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February 10, 2017

Brexit realism

We have compared the mental state of those in the UK who supported the Remain to a process of mourning. After the period of denial and anger, we are entering the stages of bargaining and depression. This is good because it moves us forward and because it reduces the still considerable risk of an accident down the road, the worst of which would be the UK crashing out of the EU without a treaty. Acceptance is the final stage. We are not there yet.

Andrew Duff notes that Brexit is now effectively a done deal. The House of Commons has a theoretically negative vote, but it cannot get the UK back into membership after the trigger of Article 50. Duff goes through the legal and political processes a reversal decision would involve. The right to an Art 50 reversal is in principle broadly agreed, but it is far from clear whether the European Council and the European Parliament would accept it. There may be limited circumstances where the EU would accept an extension of the two-year deadline by unanimity, but the EU will never allow a recalcitrant UK to procrastinate, to delay for the sake of a delay. The points of ambiguity that have yet to be addressed are the timing and sequencing of the Art 50 negotiations; the nature of the transitional agreement; the eventual customs arrangement; and the question of judicial oversight of the future trade relationships.

On the latter point, we noted an interesting suggestion by Alan Dashwood. He proposes that the Efta court should be given this role despite the fact that the UK will not become a member of the EEA. The Efta court would not be another ECJ, but a mere dispute-settlement institution for trade-related conflicts. He argues that the focus would be economic, not political, and the Efta court stands beyond suspicions of being driven by political ideology.

On the point of whether a return to the EU is still theoretically possible, George Parker has a story that debunks the idea. He quotes a suggestion that an early vote by the House of Commons to reject the draft agreement could lead to massive lobbying pressure on the government by the City and by business to try to reopen negotiations. This idea is dismissed by Nick Clegg, the LibDem leader, who takes the view that the UK parliament

"has been cowed and intimidated by the referendum result, the ferocity of the Eurosceptic press and the unforgiving stance of Theresa May...You have seen how cowed MPs have been this week...The build up to any parliamentary vote would be preceded by a drumbeat about Johnny Foreigner wanting our money, dressed up in the language of the Blitz spirit.”

The Labour party will be largely compliant in this process. Heather Stewart writes that rumours of Jeremy Corbyn's political death are exaggerated, and that the time for Clive Lewis, a pro-Remain left-winger, has not yet come. Even if Brexit turns out to be an unmitigated disaster, it is far from clear whether the public would turn to the pro-Remain politicians, rather than finding someone else to blame - the EU, naturally. Corbyn himself acted politically sensibly, she says. He had no choice but to accept the referendum result, and thus the Article 50 vote, and no choice in avoiding a conflict with the Remain faction in his party. 

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February 10, 2017

How not to attack the populists

We have made the point that populist economics could succeed before it fails. Andres Velasco, the former Chilean finance minister, makes the same point from a Latin American perspective, a subcontinent that has a lot more experience with economic populism that we do - Peron, Vargas, Ortega, and Allende. These policies always fail in the end, but it could take a very long time until that moment arrives. This is the lesson pro-establishment liberals should bear in mind when they forecast doom, as they did in the Brexit debates or during the US presidential campaign.

Velasco refers to a paper by Sebastian Edwards and Rüdiger Dornbusch who made the point that economic populism ultimately fails because it is unsustainable. Velasco argues that the time lapse depends predominantly on initial conditions. That observation is bad news for us in the west, because we are starting from a position of deflation and, in some countries, high unemployment.

"Yes, the unemployment rate has dropped considerably in the US. But after so many shocks and so much technological change over the last decade, there is considerable uncertainty about how much unused capacity remains and where the non-accelerating inflation rate of unemployment (NAIRU) lies. It could well be that the likes of Trump find that they can stimulate the economy for quite a while before obvious imbalances emerge."

Jan-Werner Müller makes another pertinent point about the populists. They rarely achieve their political goals on their own, but rely on establishment parties and politicians as helpers - witness Brexit. (The same was true, of course, for the rise of Hitler, who was supported by a large nationalist party on the right.) Müller notes that it is important also to consider the populists of the centre itself - for example, Viktor Orbán, whose Fidesz was not always a populist party. Likewise, Law and Justice in Poland did not campaign on a populist platform in 2010 and only transformed itself into an anti-liberal populist party afterwards.

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February 10, 2017

On German hegemony

George Soros is fearful about the future of western liberalism in general, and over here in Europe the trend towards illiberalism is compounded by the way Germany is imposing its will on other countries. The problem is not that Germany emerged as Europe's hegemonic power, but that Germany failed to live to the obligations that a successful hegemon must fulfil, which is to look beyond its narrow self-interest. Compare with the behaviour of the US after the second world war. Soros says he is worried that the EU might increasingly come under the influence of Russia - a worry we share.

On a more specific point of German hegemonic behaviour, we noted a commentary by Carsten Gerner-Beuerle, who argues against Germany's unilateral legal interpretation that debt relief for Greece would be against European law. The legal arguments are not fully settled, but the present jurisprudence suggests that the room for manoeuvre is much larger than Wolfgang Schäuble admits. The author argues that the Germans are trying to monopolise the interpretation of Art 125 TFEU, the famous no-bailout clause. He cites the Pringle case, in which the court allowed EU countries to help each other - short of taking over existing liabilities. This has paved the way for the ESM, secondary market bond purchase, and the like - all of which are described in Germany as breaches of the no-bailout clause. 

So, what assistance is legitimate and what is not? The best way to draw a line is to consider the objective of Art 125. It is to prevent moral hazard. Here is the crux of his rather clever argument:

"To achieve this aim, it is essential that the Member State is subject to market discipline ex ante, i.e. the market does not price government bonds on the basis of the expectation that the Member State will receive financial assistance when it experiences a liquidity crisis. On the other hand, whether the ESM is repaid in full, and whether it charges an appropriate margin, does not influence the expectations of the market and, hence, the incentives of Member States to maintain budgetary discipline before a liquidity crisis occurs."

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