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June 28, 2018

Trump now gunning for Nord Stream 2

As if the tariffs on steel and aluminium - and soon cars - were not enough, the US administration is now preparing sanctions against five European companies involved in the Nord Stream 2 gas pipeline project. Those sanctions previously had the status of a rumour. But FAZ reports this morning that it received confirmation from a senior US official, at the World Gas Conference in Washington, that the administration is formally considering an application to impose such sanctions. There are two German companies involved, Wintershall und Uniper, as well as OMV from Austria, Engie from France and Royal Dutch Shell. Together they fund 50% of the project. Gazprom funds the other 50%.

FAZ notes that Uniper, one of the German companies, would be particularly hard-hit. The company is a big player in the US coal trade. The company's CEO is quoted as saying that he continues to believe in the necessity of the Nord Stream 2 pipeline to secure gas supplies for the EU. It remains to be seen whether the companies will back off from the project once the sanctions are actually imposed.

Donald Tusk said the EU should prepared for the worst as a result of the new policies of the US administration. We think this is wise, especially since the hardening in the US position is not attributable to President Donald Trump alone. The FT quotes an EU official as saying that the EU was concerned that Trump's decisions are not just incidents, but a pattern. We think this has been evident for some time.

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June 28, 2018

Gibraltar is becoming a first-order Brexit issue

With all the discussion of the lack of progress on the Irish border issue one could be forgiven for thinking that the status of Northern Ireland is the only territorial issue that might derail a Brexit deal, but there's also Gibraltar on which even less progress is being made. The Telegraph notes that talks broke down six weeks ago on Spain's insistence on joint management of Gibraltar's airport. Earlier this month the the Elcano Royal Institute released the English version of its report on Spain's position on Brexit. The report includes the suggestion to solve the Gibraltar issue by analogy with the constitutional arrangement of Andorra, whose head of state is jointly held by the French president and a Catalan archbishop. The Elcano think tank doesn't speak for the Spanish government, but given its patronage its reports don't tend to fall too far from what is acceptable to Spain.

The proposal would then be for Gibraltar to become linked to both the Spanish and British crowns, but without Spain acquiring dual sovereignty over it. The problem that the Elcano institute is trying to solve is the rejection of a Spanish government proposal for joint sovereignty made in 2016. The issue is that joint sovereignty would be a step too far for the Gibraltareans, largely for symbolic reasons. The Spanish flag does not fly in Andorra, and it wouldn't fly in Gibraltar either.

Elcano points to other existing border regions of the EU with peculiar sovereignty arrangements: the German and Italian enclaves in Switzerland, Büsingen and Campione, which remain legally part of the respective EU states but are effectively administered by Switzerland for geographical reasons; or the British dependencies of Jersey, Guernsey and the Isle of Man.

Ultimately, Spain has no interest in exercising its veto because of the Campo de Gibraltar. In fact, the interest of the region is to keep the border with Gibraltar as open as possible. The closure of the border between 1969 and 1982 seriously hurt both Gibraltar and the Campo, and moreover cemented the Gibraltareans' determination to remain independent from Spain, so nobody on either side wants to see a repeat. Under 96% of Gobraltareans voted to remain in the EU. Spain would seek to leverage this fact to change the status of Gibraltar.

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June 28, 2018

German companies have switched from complacency to panic over Brexit

When everybody expects a no-deal Brexit and makes preparations to that effect, the damage is done. At that point, it might become politically too costly for the UK's government to agree or ratify a withdrawal treaty. The whole reason for a transitional period and a customs union is to minimise the economic impact.

We reported yesterday that more and more UK companies are preparing for a no-deal outcome because of the massive uncertainty caused by the latest political events in the UK. The same is happening in Germany. We noted a report in Handelsblatt that German companies active in the UK were very advanced in their hard-Brexit preparations. 44% have already shifted their supply chains, while a total of 72% say that they made intensive preparations. 47% of German companies have postponed planned investment decisions, and one third has stopped investments altogether. The authors of the study considered the numbers surprisingly high.

The problem is that, once these decisions are taken, they will not be simply reversed even in the case of a soft Brexit. We don't expect to see any breakthrough in the Brexit negotiations, and we think that this will be a knife-edge situation even if all goes to plan. At that point the full economic damage will be done, and the relative costs of a hard Brexit will be correspondingly lower - since the costs will already have been incurred.

We consider a hard Brexit a real possibility now - not a tail risk.

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