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May 24, 2017

We are all anti-system now

While Emmanuel Macron reacts to the Manchester attacks by promising an anti-ISIS task force, and engages with trade unions and employers in a discussion of the labour law reforms he plans to roll out in autumn, media attention focuses on the legislative elections and the list of 7,882 candidates for the 577 constituencies, published yesterday. 

Cécile Cornudet finds that Republican and Socialist candidates started to show a Macron-compatible discourse. These are not isolated cases. Whether they want to be integrated in Macron’s success or not to be seen as part of a sectarian old-school party system, the temptation is there. In about 50 constituencies Republicans show themselves as Macron-compatible. Socialists trespass their party lines even more.  Benoît Hamon chose to support communists against Manuel Valls, Myriam El-Khomri and Malek Boutih.

We also note that Marine Le Pen, candidate in Pas-de-Calais, does not want to talk about euro membership ahead of the legislative elections, but promises as FN party leader to open up the debate about what French sovereignty means. She blames her defeat on the euro debate, and the party's internal discrepancies about it. 

A note on the rules for the two rounds of legislative elections: a candidate wins in the the first round if they get more than 50% of the votes. Otherwise the first two in the first round enter the second round, unless a third or a fourth candidate surpass 12.5% of registered voters. Then all four enter a three- or four-way second round. This is more difficult than it seems. Traditionally the participation rate is lower in the legislative elections than in the presidential elections. With a 50% participation rate, a candidate would have to garner 25% to qualify for the second round. So, the higher the participation rate, the more likely tripartite second rounds are.

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May 24, 2017

Are the UK’s cards in the Brexit talks really that weak?

We have always warned that the biggest risk to the Brexit talks is miscalculation - particularly on the side of the EU. This is the most important lesson for us from the Juncker/May dinner: Juncker came away more pessimistic because he realised that May is serious about her no-deal-is-better-than-a-bad-deal pledge. Juncker’s pessimism is actually good news because the EU has realised, for the first time, that it cannot overplay its hand - even if it is strong. 

In order for a deal to happen, the UK will need to level the playing field. We think that this is possible, and so does Peter Forster of the Daily Telegraph, but we think he is overreaching too. 

He lists five areas where the UK can exploit the EU’s weaknesses.

The first is money. A walk-out in 2018 would leave the EU with a big budget gap - about €17bn for the remaining budget period until end-2020. Germany and France are reluctant to plug the hole - which would worsen the already difficult stand-off between net contributors and net recipients. Expect an outcry from Poland in particular. There is obviously no way the UK will accept an accounting method that assigns all liabilities to the UK, but none of the EU’s assets. Forster writes the EU badly needs the cash, and is already drawing up scenarios for what to do if it gets €20bn, €30bn or €40bn. The EU might reclaim some money from the UK through legal procedures in case of a hard Brexit, but this could take many years - and take us beyond 2020.

We agree that money is indeed the clincher argument. We are less impressed by his other four points. One is that the UK can leverage the position of EU citizens. The problem with this argument is that they do not constitute an electorally relevant group in their home countries. His third point is infighting within the EU. Forster gets it wrong here. The threat is not the Federalists - on the contrary, many of the Federalists are glad to see the back of the UK. The real threat to unity in the EU negotiating position comes from business interests. Several industrial sectors have a lot to lose from a sudden Brexit. His fourth and fifth points are valid, but probably not decisive. A runaway UK could undermine the EU’s social model through lower taxation and reduced regulation. We don’t think this will happen, especially not given Theresa May’s break with unfettered free-market capitalism. And his final argument is that the EU would suffer reputational damage if negotiations failed. But that’s more of a future hindsight perspective than a real argument for today.

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May 24, 2017

How Merkel will play Macron

Clemens Fuest has given a surprisingly frank assessment of Germany’s euro diplomacy towards Emmanuel Macron: appear to engage with him initially, and then tweak the agenda to satisfy Germany’s interests. He notes that Germany has no interest in a eurozone parliament. Coalitions would emerge that would extract money from Berlin and redistribute it to other places. And Germany should, of course, reject an EU budget for investment, which is another redistribution mechanism. But Germany should take him up on his proposal for an EU insolvency procedure. Any move towards more risk sharing, he writes, must be linked to risk reduction and hard budget constraints.

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