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December 15, 2016

Scared of its own electorate

Following on from our story yesterday, we now have now more corroboration that the Italian elections will be held in the second quarter of next year, possibly in June. The constitutional court confirmed yesterday that it will decide on January 11 whether the referendum on the Jobs Act, Matteo Renzi’s major economic reform, will be admissible. If it is, the referendum would have to be held between April and June. We do not anticipate that the government could conceivably win this referendum in the current political climate, as a result of which they will want to call elections merely to forestall another embarrassing referendum defeat. That would put the referendum back by another year, but it would still have to be held. Paolo Gentiloni, the new prime minister who yesterday received a vote of confidence in the Senate, said that 

“It seems to me that the prevailing attitude is to go to vote early, so before the referendum on the Jobs Act”

The statement tells us two things. This is not a man who expresses his own views, but those of others. And the Italian government now lives in fear of public opinion. We agree with the view expressed by Roberto Speranza, the leader of the PD in the chamber of deputies, that instead of running away from the electorate they should fix the actual problem. The trade union CGIL has already collected 3m signatures in favour of a referendum, more than the 500,000 needed.

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December 15, 2016

Towards a transitional deal

The Brexit debates used to have the quality of a slow-motion train wreck, but the debate is now moving in a direction that we have anticipated for some time. Whether the ultimate Brexit is hard or soft, there will have to be a transitional agreement to smooth things out, and to minimise the economic costs. This argument is strongly supported by Philip Hammond, the chancellor, while David Davis, the Brexit secretary, is now also accepting that a transitional period is at least possible. We should be discounting the continued talk about paying into the EU budget as a quid-pro-quo for membership of the single market. That option will not be on offer. Continued membership of the single market is highly unlikely, unless the UK and the EU were to agree on EEA membership or a bespoke arrangement with equivalent structures. But this would be inconsistent with any form of immigration control. It is yet possible for an interim agreement to include transitional membership of the customs union, during which the UK could naturally not negotiate third-party trade agreements, to be followed by a bilateral FTA at the end of the transition. The FT quotes Jacob Ress-Mogg, one of the Conservatives' most outspoken Brexit advocates, as saying that he, too, could live with a short transition period.

The FT also reports that the head of the Bank of England’s prudential regulation authority told the Treasury Select Committee that clarity about the transitional agreement would be vital for financial stability. He said such an agreement should be made ideally within nine months of triggering Article 50, i.e. before the end of 2017. Clarity would stop financial firms planning for a worst-case scenario. 

There is one area where the UK and the EU will need to co-operate - or even deepen their existing co-operation - and this is defence. Sophia Besch has an excellent analysis on the state of European defence and foreign policy coordination. Besch writes that the Europeans are underestimating the potential impact of Donald Trump, who has severely damaged the EU’s security by questioning Nato's security guarantee. And with Brexit the EU will lose one of its strongest European militaries, as well as a country in favour of more competition in defence procurement. She says that Trump is right to criticise the EU for lack of defence spending, and fears that differences between France and Germany on the future direction of the common security and defence policy might weaken the EU further. And it's going to be tricky to co-operate with, let alone integrate, the UK. 

“Brexit will not prevent the UK from participating in exercises and operations that are conducted outside the CSDP framework. But to include the UK in the EU’s military activities post-Brexit, London and Brussels will have to negotiate a third-country association arrangement...

The UK will not want to accept the subordinate role that the EU currently assigns to non-EU troop-contributing countries. British officials have indicated that they want to negotiate a ‘privileged’ partnership with the EU – though they have not yet specified what that entails. This means that the political fall-out from a worsening relationship between the EU-27 and London could affect the security and defence relationship as well. If the UK squanders Europe’s goodwill over the course of the Brexit negotiations, a privileged status for the British on defence matters may become elusive.”

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December 15, 2016

The comeback of Gerhard Schröder as the SPD's powerbroker

Spiegel Online has the story that Gerhard Schröder is likely to become a major player in the upcoming general elections. He is prodding Sigmar Gabriel to run against Angela Merkel, and he believes that Gabriel may have chance, despite opinion polls suggesting the contrary. There is a long history between the two men. Gabriel was Schröder’s protégé his time as prime minister of Lower Saxony, a position Gabriel inherited when Schröder became chancellor in 1998. The two are in regular contact, and at one of their latest personal meetings Schröder has told Gabriel that he should run against Merkel - and, we presume, strive for a coalition with the Greens and the Left Party. If Gabriel runs, Schröder will personally intervene in the campaign to help. While Schröder also supported the disastrous candidacy of Peer Steinbrück in 2013, he has now changed tack by operating in the background. Only after Gabriel declares will Schröder come out and become a leading figure in Gabriel’s campaign. While Gabriel is mostly distrusted in Germany, Schröder is still widely respected despite his personal links to Vladimir Putin.

There is only one way for Gabriel to become chancellor - through a coalition with the Greens and the Left Party, and this only if the three achieve more than 50% of the votes. The polls have them in the low- to mid-forties, so they are not there. But Schröder knows better than anyone that the gap is actually quite small, given how fast political fortunes can change. All it would take is another eurozone crisis, a refugee crisis, or another outbreak of internal divisions within the CDU/CSU - and all three are actually fairly probable events. It would be a mistake to treat the result of the German elections as a foregone conclusion.

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