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October 08, 2018

A renewed willingness on both sides to cut a Brexit deal

We like the description in the Financial Times of the status quo of the Brexit negotiations as an Escherian stairwell. No matter where you go you always end up at the same point. This is a good way to characterise the remaining points of gridlock what appears to be the compromise to which both sides are converging: a temporary customs union followed by a Canada-deal. The big obstacle always remains that an absolute Irish backstop written into the withdrawal agreement itself carries more legal weight than the words on the future relationship in the political declaration. By definition, a backstop kicks in if there is no trade deal after Brexit. At that point you would end up with a border inside the UK, and this transgresses Theresa May’s red line. 

There is no shortage of fudges and grey-zone proposals, of hidden regulatory and customs borders, but as long as the Irish backstop and May’s internal customs border red lines are absolute, there can be no deal. We expect both sides to budge, but so far they have not done so, at least in public. Over the weekend we noted however a number of comments that could suggest a renewed willingness of both sides to move towards a deal. On the EU side, both Jean-Claude Juncker and Donald Tusk said that, while a full agreement at the forthcoming EU October summit was unlikely, they now confidently expected a deal later this year. Juncker, in an interview with three Austrian newspapers, mentioned without elaborating further new reasons for optimism - this we interpret as Juncker-speak to hint that the UK government is budging from its pre-Birmingham stance. Tusk, using similar language, spoke of a new expectation close to certainty that a deal would be struck before the end of the year. Obviously one of the politically hairier problems remaining is the Irish-British border conundrum. Arlene Foster, leader of the Northern Ireland unionist DUP, is expected in Brussels tomorrow to discuss this with Michel Barnier. We don’t expect the Foster to show herself more accommodating at this stage than she has until now. But if history is a guide, the EU side will seek to work out a deal on the Irish problem through a series of technical provisions so complicated that only a small handful of experts will understand them.

In the UK, the Daily Telegraph noted that Theresa May has been in talks with about 25 Labour MPs to secure a majority for her proposals. Given the numbers, it does not appear that this in itself could be sufficient if the DUP does not support the government. It is possible that Theresa May pursues a deal against the eurosceptics in her own party - and then resigns after Brexit. It is also conceivable that she sides with her eurosceptics and stays firm on her red line, and waits until the EU moves. Another possibility is that she might find a way to isolate the DUP - which would require a broad degree of unity in the Tory party plus support from at least some Labour MPs. The outcome of such a dynamic situation is impossible to predict. We continue to believe that a deal is possible, and it remains in our view the single most likely scenario especially as we are nearing the cliff-edge.

Another positive sign is a new move by the European Research Group, who say they are now willing to accept EU officials stationed at UK ports after Brexit. We note that this does not solve the contradiction in principle between the two fundamentally incompatible backstops - the inner-Irish or NI-mainland border, but it could facilitate a smoke-and-mirrors version of Brexit.

As the FT writes, the fundamental issue is how to lock in the temporary nature of the transitional customs union and make it consistent with the Irish backstop. There are differences of views on this inside the EU too, with France taking the most hawkish line among member states. The article says that there is now a debate on a revamped temporary customs arrangement, a previous proposal by May.

But that leaves the EU with an important political question they need to agree on among themselves. Do they want an arrangement that leaves the UK in a temporary customs union far into the 2020s? There is always the danger it could turn into a permanent state of affairs, as the UK might conclude that the intermediate stage is preferable to any final deal that could realistically be negotiated.

An alternative proposal under discussion is the possibility to extent the transitional period, but that does not remove the issue of the final cut-off point either. Wolfgang Munchau notes in his FT column that the no-deal scenario is unlikely to be as scary as it sounds, as the UK and the EU will then have to agree a multitude of technical deals. These include the customs logistics for WTO border, on the inner-Irish border and whether to apply for exemptions that are possible under the WTO rules, and on technical solutions to mitigate the presence of the EU’s external border.

Munchau dismisses threats by the EU not to enter into such discussions. They would have to do so, not out of sympathy with the UK but out of solidarity with Ireland. Furthermore, the UK could still end up paying the agreed exit fees. Such a negotiated version of a hard Brexit would still be hard and have negative economic effects, but it would not be the disaster that some people fear. This also means that no-deal might lose its role as a useful bogeyman to force fearful MPs into compromising. If the Commons vote comes late in the process, many companies will have made their hard-Brexit preparations in any case, so a portion of the costs will have been borne already. Munchau’s overall conclusion is that the cliff edge, while not desirable, is not the end of the world, and that some of the negotiations results could be folded into this.

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October 08, 2018

Latvian politics in turmoil after huge populist gains

It is impossible to say what kind of government will emerge from the elections in Latvia this past weekend. With massive gains for populist anti-establishment parties, the main question is now whether the Russia-friendly Harmony party, the strongest with 19% of the vote, will continue to remain locked out of government as a result of other parties working together against it as a matter of principle.

The parties making up the existing ruling coalition received only 27% of the vote together; anger about the huge corruption and money-laundering scandals that have engulfed the government were a major election issue, and a big boost for the anti-establishment vote.

Donald Tusk had warned on Saturday that the Latvian elections could become a dramatic turning point for the whole region, as the first instance of successful Russian electoral interference in an EU member state. We find it interesting that Harmony argues for closer economic ties with Russia and an end to sanctions, but no longer calls for Latvia to leave Nato or the EU. However, the concern in Brussels is that, if Harmony joins a Latvian government, Moscow might acquire a new lever to influence EU policy by overt and covert means. 

Russia is doing everything in its power to undermine the EU, said Tusk, who wants the topic to be discussed at the forthcoming EU summit in the wake of the recent highly-publicised arrest of several Russian intelligence operatives in the Netherlands.

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