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September 25, 2017

Where does this leave eurozone governance reform?

It will be interesting to see how Emmanuel Macron’s eurozone agenda interacts with the German coalition talks. Christian Lindner, the FDP leader, already announced last night that a rejection of Macron’s eurozone budget will be a red line for the FDP. And the party would only accept a European finance minister in the form of a glorified head of the eurogroup, with more powers to interfere in national fiscal policy. The price Merkel will pay for a Jamaica coalition will be a de facto rejection of the Macron agenda for the eurozone, or a decision to water it down to insignificance. A Jamaica coalition is in no way an easier constellation than a straight-forward CDU/CSU - FDP coalition would have been. The relatively pro-Europeann position of the Greens is not going to be a counter-balance to the FDP's euroscepticism. A conservative position on eurozone governance is what the FDP is all about. This is what they campaigned on.

For the eurozone, the only positive election outcome would have been the one that briefly appeared possible earlier in the year: a red-red-green coalition. Last night‘s results show how far away we are from this scenario. The three parties together, which would always have been able to form a government between themselves until now, only managed to get less than 40% of the vote. 

Our expectation is that Merkel will cling to office, and that the CDU/CSU will become increasingly restless. The Greens will focus on policies to reduce greenhouse gas emissions, which will be bad for Germany's car industry. And the FDP will try to wreck the eurozone. A pro-European alliance between CDU moderates, the SPD, and the Greens, will not be able to assert itself in the Bundestag, for political reasons. 

And the AfD will "hunt" the government.

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September 25, 2017

Is Mélenchon losing his momentum?

Jean-Luc Mélenchon may be a gifted orator but his rage and righteousness could be his undoing. Does he want to be the leader of the opposition in parliament, or the Chávez of the French street? Both, so it seems. But his radical street rhetoric will not help him build a left alliance in parliament, and it does not look like it is gets the masses onto the streets either. The government now got an angle to attack him, too.

Last Saturday his protest marches against the labour law reform decree gathered some 150,000 according to his party, 30,000 according to the police. On the streets he again openly questioned the legitimacy of Emmanuel Macron's election and the legality of enacting his labour law reform by decree. But he also sees himself elected next time around, carried by the popular uproar against the “ultra-liberals”. Egocentric dreams, Nouvel Obs suggested. He promised the fight has only started, but on his way he upset the trade unions by taking their place on the streets, and the students organisations by calling directly on the youth to join his protests without consulting them.

His response to Macron’s remark that "democracy is not made in the street" went viral. Mélenchon topped this by saying that "it was the street that toppled the kings and the Nazis". The Nazi comparison did not go down well in the public discourse. 

Macron, meanwhile, officially signed the five presidential decrees of the labour law reform. 

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September 25, 2017

Lost in Florence

We were wondering throughout Theresa May‘s speech, why on earth is she talking in Florence? To whom was she talking? And why has she said not a thing going beyond what had already been leaked the night before? Why did she not speak at the European Parliament? At least the EP will have to vote on the Article 50 deal.

We also doubt that the speech will achieve its ultimate strategic objective, which is to get the European Council to declare that "sufficient progress has been made" to open discussion on the future trading regime. Whether or not the gridlock in the Brexit negotiations will be made depends on how David Davis translates May‘s guarantee that no member state should have to raise its net contributions into concrete financial reality. He will have to provide a lot more clarity than she did. 

May set out a vision of a very close partnership between the UK and the EU. This is agreed in principle by everybody. But her call for a creative solution suggests that she is still after some preferential single-market access. This is not going to happen. Her speech underlines a fundamental lack of understanding (shared by virtually everybody in the UK) about the incredibly small number of available post-Brexit options. The EU would have accepted membership of the EEA but, after the UK rejected that option, the only alternative left is a free-trade agreement similar to the Ceta agreement with Canada. The UK government has still not come to terms with the idea that Brexit means third-country status, and it is not preparing for this. We would expect to see a zero-tariff agreement on manufactured products, and rules-of-origin arrangements that should minimise disruption to supply chains. We expect the EU to strike a hard bargain on services and capital markets. If the UK introduces an immigration regime under which EU citizens could be denied access, the EU will simply not open up its services markets. That would be different if the UK agreed, unilaterally, to maintain freedom of movement. That would be a U-turn in the UK government‘s position. Even partial single-market access - confined to airlines, some financial services, and the nuclear industry, for example - would require such a U-turn.

We still think that the chances of an Art 50 agreement are high if only because everybody has an interest in it. The EU would be spared a budget crisis. The UK is not ready for a hard Brexit in 2019. But the really important deal is not the Art 50 agreement, but the subsequent trade talks, which will not be concluded by March 2019. 

The real crunch will come afterwards. If the UK insists on a strict immigration regime, we would expect an economic cliff edge. Otherwise, we would expect to see open warfare within the Conservative Party. 

Our expectation is therefore that the UK is headed for a soft transition and a hard Brexit. While there is still time to prepare, we assume that Theresa May and her administration are still betting on a soft-option cop-out. We don‘t see this.

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