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May 18, 2018

Ciudadanos pressures Rajoy on Catalonia

As we noted yesterday, Spanish liberal party Ciudadanos has gone from advocating a minimalist central government intervention in Catalonia last autumn, limited to calling new regional elections, to stronger demands. They want to extend the Spanish government control of the regional government, to pre-empt the as yet unknown policy action of the newly elected regional premier. The reason is two-fold. First, Ciudadanos is emerging as a contender for largest Spanish party in general election polls. And second, the newly elected Catalan PM Quim Torrà is widely seen outside Catalan separatist circles as a radical anti-Spanish xenophobe. 

But Mariano Rajoy will have none of the demands for tough pre-emptive action presented to him yesterday by Ciudadanos' leader Albert Rivera. According to El País, Ciudadanos wants the national government to continue to control the regional government's finances, the regional police the Mossos d'Esquadra, and the regional TV station TV3. But the Spanish government's blueprint for intervention, which passed the Senate with the support of PSOE and Ciudadanos, foresees that the intervention will lapse as soon as a new regional government is formed. That's what was agreed, and Rajoy has no intention of changing it. Rajoy has the support of the PSOE for opposing Rivera's demands. 

Meanwhile, as the legal case for charging the members of the previous Catalan government with rebellion seems to be increasingly fragile, PSOE leader Pedro Sánchez is advocating a reform of the criminal code to accomodate the definition of the crime to what happened in Catalonia. The legal debate over past months has been on whether the requirement of violence in the criminal code's definition of rebellion was met. This is also an important argument in the extradition case of former regional PM Carles Puigdemont before a German regional court. Pedro Sánchez could point to a number of academic commentaries in this debate, in support of the idea that in the 21st century new forms of political action require new definitions of crimes against the state. Those who argue in this direction point to the various Colour Revolution, as well as to the theorist of nonviolent action Gene Sharp. The problem with such arguments is that they come very close to what would be unacceptable encroachment on civil liberties in a liberal state. Be that as it may, with this proposal Pedro Sánchez attempts to keep the PSOE in what is otherwise a fierce competition between PP and Ciudadanos for the Spanish nationalist vote.

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May 18, 2018

The EU's bluff on Iran sanctions

FAZ has the same take as we do on Jean-Claude Juncker's threat of invoking the so-called blocking statute. This is a unilateral measure by the EU against European companies that observe US sanctions. If the EU does implement it, it will be largely symbolic as big companies are already pulling out of Iran.

Juncker doubled down yesterday with a pre-announcement that the Commission will take a decision on the blocking statute today, but he mentioned small and medium-sized companies. He framed this in terms of protecting the companies against US sanctions, but the blocking statute is primarily designed to penalise firms themselves. As Angela Merkel reiterated yesterday, there is no way the EU can shield companies from the wider consequences of US sanctions, which include being cut off from the US goods markets, as well as from dollar funding.

FAZ writes that Juncker's reference to small and medium-sized companies should be understood as an indication that this measure will have little impact. The French oil company Total has already announced that it will pull out of Iran. 

The FT has an interesting story about how the bilateral dispute could eventually affect the Swift network, the provider of financial messaging services which forms a critical part of the global cross-border payments infrastructure. The issue is whether Swift will get caught in a US-EU crossfire. Swift is based in Belgium, and thus not subject to US law. It could, in theory, defy the Trump administration if the EU wanted it to. And this is a powerful negotiating tool the EU could use - in theory. The article also mentioned similar dilemmas for other financial infrastructure providers, like Euroclear and Clearstream. Clearstream already paid a penalty to the US in 2013 to settle a US claim that it violated the terms of the previous sanctions regime against Iran.

FAZ's economics editor, Holger Steltzner, notes that the anger the Europeans feel about Donald Trump is exceeded only by their own sense of helplessness. He thinks it is ok for the EU simply to give in to Trump. The safeguarding of the German exports has to remain Germany's political priority. The reality on the ground is that European companies cannot afford to be cut off from the dollar markets.

It is, of course, totally unsatisfactory that the EU is in such a helpless position. The reason it is there has been the refusal to give the euro a robust infrastructure from the outset. We recall the discussion in the 1990s when Germany explicitly rejected any ideas - from France and Italy mainly - to use the euro as a foreign policy tool, and especially as a device to become independent from the US financial sector.

Germany rejected the foreign-policy dimension of the euro for two reasons. The first is that it did not want to distract from the primary goal of price stability as the overriding policy objective in the forthcoming euro regime. And it did not want to upset the Americans by creating a competitor. As we know, the German vision of a limited monetary union prevailed at the start, and throughout the euro's 20 year history. Even the eurozone crisis did not dent that strategy.

We have consistently argued that this self-limitation is ultimately damaging to EU interests, as is now become clear with Trump in the White House. We would advise Emmanuel Macron and other supporters of eurozone reform to shift the argument from the economic to the political level. The reforms are needed so that the EU has a defence against US unilateralism.

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May 18, 2018

What the Brexit deal will look like

It is has been our consistent line that Brexit will a) happen and b) be soft. The latest news is consistent with that expectation. UK newspapers report this morning that Theresa May has agreed to a temporary membership of a customs union after the transitional deal ends in 2020, to be followed by one of the other - more exotic - options currently under discussion. The reason is that none of the other options - whether the customs partnership as preferred by May herself, or the maximum facilitation option favoured by the eurosceptics - has any chance of being ready by 2020. The FT writes this is now an agreed position of the Brexit sub-committee in the cabinet.

The membership of the customs union will be time-limited. It is not clear whether it will be renewable or not. Nor is the time scale agreed. It will not be called a customs union. It will not allow the UK to implement third-party trade agreements for so long as its provisions are active, as Peter Foster writes in the Daily Telegraph. He notes that the preferred name for this temporary customs union will a time-limited goods arrangement - this sounds like an expression right out of the television show Yes Minister

But crucially, the UK still hopes that the Irish position on the border will eventually soften because the cliff-edge is only postponed. 

Would the EU buy a time-limited customs union? We think it would do so eventually because nobody wants to end up in a take-it-or-leave-it position. If the temporary customs union were rejected, and since the UK’s preferred options are not feasible, the UK may then have little choice but to go for a cliff-edge next year, or reverse Brexit altogether. Since the latter is not likely, the risk of a cliff-edge would rise dramatically with a rejection of a temporary customs union deal.

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