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June 12, 2017

Not strong perhaps, but stable

The political commentariat in the UK is flustered. Like Theresa May, they, too, miscalculated and let conventional wisdom dominate their thinking. This weekend they doubled down. Brexit would be soft, virtually every commentator writes, and May will probably be toppled.

It is impossible to forecast dynamical political events, but instead of focusing on meaningless soundbites - like George Osborne’s Dead Woman Walking - consider the incentives. The Tories have 318 seats. The Northern Irish Democratic Unionist Party has 10. Together, the coalition has a de facto majority of 10 - 328 seats versus 318 for all the opposition parties combined, minus Sinn Fein who do not take up their seats. The Fixed Term Parliaments Act would trigger immediate elections if the opposition were to win a no-confidence motion on the government. But the latest opinion polls show that Labour is now ahead of the Tories by some six points. If the Tories ditched May, there would be a civil war inside the Tory party, and no chance that the coalition would survive. For this to work, the Tories would need to calculate that a new leader, Boris Johnson presumably, would win an election. It is our assumption that they will not take the risk. They are stuck with May, like it or not.

We agree with the Financial Times news story that says: 

“In spite of widespread anger ... most [Tory MPs] believe that keeping a weakened prime minister in Downing Street is better than the alternatives.”

Charles Moore is spot-on when he writes:

"the arithmetic of the election means the most likely upshot is that the British people will not be asked to vote again for five years."

What about Brexit? The conventional wisdom before the elections was that Brexit would be hard. After the elections it is that Brexit will become soft. We have argued before that a re-elected British prime minister would be open to a long transitional period despite of what they said in public. May herself alluded to that on several occasions. A transitional agreement would keep single market and customs union membership intact, along with free movement of labour. That agreement could be renewed, potentially forever. It buys time for the negotiation of a comprehensive free trade agreement. 

After the elections the situation is not much different - except that this reality is now acknowledged. When we read in The Times that Philip Hammond, the chancellor, will insist that the interests of business be taken into account, he is right of course. It should happen, and it will happen. And the deal with the DUP, the only Northern Irish party in favour of Brexit, will ensure that the intra-Irish border stays open. This can only happen if the UK stays, at the very least, in the customs union, which it will do for as long as the transitional period can be agreed to last for at least the lifetime of this parliament.

Beyond we see no loosening of the Brexit process itself. Wolfgang Münchau notes in the FT that UK commentators tend to misjudge three factors:. The first is that the shape of Brexit is not the UK’s decision alone. The second is that the Brexit process is driven by the legal procedures of the EU, not whether commentators think a UK prime minister has a mandate or not. And the lack of a large majority is irrelevant. Ms May’s government looks a good deal more stable than many continental governments.

The following is our baseline scenario: May stays in office, for now. Article 50 negotiations start. Agreement is reached with a view to a lengthy, and possibly renewable, transitional period that is tantamount to the Norway option - with no immigration control whatsoever during that period.

What are the risks to this central scenario? 

It is possible that Conservative MPs simply miscalculate, just as Theresa May miscalculated when she called the election. They might think that they could win. Jeremy Corbyn could become prime minsiter. Brexit would probably be unaffected - he would not reverse it, but Labour would also accept a interim regime with full single-market membership. 

The second risk is that the 10-seat majority may wither. A majority of ten should be enough to get you through the full five years - even if you lose by-elections. But it might not be. If you think that the majority will not hold, you may conclude that your best bet - out of a series of bad bets - is to choose Johnson now (for there is no one else), and hope that he could defeat Corbyn.

The third risk lies with the DUP. As Jonathan Powell reminds us, the DUP leaders are the radicals who walked out on the Good Friday Agreement. It has been a tenet of UK politics for large parties not to align with any of the Northern Irish parties in order not to upset the political balance there. The Tories linking up with the DUP could have devastating implications for Northern Ireland.

But none of these scenarios would impact the Brexit trajectory. Both the Tories and the Labour Party support Brexit.

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June 12, 2017

Catalan independence, a mental state

After much foreshadowing, the Catalan regional premier Carles Puigdemont announced at the end of last week that his government's intention to hold an independence referendum on October 1st whether or not the Spanish parliament authorises it. The question will be: 

"Do you want Catalonia to be an independent state, in the form of a republic?".

This follows an exchange of letters between him and Mariano Rajoy buried the timid attempt at a dialogue between the national and regional governments, which never really got off the ground. Puigdemont then reacted by querying the Venice commission of the Council of Europe on constitutional affairs, which responded that any referendum must be agreed in accordance with the constitution. As it happened with an earlier Venice commission ruling, everyone is interpreting this to suit their own position. Puigdemont interprets that the Venice commission is saying the Spanish government must agree to negotiate a referendum according to the constitution. Those opposed to holding the referendum interpret it as saying that the referendum cannot go ahead outside the Spanish constitution and without agreement. This may seem silly, but it is important for narrative reasons. Catalan separatists consider it central to their cause to be able to claim that international law is on their side.

The Spanish government has not reacted to the announcement, except to say it is ready to take the necessary legal measures to stop it. Last week, before Puigdemont's announcement, deputy PM Soraya Sáenz de Santamaría warned Catalan civil servants explicitly that they would be breaching the law if they cooperate with carrying out the referendum. Meanwhile, a story in El Periódico notes that the announcement is not an executive order, but just a political statement, and calls the referendum date and question "a mental state". It is a way to boost the morale of the separatist grass-roots, but it still has no legal consequences.

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