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October 23, 2018

May hardens position on Irish backstop under pressure from cabinet

The circularity of Brexit politics has the capacity to induce nausea and disorientation. Whenever Theresa May circles the problem in one direction, she loses those on the shadow side of the circle. Yesterday, she circled back towards the eurosceptics in her own party so as to fend off legislation that would have frustrated any agreement on an Irish backstop. She did this with a categorical statement that she would never accept the EU’s demand to keep Northern Ireland under customs and regulatory controls if there is no deal. 

The debate that is taking place right now is illustrative of both the narrow pathway towards a deal, and the multiple dangers that could prevent it. At the moment, the UK and the EU remain a long distance apart on the Irish backstop. And there is no majority for a compromise in the UK parliament. The reasons we continue to see a narrow pathway is that positions could yet shift as we are approaching the deadline. A deal would require all of the following: significant shifts in the position of both the EU and the UK; and a sufficiently strong Labour rebellion to offset the eurosceptic rebellion. It is possible that both of these will happen, but note this: If the Labour Party will hold together, there will be a hard Brexit. If the EU is not going to move on the Irish border, there is going to be a hard Brexit. In other words, a withdrawal agreement will require a lot of people to shift who now say they won’t shift.

Yesterday, May told the UK parliament that an extension of the transitional period was under discussion, or a UK-wide backstop, but neither lasting beyond June 2022 - which is the end of the current UK parliamentary term. And she promised Northern Irish companies full access to the rest of the UK. The BBC’s political editor, Laura Kuenssberg, noted in respect of the latter:

“Hang on.... Why on earth does the PM need to make the 4th pledge [on NI companies]? Only if she foresees a deal in which there is a regulatory border between Northern Ireland and Great Britain. If the DUP and Brexiteers aren't going bananas, they should be, and will be soon.”

In this circumstance, it is very difficult to see how such an agreement could find a majority in the House of Commons. We suspect there will be a lot of discussion of the definition of full access.

One danger that seems to be receding is that of a rebellion. The time window to replace  May as Tory leader and prime minister is closing fast. The violent outburst by some rebels against May - predicting her imminent political death - had the very opposite effect, as it drove even some of her critics to support her. And as the FT rightly points out, the rebels have no clear alternative candidate. The biggest threat is now from inside her cabinet, which is stiffening its resistance against further compromise. As the FT writes, May would struggle to survive a new wave of cabinet resignations, especially if that were to include some of the big hitters like the new Brexit secretary, Dominic Raab.

We are also stunned to read that Michael Gove and other ministers now say that they did not fully understand the nature of the Irish backstop agreement signed in December, which tells us that there is trouble ahead. The cabinet ministers are hiding behind the increasingly influential Geoffrey Cox, the attorney general, a strong Brexit advocate. 

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October 23, 2018

Greek pension cuts - a classic European dilemma

Whether or not Athens will be allowed to scrap the pension cuts next year has been one of the unresolved holdovers from the third bailout programme. Promised and legislated at the beginning of the programme so as to get the blessing from the IMF, now that the programme ended the measure has turned into one of the test cases for the relationship between Greece and its lenders. The all-too-familiar narrative is that Greece insists vehemently on scraping it, calculating that this could be an easy win for Syriza ahead of elections next year. On the other side are the concerned lenders, Germans in particular, who insist that a promise is a promise and that reversing it could send a dangerous signal to markets and other EU countries. 

What is emerging now from the negotiations is an agreement in principle that pension cuts do not need to be implemented in January 2019; but this does not mean that Greece is off the hook. Kathimerini writes that there are two basic scenarios on the table: the first one would simply postpone the pension cuts, with a review due later in 2019; the second would force the Greek authorities to carry out a new actuarial study on the social security system within 2019, and implement the pension cuts if the need arises.

Both proposals would eliminate the immediate threat to Greek pensioners, but neither would end the long-term uncertainty about it. In that sense we see this as one of those compromises that turn out to be pure political poison. It would spoil Syriza's claim to have won this important battle. 

There is also another factor weighing in here. The Commission examined Greece's 2019 draft budget and concluded that the proposed measures fall short of the primary surplus target of 3.5% of GDP by €300m-€400m. The lenders could ask to fill the gap by reducing the relief measures promised by Alexis Tsipras. Macropolis suggests that Greece could use the excessive surplus from this year, €800m-€900m, or even more according to the government. This could plug the gap as well as finance the so-called social dividend, meaning payments, tax reliefs and benefits to the more vulnerable.

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