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November 02, 2018

When events intrude

There was a story two years ago of a Syrian refugee murdering a young student in the southwestern German city of Freiburg. Another violent crime occurred in the same city last month, a gang rape of a woman, orchestrated by a Kurdish Syrian. What makes this story specifically troubling is that the police had already targeted the perpetrator but chose not to act. 

The reason we are reporting a story we would otherwise consider outside of our reservation is the potential connection to the CDU leadership race. Immigration has turned into the biggest political issue in Germany since the welfare reforms of the last decade, possibly even bigger. It is present in latent form at all times, but flares up when stories like these come to the surface. 

The problem for Germany is not the number of immigrants in itself, but the lack of preparation and the government’s complacency in the management of the refugee flows. One consequence of a sudden rise in immigration should have been a massive increase in police resources and shifts in operating procedures. It would have required Scandinavian-type honesty in acknowledging problems and dealing with them, instead of giving in to the German gut instinct to hush things over. A good example of the latter was ARD Tagesschau not reportin on the murder two years ago, a decision taken out of a false sense of responsibility. They didn’t want to stoke up anti-immigrant sentiment, but achieved the exact opposite.

Angela Merkel’s historic failure was not the decision to open the borders, a decision we supported in principle. Her failure was the complete lack of follow-through. You cannot open the borders to 1m refugees and maintain the illusion of running permanent fiscal surpluses. At a technical level, the decision would have required a rule-busting increase in spending on internal security and housing construction. At a political level, she would have needed to spend political capital on this.

We note that a lack of a follow-through has also been the main characteristic of her management of the eurozone. Merkel did just enough to prevent the imminent failure of the eurozone at its various crisis nodes, but chose not expend her political capital on making the monetary union work in the long term. A monetary union without fiscal capacity - a common budget and a common safe asset - is not a sustainable construction. She was not part of the team that created the monetary union, but inherited an incomplete mess. Politics is the art of organising a majority for the things that need to be done but are difficult to do. 

It is too early to say how this latest violent crime will impact the debate on the CDU's future leadership. It might give an opening to Jens Spahn, who is clearly the most outspoken critic of Merkel’s refugee policy. Friedrich Merz is in line with the conservative mainstream in the CDU on this issue. Annegret Kramp-Karrenbauer is most closely associated with Merkel. She will need to create a distinct political profile for herself until the leadership elections a good month from now.

FAZ has a report this morning outlining her difficulties in having to organise the upcoming contest while being a candidate. She cannot use the party apparatus in support of her candidacy, while Friedrich Merz will be less constrained in using his private wealth. The CDU will decide the format of the contest next week. There is still some support for a members’ vote, or a system of regional conferences where candidates present their case to regional CDU parties, the paper writes.

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November 02, 2018

Maybe a step closer to a Brexit deal, but not really close

There was a lot of excitement in the financial markets of an apparent Brexit deal on financial services. We are in the deal-around-the-corner phase of the negotiations. We should remember that it is the secret wish of every Brexit reporter in the UK to be the first one to have the "Brexit agreed" story on the front page. The reality is that the situation is moving along, with new proposals and discussions, some useful and some not, but we are not yet close to a breakthrough.

As we and other commentators have noted, the various red lines are logically incompatible. You can fudge legal constraints - like the requirement that Art. 50 can only regulate a temporary trade agreement. But agreement would require that some of the red lines are visibly eroded. That has not happened yet. 

We note a report in the FT this morning that the EU is ready to grant the UK a bare-bones customs union as part of the Irish backstop. We assume, but cannot be certain from the story, that bare-bones refers to an EU-level type trade agreement, the kind which does not require ratification by member states. A bare-bones all-UK customs union would not replace the need for a full Irish backstop according to the report, but it would at least solve the issue of a customs border in the Irish channel. The regulatory regimes for Northern Ireland and the UK mainland would still be different, but the hope is to reduce the difference to shades of grey, as opposed to black and white.

We believe this is certainly a useful direction as it would help secure majorities for a deal. A bare-bones customs union would still not address the criticism by eurosceptics that the withdrawal treaty could keep the UK tied to the EU indefinitely. It might assuage the DUP, and thus change the parliamentary arithmetic. It is important to understand that, whatever number of votes Theresa May fails to secure from her own party and from the DUP, she will require votes from the Labour Party. Passage of the withdrawal bill will be an act of political arbitrage and parliamentary arithmetic. We have no deal at this stage because the numbers are not there.

The FT writes that the UK government will respond to this new suggestion next week. If there is no breakthrough by then, chances of a Brexit deal this month would fade. The idea also faces potential obstacles from countries - we presume France among them - who raised level-playing field arguments, as the UK would not be subject to EU rules on state aid or other single-market restrictions. 

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