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June 12, 2018

The new Italian battle lines

The first days of the Five Star/Lega administration are giving us a clearer picture on where the priorities lie. No, they are not planning to leave the euro. They don't want to talk about economics much. The battle lines are immigration and possibly foreign policy.

Matteo Salvini, in his new role as Italy's interior minister, yesterday secured a public relations coup with his decision to deny permission for a refugee ship to land in Italy. The decision would have resulted in a major humanitarian crisis if Spain had not accepted the 629 refugees instead. It is not hard to see how Salvini could cause a major political crisis in the EU, which we believe is very much his intention. Italy has much stronger political leverage in this area than it does in economic policy. 

The other big battle line will be on foreign policy. We got a hint of that last week when Giuseppe Conte, Italy's prime minister, supported Donald Trump in his impromptu call to have Russia readmitted to the G7. This constituted an important signal to Trump that he can now split the EU.

We noted a comment by Antonio Polito in Corriere della Sera, who sees the internal dynamics of the new administration favouring the Lega. Salvini's role is to push while that of Luigi Di Maio, Five Star leader, is to appease. It's a game of good cop/bad cop with the advantage to the bad cop, he writes. He sees the possibility of a newly revived centre-right, under the leadership of Salvini. 

Italy's bond yields dropped yesterday following an article by Giovanni Tria, the new finance minister, commiting to Italy's membership of the eurozone and to debt reduction. We don't buy it, but see this instead as a tactical move to focus attention away from the fundamental incompatibility between the new government's fiscal priorities and the EU's fiscal rules. The main lesson from the Greek standoff in 2015 is that any parallel currency scheme needs to be prepared well in advance, and that it needs sufficient political support. None of these conditions are in place in Italy now, and they may never be. But the underlying situation is not improving either. Italy's sustainability in the eurozone can thus not be taken for granted.

The German press, meanwhile, is focusing on the still-growing Target2 imbalances. Germany's surplus in May reached €956bn while Italy's deficit was €465bn, up by €38bn. The paper interprets the increase as caused by capital flight.

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June 12, 2018

A Brexit rebellion squashed, for now

It is impossible to turn Brexit possibilities into numeric probabilities, but it is fair to say that the chances of a hard Brexit have risen somewhat in the last few days and weeks, and the chances of a rebellion to topple the government of Theresa May are now receding. The latest news from London is that Theresa May managed to quell a rebellion within her own ranks as the party is pulling together to defeat a number of Brexit amendments that were passed in the House of Lords recently, most importantly one that would have kept the UK in the European Economic Area. There is still some uncertainty about the fate of the so-called meaningful-vote amendment, a rule that would give parliament the lead in the political process should the Article 50 withdrawal deal be rejected. 

The Daily Telegraph reports this morning that there has been a compromise on the customs union, through a wording that would compel the government to reach a mere customs arrangement with the EU. While this form of words keeps the Tories aligned for now, it probably matters little in the real world as it does not address the EU's main concern. But, as one of the rebels put it, the deal buys the government time to publish a white paper on the future relationship with the EU We understand this will be a version of the so-called maximum facilitation proposal, or MacFax, favoured by the Brexiteers. We see zero chance that this will be consistent with the agreed backstop solution for Northern Ireland. The EU is therefore unlikely to agree to it, at least not initially. What could, however, happen is a stand-off on this point. If the Tories and the DUP are united - and supported by a few renegade Labour MPs - the PM might feel confident enough to take the negotiations to the brink, which she has not done before. That would be a new situation for the EU. If a hard Brexit is no longer considered a tail risk, the EU would be confronted with important strategic issues at a time when it is already facing higher tariffs in the US. Under a no-deal Brexit scenario, the total amount of tariffs levied on EU exports would rise by far more than anything Trump has threatened to impose. We find it very hard to see that EU unity would survive the threat of such an additional shock. That would be a situation where the EU's solidarity with Ireland might be tested.

The precise shape of the Brexit deal will thus depend on whether May succeeds to keep her troops together, and on how the British public would react to the EU's de facto insistence on a hard border in the Irish Sea. The outcome is more open than many people think - which is why we see rising chances of a hard Brexit. 

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June 12, 2018

Wauquiez - a party leader without followers

Will Laurent Wauquiez last as a leader of Les Républicains until the European elections? There are more and more doubts. A recent convention on immigration had only ten participants despite several calls from the party's headquarters. The criticisms of his leadership are multiplying in the assembly, writes l'Opinion. He is not present enough, or he is too populistic, so the verdict of his MPs. His strategy to move to the right, with a sharp focus on immigration and tax cuts, won't find enough traction among party members. And his rhetoric is divisive: he uses every occasion to say something bad about Emmanuel Macron and might end up damaging himself, so one MP. He also has nothing to show in the polls, as he is trailing far behind both Macron and Le Pen. Wauquiez himself considers that he still has time to fulfil his five years as party leader and get members on his side. His focus is on the European and regional elections next year, which he hopes will establish him as a strong contender for the next presidential elections. His calculation is that he will be the candidate of his party, against Marine Le Pen and Emmanuel Macron. But what if he does not make it that far? Is there a plan B? Would Valérie Pécresse, his more moderate party rival, become a potential alternative?

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