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October 09, 2017

UK is starting to prepare for a no-deal Brexit

We have reached a news plateau in UK politics, where stories are still generated but are getting increasingly desperate. A quote by Theresa May that she wants to use all of the talent in the parliamentary party is being interpreted as a direct threat to sack Boris Johnson. That may well be, and it is possible that the journalists were separately briefed by Downing Street on May's current intentions, but the headlines cannot be deduced from the quote. What we do know is that Theresa May has for now managed to quell a potential rebellion by 30 MPs, who where willing to pass a vote of no-confidence on their leader. The next possible wobble could happen at the end of the year, if the Brexit negotiations were to stall. But, then again, the dilemmas for the Tory party will be the same then as they are today.

In Brussels, meanwhile, the next round of Brexit negotiations starts today. There is no expectation that the European Council will declare this month that sufficient progress has been made to move on to the next stage, but we would still argue that this is possible by December. In the meantime, there will be unofficial talks on the transition deal that would be formalised in December. By then, we should know whether the Brexit negotiations remain on track for a final agreement, or whether the process is hitting a serious crisis. The official views of France and Germany have not shifted, but these are negotiating tactics. 

We noted a story in the Telegraph according to which Theresa May will release billions of pounds to enable preparations for a no-deal Brexit. This would occur early next year if there is no progress in the Brexit negotiations by then. The money would be spent on new technologies for customs clearance, air traffic control, and migration control. 

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October 09, 2017

Why Germany will resist meaningful eurozone reform

FAZ reports that Angela Merkel has toughened her line on eurozone reforms ahead of German coalition negotiations - we presume to build a bridge to the FDP, which is even more virulently opposed than the CDU/CSU to the proposals coming from Paris and Brussels. Hans-Helmut Kotz introduces some much-needed realism into the Franco-German debate on the development of the eurozone, focusing on the role of the FDP. He notes that the FDP's ideas of an exit option are particularly ill-advised as this would translate into a structural increase in risk premiums - the last thing the eurozone needs at a time when the ECB is reconsidering its monetary policies. He says the FDP, having campaigned on the exit option for the last four years, will be unwilling to back off from it now. And quite a number of CDU and CSU MPs are also sympathetic to that position. In this context it will be very hard for Germany to agree to a meaningful shared fiscal capacity, or to a European finance minister with democratic legitimacy. Here is his conclusion:

"Sorting out these questions will require a level of political entrepreneurship unlike anything Merkel has ever shown. To join in Macron’s European project, she would have to assume an entirely new role and expose herself to substantial political risks. Germany would have to take the initiative: rather than rejecting proposals, it would have to offer its own. Such behaviour can hardly be expected from a government that, beholden to the median German voter, plays it safe. The German political centre has been shifting, and it is heading in a different direction than Juncker and Macron. As a result, the eurozone’s institutional design will likely remain incomplete."

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