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January 09, 2018

Where SPD and CDU/CSU differ on Europe

FAZ did a good job dissecting the policy differences between SPD and CDU/CSU over Europe, differences that are likely to be revealed very shortly. Angela Merkel is now heading into dual negotiations - over a future coalition in Berlin, and over eurozone reform in Brussels. The promised progress in March will depend on whether the two potential governing parties can reach a minimal agreement beforehand. 

There seems to be much consensus on a superficial level - such as the need to engage with Emmanuel Macron. But there are big difference on the details. The SPD explicitly supports Macron's idea of a eurozone budget, while the CDU does not want it. We think FAZ is wrong to write that the CDU supports the Commission's rejection of a eurozone budget. While that seems to be superficially true, the CDU does not support the Commission's own proposals for eurozone reforms, which are essentially to fold the eurozone budget into the EU's wider financial framework. Martin Schulz recently endorsed the common budget as a tool to raise investment. 

There are also different views on the role of a future eurozone finance minister. CDU/CSU want someone to impose fiscal discipline, while the SPD wants a finance minister to stop tax competition between member states (which would require treaty change since tax policy is an exclusive prerogative of member states).

The article says the two parties will fudge the two big issues in the debate about the banking union - the European deposit insurance scheme, and the backstop for the resolution fund. 

We would add that the EU debate in Germany is extremely superficial, both in the media and in Berlin in general. Big headline items such as the eurozone finance minister or a eurozone budget are essentially meaningless if there is no agreement on the fundamentals of eurozone governance. The big gap between France and Germany is not whether there should be a finance minister, but that Germany rejects any independent eurozone-level governance that could force policy changes in Berlin.

In a separate story, FAZ writes that Sigmar Gabriel supports Jean-Claude Juncker's request for an increase in the size of the EU budget - on the grounds that the EU cannot accomplish its tasks with a financial framework of no more than 1% of EU GDP.

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January 09, 2018

Weak and stable

Remember when Theresa May flunked her Tory party conference speech last year, and then the logo letters behind her fell off the wall? Yesterday was a bit of a repeat of that fiasco. A much-awaited reshuffle turned out to be a shambles and, as Rachel Sylvester tells us in her pugnacious Times column, the Tory's party's website went down because they failed to upgrade their computer software. 

But commentators have become a lot more cautious about drawing inferences on the future of the prime minister, as they did after last year's bungled elections and the bungled party conference in October. The reason is that it will have no impact on it. The British government was, and remains, weak and stable. The opposition is not in a position to force an election. The Northern Irish DUP has no interest in ditching the Conservative minority government, especially before the Brexit date. And the various factious in the Tory party perfectly neutralise each other.

That said, the reshuffle was supposed to demonstrate Theresa May's new-found strength, but only reconfirmed her weakness. She is clearly not in a position to impose her will. But this is not only an issue of character but also related to the lack of a majority. We have noted before that, among the British political kommentariat, anyone under the age of 65 has no experience with minority governments. They work differently from the usual governments, but they can be surprisingly stable. 

What upset yesterday's reshuffle was the refusal by a couple of ministers to change portfolios. One, the education secretary Justine Greening, decided to leave the government altogether after refusing May's offer to move to the department for work and pensions. And May caved in on Jeremy Hunt, the health secretary, who refused to switch to the business department. The reshuffle did not affect the most senior ministers: Boris Johnson, Philip Hammond, and Amber Rudd, remain as foreign, finance, and interior ministers, respectively. But especially Hunt's resistance upset the finely-worked-out scheme of musical chairs, though May did succeed to promote a number of female MPs, as well as members with a non-British background, to ministerial jobs.

We agree with the FT's overall conclusion that this reshuffle strengthens Theresa May's constructive approach to Brexit. The single most important appointment - moving justice secretary David Lidington to a job in the Cabinet Office as Ms May's de facto deputy - underlines the commitment to the current strategy. Lidington is a former Europe minister with strong connections in EU capitals, the FT writes. This appointment was triggered by the resignation of Damien Green, who was sacked last year following an accusation that he molested a female journalist.

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January 09, 2018

The first rule of no-deal Brexit is you don't talk about no-deal Brexit

The Financial times has a story that highlights the paranoid style of thinking, as well as the complete misunderstanding of the legal implications of Brexit, on the part of David Davis. The story also illustrates the risk that the Brexit negotiations may set in motion a self-fulfilling dynamic leading to a no-deal Brexit.

The substance of the story is that Davis's department interprets Michel Barnier's contingency planning for a no-deal Brexit, which became official two months ago, as a breach of the UK's rights as an EU member state. Further, they consider that the EU is acting in bad faith when it currently treats the UK differently from other member states. It is unclear what instances of this the source quoted in the article has in mind, but it is true that the EU Council has treated the UK as a semi-detached member almost from the time of the Brexit referendum, and definitely since Theresa May issued her Article 50 notification last March. The FT quotes a letter sent by Davis to Theresa May a month ago, as citing unspecific measures taken by the EU which jeopardise contracts in the event of a no-deal scenario unless firms relocate. 

Now, merely stating that the UK will become a third country under EU law is just stating a fact, and in many cases the legal implications of this will be that contracts are jeopardised. Davis said the EU's guidance to firms should instead highlight the potential for a future transition and trade deal. Opposition politicians asked by the FT described Davis' letter variously as "naïve", "extraordinary" or "passive-aggressive". They also highlighted the hypocrisy of complaining that the EU was planning for a no-deal Brexit a month after Theresa May herself put no deal on the table in her noted Florence speech.

To us, this illustrates one of the ways in which a self-fulfilling dynamic can set in leading to a no-deal Brexit. May, Barnier and Davis start talking about a no-deal Brexit as a scenario to be avoided, but in so doing both sides also start making contingency plans and issuing guidance to firms alerting them to the risk and suggesting actions. The longer the Brexit negotiations drag on without a transitional deal, the more firms will prudently make their own contingency plans for a no-deal Brexit, until a point is reached where the opportunity costs of a deal versus no deal are such that the parties have no real incentive to conclude a deal any more.

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