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June 26, 2017

Brexit - the central case and the tail-risk

We are becoming increasingly convinced that the single biggest risk to a successful Article 50 negotiation is the Bremain campaign, which is currently gaining steam. The reason why we think this is counter-productive (from a pro-EU perspective) is that it may encourage the EU to offer a more punitive deal to the UK than it would otherwise do, in the hopes that this will further the cause of the Bremainers. The danger lies in a series of mutually reinforcing political misjudgements that could lead to exit without an agreement. 

This is not our central scenario - far from it. 

One scenario in which this could happen would be a chaotic Tory leadership election. David Davies, the Brexit secretary, yesterday tried to nip this in the bud by saying it would be a disaster for the Brexit talks if the Tories toppled Theresa May. We agree with this. The various wings of the Tory party all have every rational incentive to stay put. The Guardian reports this morning that a deal with the Northern Irish DUP is now almost concluded, and could be agreed by tomorrow. Our expectation is that this will be a stable minority government lasting at least two years.

The consensus is now shifting to the position we have been advocating for one year: accept that Brexit happens, accept that it has to involve an exit from the single market, but allow a very long transitional period to soften the economic impact and negotiate a comprehensive association and trade agreement. 

But there are still a number of commentators who keep beating the Bremain drum. Matthew Paris, like the Labour politician Chuka Umunna, believe the EU will go soft on freedom of movement and clamp down on it for the whole of the EU. Readers on the European continent should understand that these characters fall in the category of pro-Europeans in the UK. We are quoting from Parris just to demonstrate how intellectually shallow the case for Remain has become in the UK:

"The question, then, as we stand at the gate in March 2019, would be the old, old question that logic whispered we would face in the end: 'How is this better than what we had?' And the whisper 'you don’t have to do this, you know', will be growing more insistent from this week onwards. We are at our strongest before we take the plunge, and I believe that to keep us in, our European partners might at last be prepared to talk about a system of shock absorbers on internal migration — not just for Britain but for the whole EU."

Unlike Parris, Jonathan Freedland at least has got his facts straight, but he, too, cannot think of a plausible mechanism to bring about a Remain position in the UK parliament within the next 18 months or so, which would be the required. You will need an election, and a pro-Remain party to win it, which is clearly not on today’s political horizon.

A somewhat misleading assessment is that of Timothy Garten-Ash, who says that the transitional period will happen, and offer second-class membership of the EU. This is true, of course, but it is misleading in the sense that it only affects the transitional period. Once that period ends, the UK will either return to full EU membership under Article 49, or leave the EU with a Free Trade Agreement and ideally a broader association agreement, both of which have yet to be negotiated. 

Wolfgang Munchau notes in his FT column:

"It is a shame that so many Remain supporters have been banging on about undoing Brexit, rather than rallying behind the pragmatic idea of a long transitional period inside the single market. In doing so, they have weakened their influence in the debate. I also believe that Donald Tusk, president of the European Council, is ill-advised to keep talking about this possibility."

Larry Elliott provides a good account of why the Labour Party supports Brexit, albeit reluctantly. This is not only in deference to the Labour Brexit-supporters, but because it plans to introduce policies on state aid, infant industry protection, and public ownership, that would be harder to implement inside the EU. Also, the Labour Party cannot credibly demand that the poor have a voice following the Grenfell Tower inferno, and then overturn a referendum result.

And finally, for those who want a really glum scenario, the author and former journalist Robert Harris has this:

"May resigns, Boris PM; Boris sex scandal, Davis PM; UK leaves EU, no deal; Tories lose election; Corbyn = 5th UK PM in 3 yrs; Queen dies. The End"

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June 26, 2017

The German fear of Macron

The rise of Emmanuel Macron alarms the conservative ordo-liberal forces in Germany’s establishment, which is deeply distrustful of Angela Merkel’s ability to stand up in defence of the German vision for the eurozone economy. Thomas Mayer has encapsulated these fears in a comment in Frankfurter Allgemeine, in which he writes that Macron is a "dangerous partner". Mayer explains the difference between France and Germany as one of fundamental philosophy around the role of the state. France is guided by rational constructivism - the state is understood as an organisation to pursue specific goals, legitimised by democratic elections. The German understanding of politics is completely different. Germany is under the influence of Anglo-Saxon liberalism and the critical rationalism of Emmanual Kant. The role of the state is that of guardian of the rules that emerged as a societal consensus over time. The purpose of the rules is to give individuals the freedom to do what they want. 

These fundamental differences have led to many fudges in the construction of the monetary union, and continues to be a source of misunderstandings between the two countries. It is no surprise that France supports the ECB’s policies while Germany does not. Macron’s proposals for a eurozone fiscal capacity are also going in the same direction. Mayer fears that liberalism in Germany has weakened to such an extent that Germany will no longer be able to resist French advances. With Brexit Germany has lost a like-minded ally. And with Macron it regained an ally who is committed to an illiberal philosophy.

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