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May 03, 2017

Brexit at €100bn now. Any further offers before the auction closes?

We thought the leak of the Juncker-May dinner conversation was amateurish, very likely to strengthen Theresa May in the UK, and reduce the role of the European Commission in the upcoming Brexit talks. We do not think that any of this will alter the Brexit negotiation outcome. A deal is possible if both sides want it - and impossible if one does not. 

Another news story made headlines this morning: that the EU is now upping the Brexit bill from around €60bn to around €100bn. This can, of course, not be a serious proposal, and it can only mean one of two things. They are setting out a tough negotiating position from which they will step back eventually. Or they want this to fail - because the UK will clearly not hand over so much money. We don’t think the UK will even accept the notion of a formal “bill”.

The FT has made its calculation on the basis of the latest EU negotiating mandate, but notes that any number depends on a wide range of factors, such as the exit date, the transitional deal, and various technical and political assumptions. The wiggle room is massive. 

But what has changed the overall level of the payments is that, at the insistence of France and Poland, the EU now wants to make the UK pay for post-Brexit agricultural subsidies, while Germany opposes Britain getting any money for its EU assets. Michel Barnier is quoted as saying that, for now, all he wants is for the UK to agree a methodology by which this issue can be addressed before any trade talks can start. He is due to unveil his negotiating mandate today.

The FT has calculated that the total costs range between €91bn-€113bn gross, the difference being accounted for by assumptions about the UK’s share of future costs. This will come down to a net cost of €55bn-€75bn. The difference between gross and net consists of advances, including loans, that will be repaid in the future. 

There are no prizes for guessing the political reaction in the UK to these numbers.

The Guardian reports that Theresa May taking up a line from Kenneth Clarke, who once called her "a bloody difficult woman". She said she will approach the upcoming talks in this spirit. The article also says that her position is that the UK is not under any legal requirement to pay a single penny - so we are starting these negotiations with the widest possible gap. The article also quotes unnamed sources as confirming that the expectations of difficult Brexit negotiations were the principal reason why May called am election.

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May 03, 2017

Is the IMF too optimistic about global growth?

We note a race by some analysts and commentators to be the first to declare that the crisis is over. This race began in 2011, and was joined by the ECB at the time. There have been several false dawns since. What about now?

We believe that the current recovery is probably more substantial than previous ones. Financial crises end eventually, even the worst ones. But as Carmen and Vince Reinhart point out, there can be no question of a return to the status quo ante. The authors argue that the very positive sentiment at the recent IMF/World Bank spring meetings may have been too optimistic. They note that, in Europe, growth is still 20% below the pre-2007 trendline. We have some quibbles with the methodology of extrapolating trends from a bubble period, but there can be no question that the output loss that resulted from the financial and eurozone crises was massive and has been persistent. 

Where we agree with the authors is their warning about the impact of the fall in potential output. According to IMF estimates, real potential GDP growth in advanced economies has fallen from 2.71% in 2001 to just 1.28% a few years ago. The decline in the US was from 4% to 1.5%. The main reasons are ageing populations withdrawing from the labour market. And the authors note that at a 4% growth rate GDP doubles in 18 years, while it takes 48 years with growth of 1.5%. The authors end up casting doubt that political leaders will make the policy choices that are necessary in such an environment.

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