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October 03, 2016

Hard, harder, hardest

Now we know the British government's plan for Brexit. Theresa May said as much as could conceivably be said, considering that the negotiations with the EU have yet to start. But she set out Britain's position with great clarity. The most important point is not the March 2017 deadline for triggering the article 50 procedure. It was always clear that this would have to happen either in Q1 or Q4. It is the goals and the procedures. The goal is full sovereignty from all EU institutions and laws, including the European Court of Justice. The priority will be immigration control. In relation to the single market, she is not talking about membership, but about trade. Her goal is 

"to give British companies the maximum freedom to trade with and operate in the single market and let European businesses do the same here".

There you have it. This is telling us that Britain will clearly be leaving the customs union, and seek a bilateral trade agreement with the EU. There will clearly be a time gap between the date of Brexit - presumably July 1, 2019 - and the entry into force of a EU/UK trade deal, so nothing she said rules out a longish transitional period. But we doubt that this agreement could be longer than five years for political reasons. If Brexit is not fully consummated in the following parliament, the procedure may lack credibility. We would not be surprised to hear that one of the sticking points of the Art 50 negotiations will be the precise legal basis of the future trade agreement. The EU can, if it chooses to, ratify trade agreements without member state ratification, as long as the trade agreement is sufficiently narrow. 

The legal method by which May will extricate the country from the EU is the repeal of the 1972 European Communities Act - which she called the Great Repeal Bill. Parliament will not get a vote on Article 50 itself - unless a court overturns this - but it will naturally have a say on the repeal bill. 

We would categorise her plans as a hard Brexit - hard in the sense that it will leave the UK fully sovereign outside the EU, with a bilateral trade and investment agreement only. The Guardian talks about an advantageous relationship with the single market without joining it. This is a big call, the paper writes, and details matter. We think it will be a privileged version of a bilateral trade agreement: tariff-free trade for merchandise, and bits and pieces agreed for some industries - those that can claim regulatory equivalence. Beware, though, that two fully sovereign entities may not be able to maintain regulatory equivalence indefinitely. Democracy will get in the way. 

We broadly agree with the comment by Sebastian Payne in the FT who said May made the right decision. Her government needed time to get to the point where they are now. Nobody can accuse her government of not having a plan (a criticism that seemed always unfair to us, given the complexities of the issue). Nor can anyone doubt now that Brexit will actually happen. But while the goal is now set out clearly, the process is going to be very messy.

The Guardian ended its editorial on a sad note, to which we have a riposte below:

"... it is a very dispiriting spectacle to anyone who wants the terms of Britain’s departure from the EU to contain some recognition that 48% of the electorate rejected the proposition altogether. The tone, as well as the content, of Sunday’s speeches from David Davis and Mr Johnson did little to calm the nerves of those who want the prime minister to navigate a wise course between the most extreme appetite for separation and a realistic acknowledgment that economic and diplomatic intimacy with our nearest neighbours and allies remains fundamental to the national interest."

We agree that this is bad news for the 48% who voted Remain. The referendum was a binary, winner-takes all decision. But one reason is the insane "Bregret" strategy by some former Remain advocates, who are seeking to undo the process either through parliamentary procedures, through technical obstacles, or through a second referendum. That has only reinforced the Brexiteers in their determination to lock the door and throw away the key. The Remainers should have immediately accepted the result, and provided intellectual leadership in the subsequent debate, instead of continuing the referendum campaign.

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October 03, 2016

PSOE cuts its nose to spite its face

The PSOE's federal committee bickered for ten hours on Saturday to make it through an agenda with just two action items: to report on the resignation of 17 members of the party executive, and to convene an extraordinary party congress to replace the party executive and the secretary general. Just to agree who would preside the meeting took three hours, followed by a lengthy disagreement on the agenda, and then on whether the vote should be by show of hands or by secret ballot. When Pedro Sánchez reportedly brought out ballot boxes he was accused of ballot-stuffing by his opponents, who then prevailed by 132 to 107 in a show of hands. Sánchez then resigned as Secretary General and, while he spoke to journalists in the press room, the committee appointed a steering group to replace him and the party executive until an as-yet unscheduled ordinary congress can be held, in principle after a government is formed in Spain but no later than February as the latest party congress was in February 2013. Significantly, the Catalan socialists will be not represented in the steering group for now.

The sorry spectacle left the Socialist party demoralised, but also without a clear strategy going forward. The PSOE now needs Mariano Rajoy to attempt to be appointed PM again, so that they can abstain and avoid new elections in mid-December. In case of new elections, candidate lists must be filed around mid-November and, if there isn't a government by October 23, the PSOE would have barely enough time to call a party primary to select a new PM candidate before the deadline. And the people behind the PSOE steering group would want to delay a party primary until at least January. Doing without a primary would risk alienating much of the party base.

Aware that he's now in a position of strength, Mariano Rajoy now intends to demand government stability guarantees from the PSOE, writes El Mundo. Without a commitment to pass at least two budgets, for instance, Rajoy would tell King Felipe he does not have the support to be PM and Spain would go to third elections, at which the PSOE would now presumably be routed. So far, PSOE regional leaders continue to insist the party will oppose Rajoy's appointment as PM. But one way or the other Rajoy will have a second term in office and, depending on how things play out, the PP may remain the hegemonic political force in Spain for several election cycles.

Pedro Sánchez, who in his two years of leadership managed to alienate large parts of his party and shares some responsibility for the PSOE's poor election results, has now acquired a substantial amount of credibility with the party base. Odón Elorza, a well-respected socialist MP, writes that Sánchez' loss of control over the party may well be temporary. He won't be the one to pay the political cost of the coming difficult decisions on Rajoy's PM bid, or negotiating an alternative government, or leading the party into a third election. And he will be able to say he already paid the price of the past bad election results. It seems likely that Sánchez will contest the next party primary whenever it takes place. The situation is, overall, bad for the PSOE, which cut its nose to spite its face.

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October 03, 2016

In defence of Jeremy Corbyn

Readers will know our scepticism of survey-based methods in politics and economics - the attempt to make predictions on the basis of small samples. Political analysts often go to further extremes by forming universal judgements on the basis of two or three observations. The successes of Bill Clinton and Tony Blair are often cited as proof that centre-left parties have to govern from the centre. Wolfgang Munchau disputes this, arguing that this may have been true until the financial crisis but no longer. Some combination of fiscal austerity, quantitative easing, and ongoing globalisation has produced wider income differentials, followed by the strongest political backlash our generation has experienced. Munchau invokes the experience of the SPD during the 1930s, when they supported the deflationary policies of Heinrich Brüning, which allowed Hitler to claim power in 1933. Munchau says while it is nowadays fairly normal for mainstream economists to advocate big increases in investment spending, the political parties that offer such a choice in Europe are radical parties of the left and the right, and Jeremy Corbyn's Labour Party in the UK. He writes that, unless the centre-left parties adopt radical public sector investment agendas, the fringe parties will continue to prosper. Since unilateral increases in investment are not compatible with the EU's deficit rules, they should either go for full fiscal union - one that delivers investment - or, if that is not attainable, they should favour euro withdrawal so they can extricate themselves from the deficit rules. Only the full-in and full-out options allow for more investment. It is the middle way that produces economic stagnation.

In this context we noted a column in the Daily Telegraph by Dominic Raab, a Conservative MP, who warns Conservatives not to underestimate Corbyn.

"Make no mistake, Corbyn is dangerous. He deserves respect as a conviction politician in an age of spin. His fringe politics make his ability to mobilise mass support all the more remarkable."

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