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July 17, 2017

What Tony Blair's Brexit confusion tells us

Tony Blair made two contradictory comments over the weekend, which we think are useful to discuss in some depth because they highlight the two fundamental confusions of British EU supporters about how to respond to Brexit. The first is on freedom of choice about the post-Brexit relationship with the EU. The second is about whether to frustrate Brexit.

In an interview with the BBC, Blair said he had spoken to some EU leaders and found that they are open to a compromise over free movement. They would do so in the context of Emmanuel Macron's eurozone reform agenda, which will eventually see the EU split into an inner circle and a periphery. We ourselves have often written about this subject, and have also argued that eurozone membership is the real dividing line in the EU. The fundamental problem with Blair’s statement is that this proposal would take us way beyond Brexit, because it involves treaty change. 

We would agree that this is an option for the UK in the long run. Indeed it is possible, even likely, that the post-Article 50 agreement between UK and EU could serve as a blueprint for a future EU association agreement with third countries, including former EU members. So this observation is not helping the UK much. It will help other semi-detached members states, maybe Sweden, Denmark, and various central and eastern European countries. But even then, we would be very surprised if the core EU were to agree any restriction on freedom of movement inside the single market. The number of Britons who think the EU would compromise on freedom of movement is astonishing.

Blair’s confusion on this issue can be filed under confirmation bias. He had conversations with somebody, whose name he did not disclose, and who confirmed Blair’s own preference of a semi-detached membership. 

Blair’s second confusion is of a different kind. He told Sky News:

"I think it’s absolutely necessary that it [Brexit] doesn’t happen because I think every day is bringing us fresh evidence that it’s doing us damage economically, certainly doing us damage politically."

So he still continues to prefer a strategy to frustrate Brexit. And indeed, we can see at least one domestic political scenario under which that might happen: a Tory revolt, followed by a divisive leadership election; a general election; a tanking economy; a Labour win, maybe in coalition with the LibDems; Corbyn rejecting the Article 50 agreement and applying for revocation after a referendum. It is almost certain that the EU would attach conditions to this - an end to the rebate, a credible commitment by the UK not to block the post-2020 EU budget; and a commitment by the UK not to veto the treaty change that Blair outlined above.

So, even if we can imagine - with some difficulty - a domestic political scenario of a frustrated Brexit, we think that scenario goes up in smoke once it interacts with Brussels and the other member states.

In the real world, meanwhile, the Brexit negotiations continue in Brussels today, with increasing signs that the process is headed for a transitional phase. Philip Hammond added some detail to his previous demands for a transition, saying that it should last a couple of years. This strikes us as a minimum because a UK-EU trade agreement may not be agreed and provisionally enacted quite that fast. But at least this returns us to the realm of political realism. We noted an interesting tweet by Charles Grant (@CER_Grant), who, like us, believes that the transitional agreement is absolutely essential, not least because it unlocks some of the outstanding areas of disagreement:

"Following chats with EU negotiators and UK ministers, I think Art 50 deal on UK’s financial obligations is doable this autumn... Key is transition: if UK pays €10 bn pa for last 2 years in EU + 3 years transition at same rate, EU has most of €65 bn it wants."

The expressions hard and soft Brexit no longer make sense because we are now talking about an FTA with partial access to selected EU agencies from 2021 onwards, following a transitional period during which the UK remains de facto, but no de jure, a member of the single market and the customs union. Call it what you want, maybe a hard Brexit with some cushions.

The FT writes that a City of London lobbyist was aghast to find that France really wants the hardest possible Brexit. A memo said that the Banque de France positively wants to see financial instability post-Brexit in order for France to attract business from the UK. While that is the sort of thing that some puffed-up official might say, it is not a very likely official position of the French government, let alone of the European Council. But it does underline one point. A decision by the UK to revoke Article 50 would not necessarily be accepted by the EU. One of the many illusions in the UK discourse is that this is a decision for the UK alone.

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July 17, 2017

Schulz advocates compulsory investments

The opinion polls do not give Martin Schulz a chance but, unlike previous SPD candidates, Schulz enjoys the enthusiastic support of SPD loyalists, and now he has an economic programme that sets him apart from the CDU. We don’t know whether this is enough for him to win the elections, but at least he is now doing a few clever things after basking too long in the glory of a misleading poll surge. 

As FAZ reports, the SPD wants a dramatic increase in public and private-sector investments, by adding another fiscal rule: a minimum investment rule. This would be coupled with a change in some of the EU’s state aid rules, which often end up frustrating domestic investments, for example aid for high-tech companies. He also promises an internet portal for citizens to conduct their administrative affairs with the state.

The new investment rule will, however, not supersede the balanced-budget rule, which is supported by the SPD. We noted a comment by Sara Wagenknecht of the Left Party, who welcomed the SPD’s commitment to investment, but said that the balanced-budget rule and the refusal to increase wealth taxes will make it impossible for the SPD to fund its plans.

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July 17, 2017

Italy’s government has effectively lost its majority

We got a taste over the weekend of what Italian politics will look like in the probable case of a hung parliament after the next elections. The Italian government pulled a proposal for Ius Soli, the right of children of immigrants born in Italy to take on Italian citizenship. The government of Paolo Gentiloni pulled the legislation, which had the support of the PD and Matteo Renzi in particular, because its supporters did not have the numbers of get the legislation through the Senate. The left is fuming, and the right is celebrating. With the next elections held under proportional representation, we should expect more of this sort of gridlock.

Another issue on which Renzi is likely to be frustrated is his call for the fiscal compact to be scrapped. Massimo Bordignon has an interesting discussion about Italy and the fiscal compact on Lavoce. For starters, he says, people make an awful lot of noise ahead of an election, but with proportional representation they will not be bound by anything they promise. Yet, the message that Italy wants to dump the fiscal compact may be registered by foreign investors, and affect Italian spreads. In reality, there is not a lot Italy can actually do. The fiscal compact has already entered the Italian constitution. It has entered the procedures through which the European Commission judges fiscal policy. It has already been operationalised so, even if Italy kept up its threat to veto the inclusion of the fiscal compact into the next treaty, it would have very little effect. Bordignon says it would be much better for Italy to recognise that a window is opening up through the election of Emmanuel Macron, who is in favour of a number of governance changes in the eurozone.

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