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February 22, 2017

Schulz and the neoliberals

Martin Schulz has found his campaign theme, which Gunter Bannas describes as the fight against neoliberalism. This notion is as common in Germany as it is uncommon in the Anglo-Saxon world, where liberalism never disappeared to be rediscovered. In Germany it is a dirty word, not used by liberals themselves, an amalgam that brings up a whole number of connotations: financial excesses; tax havens; oligarchs; rising income inequality; and weakening social systems. In his speech on which we reported yesterday, Schulz acknowledged that the SPD (or rather Gerhard Schröder) made mistakes, while simultaneously distancing himself from those policies. No SPD politician has been able to do this. Frank-Walter Steinmeier was the co-author of the Agenda 2010 reforms. Sigmar Gabriel was a close political ally of Schröder's; and Peer Steinbrück was the epitome of the neoliberal Social Democrat. Schulz offers the SPD a policy that bears resemblances to those of Oskar Lafontaine, but with a much greater chance of success since many of the right-wingers of the SPD now accept that the Agenda 2010 reforms - while right in principle - had many short-comings. One widely acknowledged problem has been the rising trend towards precarious forms of employment, like short-term contracts. 

There is another contrast to Schröder that Schulz embodies. While Schröder took on the trade unions, Schulz aligns himself with them.

Consider for a moment how the CDU/CSU might confront this. The CSU reluctantly supports Merkel as their joint candidate, but there are deep divisions on the chancellor’s refugee policies. And we would not be surprised if some CDU/CSU dissidents were hoping to come second at the election, which would allow them to get rid of Merkel and sharpen their conservative profile in a future grand coalition. We think this is the single biggest danger for Merkel.

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February 22, 2017

How to get back into the EU

We thought that Janan Ganesh nailed it this morning. The Remainers are right in the substance of their argument, he argues, but wrong in their strategy of trying to frustrate Brexit. The only way to undo Brexit is for Brexit to happen. We like the concise elegance of his main point:

“The people voted for a proposition. They want to see that proposition tested. If it tests badly enough, they will change their minds. But there is no way to skip a stage in the sequence. Brexit is an idea whose only effective rebuttal is its own implementation.”

He goes through a number of policy areas where Britain will want to keep as close ties as possible with the EU. The UK will opt back into Europol. It will maintain a system of regulatory equivalence. Over time, the UK will want to regain as much access to the EU as possible. The pro-Europeans will be able to salvage everything they want. He concluded with another true observation: the best case against Brexit was not the steep downside but the non-existent upside.

As a macro perspective on Brexit we see it exactly the same way - keep the UK as closely aligned to the EU as possible, but under no circumstance try to frustrate Brexit. We think this would be the most counter-productive strategy by pro-EU forces, many of whom still behave like they are under shock. 

In his latest analysis of how the Brexit negotiations will unfold, Charles Grant arrives at a similar conclusion:

"Whatever happens in the negotiations, Brexit will be hard. That is because both the UK and the 27 are placing politics and principles ahead of economically optimal outcomes. In the very long run, once both the UK and its partners have understood that a hard separation is not in anyone’s interests, serious politicians will start thinking about how to engineer closer relations."

Grant's observations are sensible from today’s position. But we expect the positions of both the EU, and possibly the UK as well, to shift as the reality of the Brexit negotiations sinks in. It is a mistake to think, as some commentators do, that the EU is strong and united in its approach to Brexit. That is only apparently so because the negotiations have not yet started, so we are still in the sound-bite stage with lots of reference to “cherry-picking” and the like. We noted a recent comment from Sigmar Gabriel that the EU should not penalise the UK, which we know is also the position of Angela Merkel. Germany will be a force of moderation. Once both sides are confronted with the actual costs of Brexit, they might conclude that they want to minimise those costs. That process has not started yet.

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February 22, 2017

The second phase of Trump

The appointment of retired army general H R McMaster as Donald Trump’s new national security adviser constitutes an important development, also for the EU. Following the utter confusion that dominated the Munich Security Conference over the weekend, with conflicting messages, there is now a foreign policy leadership in place that is very likely to tread more cautiously than many Europeans had feared. So, it is probably time to reconsider the notion that Trump will seek to destroy Nato and the EU. 

This is also why we would not overplay the report that Steven Bannon had told the German ambassador to the US that the EU was a flawed construct, and that the US would favour conducting its European policies on the basis of bilateral ties with member states. Bannon may well have said this, but his influence over the foreign policy course of the Trump administration is probably exaggerated. 

So is the notion of a US alliance with Russia. We noted a comment by Dmitri Trenin, who argues that there are superficial similarities between Trump and Vladimir Putin, but the strategic interests diverge. 

"Trump is clearly focused on containing China and destroying Islamic terrorism. For Putin, however, there is no question of siding with Washington against Beijing, with whom Moscow has built a solid relationship over the past 30 years. This relationship will not break unless China embarks on an adversarial course against Russia – a highly unlikely eventuality in the foreseeable future. The Washington-Beijing-Moscow triangle is back in play, but the US is far from being its main player."

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