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October 11, 2018

How to shrink the Irish border

We are in a critical phase in the Brexit negotiations, but we are certainly not close to a deal as some reports suggested yesterday. We recall similarly statements during the Greek crisis in 2015. It is the oldest negotiation trick in the book, aimed to put pressure on the other side in the final stages of a long and hard negotiation. 

We still don’t see the UK parliamentary math stacking up in favour of an agreed Brexit deal, at least not yet. It will invariably shift, but until that happens we don’t see much room for manouevre.

The biggest news yesterday were reports suggesting the possible beginnings of such a shift. But it goes in two directions. The DUP has hardened its position after Arlene Foster's meetings in Brussels, and is now threatening to vote against the budget thus effectively ending its support for Theresa May’s minority government. We discount that threat because it would trigger new elections - not immediately but certainly in 2019. But the statement is also telling us that the DUP is not yet on board for a Brexit deal - to put this mildly.

On the other side May is talking to some 20-30 Labour MPs who are considering to support an agreement as they prefer any deal to a hard Brexit. Sebastian Payne argues in the FT that the parliamentary arithmetic is beginning to shift in May’s favour. The 20-30 Labour MPs are not beholden to Jeremy Corbyn, who is expected to impose a three-line whip on his MPs to reject the deal. All of these 20-30 MPs are willing, in principle, to break the whip. Payne also argues that the much-threatened Tory rebellion is likely to shrink to a small group of hardcore Brexiteers. Payne’s rule of thumb is that parliamentary rebellions usually shrink to a quarter by the time it comes to a vote. We also believe that the rebellion will weaken in the coming weeks and months, but to secure agreement May needs two things to happen at the same time: the number of Tory rebels must not be much larger than the number of Labour rebels; and the DUP needs to support her. May can hardly afford to lose the 10 DUP votes without securing off-setting support either from Labour or her own ranks. What complicates the matter further is that the demands of the Labour MPs and those of the Brexiteers are diametrically opposed. Whatever direction May moves towards, she will lose some support.

In his statement in the European Parliament yesterday Michel Barnier indirectly alluded to the big decision that has yet to be made, which is one between a customs union as the end state of Brexit and a free-trade agreement. If May pivots towards a customs union, she may gain more support from Labour MPs and the DUP. But that would maximise the Tory rebellion. We doubt this is the way she will go. If she moves towards an FTA, she might placate some her own rebels, but she may find it harder to keep the Labour MPs and the DUP on board.

Barnier gave details on some of the technical discussions that are currently taking place. We note that some UK newspapers are very confused about the three stages of Brexit - the transition period, a very likely interim period that involves membership of a customs union, and the yet undecided final state. The technical discussions on the Irish border relate to the latter. Barnier said the EU was willing to consider technical solutions to shift some of the border control formalities into companies. We very much agree with him when he talks about the need to de-dramatise the Irish border issue. It is of the kind of issues that appear to be huge in political discussions, but then disappear as you approach them. We believe that even in a scenario of a transitional phase ending in a WTO regime, the border can be substantially softened. Many of the technical points Barnier talked about like barcode scanning or veterinary controls can be carried out away from the border under any regime. 

Both the end state and the transition modalities towards it are the big outstanding political problems - both for the UK and the EU. May will today gather her inner cabinet for a briefing on the latest development, another sign that there is movement in the debate ahead of next week’s summit.   

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October 11, 2018

The people versus the motor car

The European car industry has, for the first time ever, lost the protection of politics. Even German newspapers and self-proclaimed car experts, who have been deriding the debate about electric cars and artificial intelligence as hysterical, are now talking about the beginning of the end of the fuel-driven car. This follows the decision by environment ministers to reduce emissions of new cars by 35% by 2030. Many experts and commentators had been in denial because they believed that the German government would find a way to stop this trend and continue to protect the industry. We even heard the argument that the targets are physically impossible to meet simply because VW and other German car makers did not have the capacity to produce the number of electric cars that will be required to meet the overall emissions targets - which ignores that French car makers have been focusing on electric car development for many years already. They never even considered the possibility that companies from South Korea and Japan might fill that gap, especially as their imports tariffs will fall towards zero until recently agreed trade deals. Or that China is technically ahead of German in the development of batteries and electrical engines. The century-old predominance of the European car industry rested on its know-how on engines, which was hard to replicate. Electric engines are as different to fuel-driven engines as computers are to typewriters. 

Sueddeutsche Zeitung quotes the head of VW as saying that the number of jobs in its German factories will fall by 100,000 in the next decade, an estimate we still consider relatively optimistic. We suspect that the compromise agreement in the council of ministers is likely to be hardened a little during the arbitration process between council and European Parliament, which demanded a 40% reduction. FAZ notes that the two might meet half-way, which would suggest a forced emissions reduction of 37.5%.

