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November 06, 2017

Pressures on EU rise over Catalonia

Is Catalonia becoming the next political test case for the European Union? Can European institutions afford to stay out of it, and to continue to refer to the case an an internal legal matter of Spain? 

It is one thing for the European Union and its member states to stand by Mariano Rajoy and condemn an illegal proclamation of independence. But the imprisonment of the members of the dismissed Catalan government, and the prospect of 30 years of jail for Carles Puigdemont and his ministers, clearly raises the question of proportionality. And, with separatist politicians still in prison, this will impact the regional elections on December 21. This goes way beyond the legal arguments, and that is before even asking the question of how independent the Spanish judicial system is, or whether one can trust Rajoy - whose party is embattled with fraud and corruption cases - as a defender of the rule of law. These are questions that cannot be easily brushed aside.

There are already the first voices calling for a more pro-active response from the EU. Guy Verhofstadt calls for de-escalation, for Spain's National Court to undo some of its measures - however legally justified they may be - and for a regional election that produces a legitimate outcome. Then political dialogue has to follow to solve this conflict, which has been brewing for so many years. Two other Belgian politicians, Jan Jambon and Elio di Rupo, both said Spain is over-reacting. And in Politico Richard Youngs writes the EU cannot sleepwalk through this conflict, and has to provef itself as a guarantor of reconciliation, coming up with productive solutions rather than giving a blank cheque to Rajoy.

In Belgium, meanwhile, the legal procedure continues. Carles Puigdemont and his four ministers turned themselves in and were released by the instruction judge last night, under some strict conditions. They cannot leave the country, have to remain at a fixed address, and can only appear in court in their personal - not official - capacity, according to Le Soir. There will be some back-and-forth with decisions and appeals on extradition. Playing by the rules, Puigdemont can extend his stay in Belgium until February without any problems. This time frame gives him some leverage to play a political game, given that the regional elections are in December.

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November 06, 2017

German pre-coalition talks hit glitch

The German coalition talks are currently not going well. We are not at the point yet where we would signal a serious probability of a collapse, to be followed by new elections, but such an outcome can no longer be excluded. The reason is that the FDP seems to be calculating that it has less to lose from new elections that the CDU/CSU or the SPD. Hence, FDP leader Christian Lindner is raising the stakes.

The parties are not yet in formal coalition talks, but in talks about talks where they highlight the areas of differences. Over the weekend the parties discussed the eurozone, obviously of central interest to us. One of the Green participants said after the talks that they had thought that the FDP‘s election promise to phase out the ESM was just loose talk, only to realise over the weekend that Lindner was really serious about this.

Lindner himself came out of the talks and put the chances of a deal at 50:50, adding that he was not afraid of new elections. 

We noted a comment at FAZ by Holger Steltzner, who does not hide his support for the FDP and in particular for its radical eurozone policies. Writing this morning, Steltzner advised Lindner not to yield to the CDU and the Greens, and not to disappoint FDP voters once again, as the party did when it was last in government between 2009 and 2013. Steltzner notes that the FDP got 1.4m voters from disappointed former CDU voters. These voters did not vote for the FDP to secure Merkel‘s job. Steltzner concluded noting that both the CDU and the SPD have more to lose from elections than the FDP.

Handelsblatt notes that the sum of the extra tax revenues and the budgetary surplus available for spending and tax cuts amounts to a total of €30-40bn over a period of four years, which compares to demands from each party for about €100bn. The article concludes that the latest tax estimates are optimistic, but do not go beyond what the parties had hoped for. There will be no additional windfall gains. Since the coalition partners are committed to the Schwarze Null - a small budget surplus over the economic cycle - the financial room for manoeuvre to satisfy everybody’s demands will be limited.

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November 06, 2017

If you thought UK politics couldn‘t get worse...

The Hollywood sexual harassment scandal is having a global political impact as women in several other countries have come forward to bring accusations against politicians. The situation is particularly acute in the UK, where the spotlight has now turned to the second important cabinet minister, Damien Green, the first secretary of state - the de facto deputy prime minister and Theresa May‘s most trusted senior colleague. Police said they had found pornographic material on his computer, and the home secretary, Amber Rudd, has confirmed that there will be a formal cabinet-level investigation of the charges. There is no doubt that Green will have to go as well. The string of allegations also hit another Tory MP, and the UK media reported that six Labour MPs are also under scrutiny after a series of recent revelations.

We still don‘t see an overarching reason to assume that the scandal will bring down the government, but we want to keep a close eye on the events, as situation may well spin out of control. The sex scandal has also managed, for the first time in over a year, to displace Brexit from the top slots in the UK news media. 

The one Brexit story that did catch our eye was from the Daily Telegraph, which reports that the UK officials have no intention to undertake any serious negotiations next week. We noted quite a few outraged reactions, but we are not surprised that the officials want to stall the talks because they have been given no mandate to negotiate the financial settlement.This is likely to happen at the December summit where we expect to see a Brexit stage one package deal that will include a trade between a financial settlement, and the start of the transition and trade talks. 

In his FT column Wolfgang Munchau writes that he expects the December summit to agree to moving the Brexit talks to the next stage, but that the trade talks are going to be really difficult. Munchau does not see the EU agreeing to much more than a pure trade agreement to remove the remaining tariffs on manufactured goods, similar to the deal with Canada. He dismisses notions of a Canada-Plus deal that are now widely talked about. He does, however, see the possibility of transition agreement for various categories of services. Probably the biggest risk to the entire Brexit process would be a realisation by Tory Brexiteers that they will be asked to pay a lot of money to settle the UK’s liabilities in exchange for a relatively modest trade deal, which will benefit the EU more than the UK, given the EU‘s large trade surplus.

The rest of the world continues to find it very hard to understand the British mindset right now. A good example Steven Erlanger‘s article in the New York Times where he compares Theresa May to a captain who is tied to a mast, fully aware that it in the best interest of the ship to return back, yet not being able to do so. It is a very elegantly written article, but like so many other foreign observers, Erlanger misjudges the political impact of a manoeuvre to ignore a result of a referendum, in which both sides insisted that its outcome should be respected. We share the disdain for Brexit, and also for referendums in representative democracies. But this disdain should not equate to disrespect.

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