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December 20, 2016

The politics of terror

The day was a reminder of the massive and ongoing insecurity Europe is facing now, and the potential this has to usurp the political agenda. The question we should be asking today is the one the German press did not discuss -  the political impact. The German media even appeared to be in denial last night that this was a terrorist attack. And while we generally do not quote the AfD as a source for anything, they were factually right with the observation that if you wanted to get a sense of what happened in Berlin last night you had to tune into the US or UK media because the German media were still pretending that this may have just been an accident. This in itself is bound to fuel conspiracy theories that the media will do anything to support Angela Merkel's refugee policy. You may recall the story we had recently about the main evening news censoring an item about a young student killed by a refugee. If you want to believe in a conspiracy, the German media are not making it hard right now for the right-wingers to believe in the notion of a "Lügenpresse", an expression used by the Nazis before 1933 to denote the media that were hostile to them. There is, of course, no conspiracy, just a combination of terrible journalism and self-censorship. But this stuff can swing elections.

What happened last night was, of course, a terrorist attack. The man arrested was either from Afghanistan or Pakistan. Isis has claimed responsibility for the attack. By this morning 12 people were dead, about 50 were injured. This is not quite on the scale of what happened in Nice last summer, though it was clearly a copycat attack. The lorry used in this attack was not rented but hijacked. It is the first big terrorist attack in Germany - not only in terms of the number of people who died or were injured, but in terms of how it affects ordinary life. Christmas markets are part of German life as the July 14 celebrations are for France. The idea, peddled time and again, that these attacks do not change our way of life is nonsense because they already have. 

Germany had a number of lucky escapes, as France and Belgium had been the main targets by terrorists in Europe so far. One of the questions we will need to watch out for is whether the suspect was a refugee, or someone who had lived in Germany before, and how this will shape the debate about violence committed by refugees and migrants. Official statistics show that the crime rate of refugees is lower than that of ordinary residents, but like any statistics this number has to be treated with some caution, and is in particular challenged by the right. Since police did, for example, not intervene in the attacks by North African migrants against women in Cologne last New Year's Eve, the presumption has to be that crimes committed by refugees and migrants are consistently under-recorded for political reasons.

The political impact of this - and subsequent - terror attacks on Germany could be significant. One often debated residual danger is that Turkey may flood the EU with refugees just before the Italian or German elections. We don't think this is the most likely outcome, since both Turkey and the EU are currently trying hard not to let their relationship deteriorate completely. But, even if Erdogan sticks to the deal, Merkel's refugee policy still constitutes a mortal risk to the CDU/CSU next year. A senior AfD politician called the 12 victims "Merkel's dead" last night, a taste of the debate to come. With each attack, expect the AfD to benefit politically as it will peddle the message that Merkel's policy has made the country less safe. As this debate unfolds, also expect nervousness inside the CDU/CSU, where a majority are opposed to the policies themselves, but still support Merkel tactically because she is the candidate most likely to win. Watch out if that were no longer case.

This is one of several factors why we would be cautious to call the German elections prematurely as other commentators have done. Whatever the polls may say now, this is not going to be a cakewalk for Merkel. The risks are bigger than ever before.

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December 20, 2016

On Lagarde

Christine Lagarde survived her court case. The board of the IMF immediately rushed to her support, as did current and former staffers like Olivier Blanchard. The court found her guilty of negligence in the Tapie affair. There will no criminal record. Nor will there be a penalty. She will not appeal. So, on that level, the Tapie affaire is over. As Le Monde writes, there is no appetite in Europe's chancelleries for a change at the top of the IMF one month before Donald Trump ascends to the US presidency.

On another level, an aftertaste lingers. One point made by Le Monde is whether the IMF can credibly demand fiscal discipline of a programme country when its chief has carelessly allowed a transfer of half a billion euros to a dodgy businessman. The normally cautious Michaela Wiegel, Frankfurt correspondent of FAZ, also noted in a comment that Lagarde's reputation has been affected by this.

Another point to watch out for is how this will shape the debate about the IMF's future leadership. Her term runs until 2021, just beyond Trump's first four-year term. We would expect her to be the last European at the head of the IMF for a long time. One point that people will make in the debate is that the last three IMF chiefs - all European of course - have run into conflict with the law: Rodrigo Rato, Dominique Strauss-Kahn, and now Lagarde.

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December 20, 2016

Is a disruptive Brexit possible?

The answer is: of course, it is. The Brexit process is technically and politically complicated. To us, the single biggest risk is failure by the EU-27 to stick to a common negotiating position. Gideon Rachman looks at another scenario whereby the right-wing of the Conservative Party and the media would force Theresa May to reject any notion of a "divorce bill" as the likely costs of the Brexit procedure are known in the UK press. The pragmatic answer would be to negotiate the demands downwards, as Rachman notes, and stretch the payments over many years. But that may not be possible politically.

"As a result, it is entirely likely that Britain will simply stalk out of the talks, after which the matter will go to arbitration at the International Court of Justice in The Hague. The ICJ could take years to reach a decision. But in the meantime the clock will be ticking. With Britain and the EU facing off in the international courts, it will prove impossible to make any further progress on negotiating Brexit. The anger stoked against the EU in Britain by the budget dispute would also make it impossible for the UK to reverse course and abandon Brexit. A similar hardening of opinion would occur on the European side. And that would probably prevent the EU agreeing to extend negotiations with the UK beyond two years. As a result, Brexit would happen after two years in the most abrupt and damaging fashion possible: with Britain’s membership of the EU simply lapsing."

We think that an extension of the negotiations is not likely in any case, simply because it cannot be in May's interest to push the Article 50 process into or beyond the next elections. If Article 50 is triggered in 2017, the probability must be very high that the UK will formally leave the EU in 2019. The transitional deal comes afterwards. Its purpose is not to extend EU membership but to smooth the economic adjustment - both for the UK itself and for the EU, too.

And this remains the most probable Brexit scenario in our view because it aligns the interests of most of the participants. May gets to deliver Brexit before the next elections. The British economy would be fine in this scenario. Brexit in itself will not trigger the departure of other countries. The election of Donald Trump and the presence of Vladimir Putin render a departure less desirable for most EU countries. There will be less risk of financial instability that could result from a cut-off of the eurozone's financial centre. And the last thing the EU needs right now is a major falling out with a former member when there is a risk of a resurgent eurozone crisis.

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