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March 07, 2018

The PD - so much like the SPD

The similarities between Italy's PD and Germany's SPD go much deeper than the mere observation that both parties had a terrible election, and that this is part of a secular decline of the centre-left in European politics. Both statements are true of course. But we also see a similar post-electoral dynamic at play: A failed leader is hell-bent to go into opposition, but the perceived interests of his own party ultimately destroyed that strategy. Matteo Renzi's strategy is now to boycott any talks with Five Star, and then to force a new round of elections. It looks to us that his resignation is merely a tactical retreat. The problem is that this option is not necessarily in the best interest of PD MPs and senators. There is no rule that says that 19% is the lowest the party will ever poll. In Germany, support for the SPD continues to fall - the party now polls at 15%. The AfD - and the Lega in Italy - could end up bigger than the SPD - and the PD respectively - at the next elections. 

Officially, the party still sticks to Renzi's position, but there is now talk of a members' referendum like in Germany, as La Repubblica reports this morning. The party's establishment is still formally opposed to collaboation with Five Star, but the latter is considering making some rather tempting offers: presidency of the chamber of deputies, and inclusion of PD ministers in the cabinet.

We have entered the post-election phase in which most of the news consists of pronouncements and interviews where politicians make implausible claims. What we found interesting was the shift of view by Eugenio Scalfari, the founder of La Repubblica who was one of the quintessential pillars of Italian establishment thinking for several decades. He said on a TV show that he had this time supported Silvio Berlusconi, and previously considered Five Star and Lega aqually appalling. But he changed his mind on Five Star. He said that Luigi di Maio had demonstrated political intelligence, having turned Five Star from a disparate movement into a political party in a parliamentary tradition. He said Five Star was the party of the modern left. The PD is tried and confused. 

We actually agree with that sentiment. PD MPs will have to consider very carefully a strategy of boycotting cooperation with Five Star, which can take other forms than a coalition. The issue that no-one in Italy can get around is that the political centre is now in a structural minority in parliament. New elections could strengthen Five Star and the Lega, who between then could tweak those aspects of the electoral law that clearly benefit the PD.

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March 07, 2018

Why the EU is right to blackball the City of London

The FT has a story that will come as a shock to many in the City of London, but not to us. The EU will flatly reject market access by UK financial firms after the end of the transitional phase. In other words, the EU will not accept Theresa May's three baskets - one basket full of cherries, another basket of cake. The British idea was that the EU and the UK would sit together and agree regulatory outcomes, and the City would then have continued market access. Donald Tusk will issue guidelines to instruct Michel Barnier that the UK will get no more than a bog-standard free-trade agreement, similar to that of Canada. The paper reports that Bruno Le Maire will this week clarify the French position on this issue - which is that financial services cannot be included in a trade agreement on the grounds that financial services are not goods. The only route for the UK into the EU financial markets is through regulatory equivalence, a one-sided procedure under which the trading partner adheres to EU rules in their entirety, and which the EU can end at short notice. This is clearly not an attractive or acceptable proposition for the UK. 

We have observed before that the EU will take a purely mercantilistic position by restricting trading relations to areas where it has a strong surplus - like the trade on goods - while restricting areas where it has a deficit. But one thing confuses us about the EU's strategy: the EU's clarity of support for a Canada agreement as the only alternative to a customs unions also sits oddly with the EU's insistence of a customs union for Northern Ireland. 

Andrew Duff notes that there is an alternative, one that is based on the Ukraine association agreement. It creates a large trade area and wide alignment of Ukrainian sectors with the EU economy. It also incorporates WTO rules on non-tariff barriers. The deal gives Ukraine unprecedented access to the single market, including associate membership of various EU agencies.

The EU operates a wide variety of bilateral arrangements, like those with Switzerland, Turkey, Israel, and Ukraine. But all of these are economically tiny compared to the UK, which is why none of them can serve as a model outright. We agree with Duff than a association agreement would be a better option than membership of the EEA. But since May already rejected membership of the single market or a customs union treaty, we have now entered a territory where the Canada deal is the real alternative. We think that Tusk's position is thus entirely reasonable. A key moment will be the vote in the UK parliament on an amendment to seek customs union membership. If that vote is lost, the choices will be between Canada and no deal. If the vote is won, Theresa May will presumably resign and a new conservative leader will take over. That would open up the possibility of a new strategy or elections, which could open up alternative goals for the post-Brexit relationship.

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March 07, 2018

Car companies don't deliver on diesel upgrades

Tagesschau reports this morning that the German car companies are struggling even with the modest software upgrades they promised to deliver this year - to allow some 5m diesel cars in Germany to reduce their emissions by some 25-30%. This was also seen as the car industry's big gesture to ward off the increasingly likely bans of diesel cars in German cities. But the industry will not be able to deliver on their promise, according to information from Bavaria's state broadcaster. 2.5m diesel cars have been upgraded following a court order, but the companies have made no progress whatsoever on the voluntary software upgrades. They are waiting for instructions from the government, while the government blames the companies for inaction. The article concludes that it is now likely that several cities, including Hamburg, will press ahead with diesel bans before a software upgrade is available. And this means that the bans could affect many modern cars as well.

The software upgrade only affects cars that meet the Euro 5 and Euro 6 emission norms. Older models would require much more intrusive mechanical upgrades, which the car companies have refused. 

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