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January 18, 2017

Will she walk?

Theresa May’s Brexit speech did not contain all that much hard information we did not know already, but it was still an important speech, one that marks an important moment, perhaps the point in many people’s consciousness that Brexit may actually happen. Beyond the symbolism, it is worth looking at some aspects of her speech in some greater detail. To us the two most important bits of her speech were her preference for an interim agreement, and a clearly stated negotiating position that she would walk away from the deal if there is none. 

Sebastian Payne made an important point yesterday. It was clear that David Cameron wanted a deal badly, which is why he did not get a good one. May’s credible commitment to walk away from a bad deal makes a deal more likely. A treaty-less Brexit is a scenario the EU clearly wants to avoid, given the multiple crises it already has to deal with. Since May explicitly ruled out continued membership of the single market, the EU-27’s blackmail potential is significantly reduced. All the Brits want is a symmetric trade deal with a transitional arrangement - Canada+ as some people call it - which seems a reasonable proposition. 

While May expressed a preference for a transitional agreement, the nature of the transition remains murky. She talked about becoming “an associate member of the customs union in some way”, which does not make sense to us. When you are in a customs union, you must respect its third-country trade arrangements. When you are outside, you can do your own. The customs union is binary. She talked about phasing-in Brexit, without giving a time frame in her speech. This suggests that the shape and length of the interim agreements remains the biggest uncertainty about Brexit - and one that clearly cannot be resolved ex-ante because it also depends on the other 27.

We will not summarise her twelve points - some are duplicates, all are known. 

More important perhaps was the positive tone of the speech. She held out the possibility of co-operation with the EU in areas such as security and crime prevention.

The pound shot up yesterday in response to the speech, by about 3% in the afternoon, which we see as confirmation that the worst news is out now.

Donald Tusk welcomed her speech as realistic - presumably because it falls inside his own framework of “a hard Brexit, or no Brexit”. It will be a hard Brexit - in the sense of a complete withdrawal from the EU, its institutions, and its legal framework.

Charles Grant made an interesting point on the transition phase: 

“Sensibly, May has committed herself to an implementation phase’ to start when Article 50 is concluded, which will in practice last until the various negotiations are completed. But it was unwise of No 10 to brief after the speech that everything would be negotiated in two years, because it will not be.”

This seems right to us. The negotiations will not take ten years, but they cannot be wrapped up quickly either. Sebastian Payne offers the following comment in the FT about May’s strategy:

“Mrs May’s Brexit approach is to abandon all elements of EU membership and then claw some back, notably on customs and security. It is a strategy designed to satisfy the country’s political mood...Aside from the unnecessary threat that Britain will walk away if offered a ‘bad deal’, the tone and content of the speech was well judged. After plenty of stick brandished in Europe’s direction, there were lots of carrots in the talk of friendship and a new ‘strategic partnership’.”

And finally, we may recall our rant in yesterday’s briefing that politicians and journalists on the continent were still hopeful that Brexit may never happen once the British wake up from their nightmare and see the light. We assume that the clarity of her presentation will have persuaded at least some people to take Brexit a tad more seriously. One person who did not was Alain Lamassoure, MEP, a French Republican. He called her statement incomprehensible because it was in the clear interest of the UK to stay in the single market, which has been, presumably, his working assumption about Brexit. The same goes for a number of German MEPs. Politico quotes Lamassoure as saying:

“It’s a kind of economic and business suicide that makes it hard to understand what is going on over the other side of the Channel.”

That’s a vast exaggeration of the benefits of the single market, the kind of unthinking lose talk you keep on hearing in Brussels. Whatever the benefits of the single market may be, the political reality that has escaped Lamassoure and many other continental politicians is that for the first time in living memory a British prime minister no longer prioritises economic output at the expense of everything else. 

 

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January 18, 2017

Should we shut up about globalisation?

There is a class of political economy arguments that goes like this: We note a problem, and posit an ideal solution. Populists identify the problem, but instead of solving the problem, they propose a diversion. We cry foul, and say that we should solve the problem instead. 

An example is the debate about monetary union. We know that a monetary union requires a political/fiscal/banking union to be sustainable. But politics has prevented that path. The populists are blaming the monetary union itself. But you could also say that the problem is not the monetary union, but the lack of its completion. The backward looking argument of the populists though sounds convincing to many people: Since a meaningful political union is not realistic, they argue, it is best to dismantle the monetary union.

Forgive the long preamble, but we fear that Angus Deaton has fallen into the same trap - the trap of a bottom-up argument, the kind of which that works better in economics than in politics. Deaton argues, correctly, that we should stop blaming globalisation for inequality. The threat to the middle classes are robots, not free trade. Restrictive trade policies will not address the problem. He is right to argue that the problem is not inequality as such, but the wrong type of inequality - rent seeking behaviour and even more disturbingly, corrupt political institutions. This needs fixing. 

This analysis is as logically correct as it is politically naive. The liberal establishment has allowed the corruption to happen. They could have fixed it but chose not to. They could fix it now, but don't. Their approach to crisis resolution has been to kick the can down the road, to preserve the assets of the wealthy, and to squeeze the incomes of the poor through fiscal contraction. The populists do not provide any real solutions, but, crucially, they offer the hope for regime change. The liberal establishment, and especially those trained in the rigour of macroeconomic thinking, ignore this particular appeal of the populists at their peril. Our lack of responsiveness is the fundamental reason why the populists stand a good chance of winning this seminal conflict - not everywhere, perhaps not in France, but in large parts of the industrialised world.

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January 18, 2017

Political renewal à la française

The French are interested in politics but mistrust their politicians. A Cevifop survey for Les Echos confirm for what we wrote above, there is a thirst for renewal that makes populists so appealing. The poll shows that 89% of the French consider that politicians don’t care about their problems, 75% consider that politicians are corrupt somehow and 70% consider that democracy is not really working in France. They view politicians as non-empathetic and abstract talking, who won’t keep promises and is only caring about the rich and the powerful. The responses were even more pronounced in those society groups that were more affected by the consequences globalisation, the perfect ground for the Front National. They are still attached to the representative democracy, but not satisfied with its operation nor its efficiency. They want a renewal of the political class and its practises. According to this poll, Emmanuel Macron and Jean-Luc Mélenchon correspond well to this trend on which already Nicolas Sarkozy was building on. 

On the other end is Francois Fillon. In a concerted action three of his supporters describe Macron as the new Hollande: promising the promised land without offering much. And where Macron does offer something, it is fiscally expensive. In other words, Macron is not a serious candidate. By contrast, Fillon is painted as the serious candidate that goes into the details, he is the one to trust, so goes the tenor of their opeds.

Cecile Cornudet likened the two profiles that emerge from this with one of Balzac’s books Mémoires de deux jeunes mariées: Will the future president of France be a marriage of love or a marriage of reason? In his book Balzac concluded that happiness is formed on reason. What will the French vote?

We are reminded of the enthusiasm that Alexis Tsipras once inspired as a young charismatic anti-establishment leader and look what he has become. There was nothing much left, except his capacity of a very gifted tactical politician. Then again, France is not Greece. And today the yearning for political renewal is much more established than it was years ago. Is this the beginning of a new era?

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