What makes these targets so fiendishly difficult for the industry is the interaction with the diesel scandal. The German car industry’s single-minded focus on diesel cars was based on the calculation that they have much lower CO2 emissions than petrol cars. With continued predominance of diesel the newly-agreed CO2 targets would have been possible to meet. But diesel has very high emissions of nitrogen oxide, a gas blamed for tens of thousands additional deaths per year in European cities, and nitrogen dioxide, another greenhouse gas. The whole point of the cheating devices had been to suppress the emissions of those gases. Now that cities are imposing diesel bans, the car industry’s plan B had been to step up production of petrol cars, but this strategy is now double-crossed by the new CO2 emissions targets. 

FAZ thus calls the decision a quota for electric cars. While this is technically not correct, it has a similar effect. It is a development the German industry had sought to avoid because it is not one in which they have a natural leadership. We would add to that a forecast of our own: the import quota for cars will have to rise substantially for the EU to meet its own emission standards. This will become of the biggest factors driving the inevitable de-industrialisation of Europe - a socio-economic shift which nowadays has widespread political support but for which the EU and its member states are not prepared.

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October 11, 2018

Timmermans volunteers as social democratic spitzenkandidat

We had encouraged our readers earlier this week not to shoot the social democratic ambulance driving bravely into the blizzard of the next EU elections; we would like to reiterate that call now that a new volunteer has stepped forward to take the steering wheel.

After the little-known Maros Sefcovic, Frans Timmermans, one of the European Commission’s big hitters, has come out as the second aspirant from within the institution to enter the race to be the Party of European Socialists’ spitzenkandidat.

Timmermans is a big beast in Brussels. As the man in charge of pursuing breaches of fundamental rights in member states, the outspoken Dutchman has built up the kind of name recognition most commissioners can only dream of. If the PES does indeed nominate him at their congress in December in Lisbon to be their man to succeed Jean-Claude Juncker, they will field a polyglot candidate with an unimpeachable cv: before joining the Commission, Timmermans served his country as foreign minister, and his tenure in Brussels is generally seen as a success. 

So if no competitor other than Sefcovic appears, will Timmermans be a shoo-in? As Politico reports, Timmermans has won the all-important backing of Germany’s social democrats, who despite their electoral woes at home will remain big enough to be the key power-broker in the PES. Unless another hopeful of similar political weight steps forward –  there is no one in sight – we believe Timmermans' stature will make him very difficult to oppose, and this despite the awkwardly poor showing of his own Dutch PvdA in recent Dutch elections.

On the face of it, a spitzenkandidat Timmermans will clearly be an asset for a PES currently looking set to lose its traditional second place in the all-important ranking of groups in the European Parliament. Upon closer inspection, Timmermans could just as clearly become a bit of a problem. For one, Timmermans, like every proper Dutchman, is a vocal debt-and deficit-hawk: electoral poison for notoriously über-Keynesian French socialists who can ill afford to see their tiny vote shrink even further as a result of blunt Timmermans comments about the recklessness of excessive debt.

Second, Timmermans’ recent track-record as a fighter for EU fundamental democratic norms means that under his leadership, the PES would be very much competing for the same political space with the new EU-wide alliance against hard-right populists Emmanuel Macron is currently working to forge with other centrist leaders such as Mark Rutte. As a consequence, social-democratic policies on social welfare issues might easily pushed to the sidelines of such a debate. Finally, his recent Commission job has made Timmermans a highly polarising figure in the EU’s Eastern member states, with a clear danger of deepening the West-East divide if he runs as PES spitzenkandidat.

So pity the PES strategists — the ambulance might soon need a new driver, but the man on the job might bring as many problems as he solves. The only consolation for social democrats will be that the European People’s Party is hopelessly mired in its own big trouble, meaning what to do about Viktor Orbán; that Macron’s centrists and the European liberals are viciously struggling to get their act together, with the infighting on the way to a breakthrough agreement now getting embarrassingly public; and that far-right harmony is far from certain either, if one looks at some of the recent to-and-fro between Matteo Salvini and Marine Le Pen.   

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October 11, 2018

Golden visa report hits hard at member states

We have already written about the less-than-odorous de-facto sale of residence permits – often leading to citizenship - by some EU member states to rich foreigners, some of whom made their fortune in ways the law disapproves of. Two NGOs, Global Witness and Transparency International, have now published a report making the scale of the problem apparent. According to the authors, these golden visa schemes have generated a staggering €25bn of FDI in the last decade. Cyprus tops the list, having raised €4.8bn since 2013. The report makes for some juicy reading, with several member states little more than perfunctory in their golden-visa vetting. The authors call for the introduction of an EU-wide vetting scheme for golden visas and, in the current climate of stepping–up EU activities against money-laundering, we see a good chance that it might come to that. Brexit, incidentally, should facilitate such a move: the UK has been one of the EU’s five most generous member states when it comes to granting such visas.  

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