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August 21, 2017

Soft, getting softer

In the UK, meanwhile, the signs of a soft Brexit are proliferating. We have argued before that the Brexit referendum gives the UK government a political mandate for a departure from the EU - one that cannot and should not be blocked. But it gives no mandate for any specific form of Brexit. Given the closeness of the result, a soft Brexit with a transitional period seems a sensible political compromise. 

We noted a story by Reuters on a policy document by the UK government setting out an arrangement for after the UK's exit from the customs union. This involves electronic tagging of shipments across the border, as opposed to physical border checks. An alternative suggestion is what the document called a "customs partnership", membership of the customs union in all but name, which would remove the need for a customs border. We expect to hear more of the latter. Much of the Brexit debates are about symbols and not content. For example, the dispute about the Brexit bill is not fundamentally about money, but about the notion of a bill itself. If the costs can be hidden in some other way, for example through continued payments to the EU during a transitional agreement, much of the political problem will disappear.

The Times, meanwhile, reports that Carl Baudenbacher, president of the court of the European Free Trade Association, is proposing what appears to us as the only sensible compromise on the intractable question of the role of the ECJ after Brexit: let the Efta court act as adjudicator. Under this proposal, the UK would accept the jurisdiction of the Efta court. Baudenbacher had already met with Brexit secretary David Davis, and with the first ministers of Scotland and Wales. Without such an arrangement, it would be impossible for the EU and the UK to negotiate any form of bespoke arrangement. We consider this another face-saving compromise. The Tory eurosceptics are right, of course, that the Efta court is not really independent and operates in close tandem with the ECJ. But if the debate is more about appearance than substance, this is a potential way forward.

The hard Brexiteers, however, have not given up yet. Patrick Minford, one of the leading pro-Brexit economists, is about to launch a report in the autumn in which he will claim some £120bn in annual savings resulting from a hard Brexit. This results from lower tariffs and benefits from deregulation. But there is an implicit assumption in his calculations: that the EU would offer the UK a free trade deal, as it stands to lose more than the UK (given the EU's trade surplus with the UK). While we think the economics of a hard Brexit is, and will remain, an interesting intellectual debate, no government will risk that outcome in practice if it can be avoided. But a managed hard Brexit constitutes a plausible plan B, in case the Brexit negotiations fail. We don't think this is likely, but the chances of failure are clearly not zero.

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August 21, 2017

Tsipras' chances of a boost

As the summer pause slowly comes to an end, Alexis Tsipras is considering his options to bounce back after difficult months of negotiations with the creditors and painful compromises. His prospects are grim.

Some of his advisers are now pressing for a cabinet reshuffle, preferably already in September. Their argument is that he government became more and more incoherent, and that some ministers appear to be running out of steam. But Tsipras has little leeway here, due to the power politics at play and the lack of capable candidates within Syriza. Tsipras' main objective is to get past the trough until the elections in 2019, long after the bailout programme is finished. But Tsipras also asked his staff to prepare for early elections, just in case things go wrong. And there are is indeed some potential for things to go wrong.

The next 2018 budget already looks tricky, especially after July data suggests that tax revenues are running behind the target. The government plans 11 new measures to ensure that the primary surplus target is met. The result is that the taxpayers will have to pay more than €1.15bn additional indirect and direct taxes next year, despite public expenditure being cut by about €1.4bn, according to Kathimerini. Among the measures are a reduction in tax benefits (limiting tax-deductibility of medical expenses, tougher criteria for heating allowances, and abolishing deductions from VAT taxes and the special VAT status for Aegean islands), changing eligibility criteria for pensioners, and new basis for the calculation of social insurance for the self-employed and entrepreneurs.

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August 21, 2017

On the fallacy of a middle-ground option for the eurozone

We noted a comment by Agnes Benassy-Quere, Michael Huther, Phillipe Martin and Guntram Wolff, who argue that the election of Emmanuel Macron has given an impetus for rebooting the eurozone and the EU in the three areas - the further development of the eurozone, an EU foreign and security policy, and an inclusive single market. We are probably more cautious than they are about the impact of Macron himself, but the more important issue raised by the article is the scope for eurozone governance reforms. We agree with the authors that the Maastricht construct has been unstable. We are not so optimistic about the feasibility of a third, middle way, between the status quo and full political union. The authors are calling for the completion of the banking union, a European Monetary Fund, and capital market integration - while sidestepping the question of a eurobond. The point we would like to raise is whether a middle ground of coordinated macroeconomic policies is any more realistic than a full political union. In a monetary union of fiscally sovereign states, it is not sufficient to coordinate between governments, but coordination between legislatures and electorates is also needed. In Italy, for example, there is no mainstream party that supports sticking to the fiscal compact. And, in Germany, neither SPD nor CDU/CSU favour eurobonds or pan-European bank deposit insurance. A removal of the German current account surplus is inconsistent with the German constitution's balanced-budget rule, which in itself goes way beyond the fiscal compact. The middle ground sounds like a sensible compromise, but in a monetary union the middle ground is not an easy place. The fundamental problem with the middle-ground option is political legitimacy. In the absence of a political union, where are the checks and balances in a deeply integrated economic union? An inter-governmental emergency support system like the ESM is fine, but a monetary union requires a political union for all the other stuff.

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