is unclear whether this concern will have any consequences.

Meanwhile, Greek courts have handed down two-month suspended jail sentences to the eight Turkish soldiers that escaped to Greece in a helicopter and have asked for asylum. The Turkish government now admits that over 1000 military personnel are missing since the night of the coup, having deserted and left in the confusion. The Turkish government has had to deny reports of up to 14 missing ships on the Aegean or Black Sea that may have failed to report to port after the coup, and that coast guard vessels were hijacked.

Domestically, Erdogan is busy mopping up his erstwhile allies in the Gülenist movement. This includes the high-profile arrest of the lead judge in the Sledgehammer case at the start of the decade, where AKP and the Gülen movement cooperated to root out Kemalist elements in the military accused of involvement in coup plots. After Erdogan and Fethullah Gülen fell out over corruption allegations affecting Erdogan's entourage, the Sledgehammer and Energenekon cases were revealed to be largely fabricated and those jailed for the plots were released. Also symbolic is the arrest of two pilots involved in the downing of a Russian fighter plane above the Syrian border. Erdogan told media that it is being investigated whether the two had ties to the Gülen movement. This would seem to be a way to both ingratiate himself to Putin and pile one more accusation of treason onto the Gülenists.

Dov Friedman also goes into the divisions of the Turkish military in an article on the causes of the coup. After Erdogan and Gülen fell apart, Erdogan partly reversed the effects of the Energenekon and Sledgehammer purges, and then relied increasingly on the military for operations against the Kurds. Friedman suggests the increasingly ambitious operations against the Kurds made junior officers worry that Erdogan might turn to air strikes on targets in Turkish cities, which gave them pause. Eventually the military, newly confident and still distrustful of Erdogan, launched a coup in the middle of an ongoing purge of Gülenists from state institutions.

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