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November 06, 2018

Preparing for a no-deal Brexit between friends

We are hearing conflicting reports on whether Theresa May will force her cabinet to accept a compromise over the Irish backstop. The Times is reporting that it would involve an independent arbitration panel, but we fail to see how this can constitute a compromise if the UK then later makes a stand about sovereignty. The truth is there are simply no newsworthy Brexit developments. The reason is that, as of now, there is still no majority for a deal. 

So let us focus instead on smaller pieces of the puzzle that might become relevant later.

One of those was a small item in the Financial Times from the Hauts-de-France region in Northern France, whose president is demanding a constructive attitude by the EU in the case of a no-deal Brexit. Expect to hear more of this as we approach the Brexit deadline. If the EU plays it tough to the bitter end, not only Hauts-de-France will be clobbered along with the UK.

The EU could in theory turn a no-deal exit into a de-facto blockade of the UK. But a far more likely scenario would be a no-deal Brexit accompanied by a multitude of mini-deals to keep goods and people flowing for a short transitional period (not to be confused with the 21-month transitional period now under discussion in the Brexit negotiations). The simple reason is that this would be in the best interest of the regions of northern France, Belgium, the Netherlands and parts of Germany, all of which are very keen to keep the disturbance to their economies to a minimum.

The FT has interviewed the president of Hauts-de-France, who wants a no-deal transition until the French and UK governments have a border infrastructure in place to guarantee orderly flows. He has calculated that an extra clearance time of just two minutes per truck would produce vast queues on both sides of the channel. 

"The trucks, companies and factories that will be blocked will be those of the north of France, the whole of France and Germany."

The article also notes a comment by David Lidington, Ms May’s de facto deputy, who predicted that the Dover-Calais freight route would be reduced to 12-25% (that is, down by 75-88%) of its normal capacity for up to six months in case of a no-deal Brexit. We note that these capacity cuts apply to both sides - and affect the EU countries closest to the UK disproportionately. Do we think that Emmanuel Macron and Angela Merkel - or whoever succeeds her - will sit back and accept a wholly avoidable economic shock to the disadvantage to their own economies? Of course not.

We have been arguing for some time that the Brexit negotiations would ultimately turn out to be far more even-keeled than one might have thought early on in the talks. This is now becoming increasingly evident. As we draw towards the deadline, many people on both sides of the channel are beginning to realise what a no-deal Brexit would mean for them, and what kind of preparations are necessary. Philip Hammond reiterated yesterday that the UK would pay its exit bill, or parts of it, even in case of a no-deal. This is a sign of the willingness to agree if needed a no-deal type of deal.

The chances of a no-deal Brexit have been substantial throughout the Brexit negotiations, but they were always unquantifiable. Unless there is a breakthrough in the talks in the next few days, we would expect both sides to step up their no-deal preparations dramatically - so much so that the no-deal scenario itself will lose most or much of its ability to scare. Of all the possible outcomes, an amicable and consensual no-deal is not the worst by far. Just think of the civil unrest that could accompany a second referendum, or of a nasty version of no-deal that would lead to the loss of lives because security co-operation ceases overnight, or because vital medical supplies are held up at the border. Unthinkable is the word for that.

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November 06, 2018

Swift blinked, EU to move

We wondered yesterday what Swift would do in response to pointed US pressure to disconnect Iranian banks from its messaging system as a result of the secondary sanctions regime entering into force over the week-end. The answer came, ahem, swiftly.

Swift said in a statement that it will indeed disconnect a number of unspecified Iranian banks. But Swift is incorporated in Belgium and so subject to the EU's sanctions regime. Therefore the EU's blocking statute, intended to prevent European firms from complying with US sanctions, applies. Swift is trying to wiggle out of this impossible situation by not claiming it is disconnecting the Iranian banks in application of US sanctions. The question then is whether the EU will let Swift get away with that.

The FT quoted Swift's statement as saying

"In keeping with our mission of supporting the resilience and integrity of the global financial system as a global and neutral service provider, Swift is suspending certain Iranian banks’ access to the messaging system. This step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system."

We note that the blocking statute is not intended to protect Iran, but to protect European companies from the economic effect of the sanctions. This probably means the EU would have to wait for a European entity to complain that it cannot communicate through Swift with a now disconnected Iranian entity. If this never happens, the EU may be able to play along and pretend that Swift is not applying US sanctions. We are not aware that the EU has made any statements on Swift's decision yet.

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November 06, 2018

Seehofer’s evil genius

Horst Seehofer is the evil genius of German politics. He got everything he wanted. Angela Merkel is leaving politics. He destroyed the SPD and its leader, Andrea Nahles. Thus he managed to shoot down the two most powerful women of German politics, and remains alive to see it all. 

It is worth recalling the two issues that almost destroyed the grand coalition. The first was Seehofer’s support for border checks to reject secondary refugees. The second was his support for Hans-Georg Maaßen, the president of the Office for the Protection of the Constitution and a man with obvious far-right leanings. The first issue virtually disappeared with a rubbish compromise to set up refugee centres. The second ended yesterday, when Seehofer himself dismissed Maaßen unceremoniously after the latter made another highly provocative speech flaunting his hard-right colours. If you look at the ultimate outcome of those controversies, you wonder what all the fuss was about. Seehofer has single-handedly managed to produce a new category of coalition failure: the smokes-and-mirrors syndrome. Victims suffer from a sense of falling into the abyss when affected to it.

In the past, German coalitions usually failed because of some objective political disagreement. A CDU/FDP coalition failed in 1966 because the FDP was tired of Ludwig Erhard. An SPD/FDP coalition failed in 1982 over economic policy. The SPD/Green coalition ended in 2005 amid deep divisions within the SPD over Gerhard Schroder's structural reforms. A CDU/FDP coalition ended in 2013 because the FDP imploded. This current grand coalition is failing for reasons that are hard to remember even though the events are only a few months old. It is a struggle even for us to tell the stories with a straight face as they are so unbelievably insignificant.

The paradox is that, if you evaluate the grand coalition in terms of the legislation passed, you could easily conclude that it is more active than most previous governments. In addition, the grand coalition is implementing most of the SPD’s social agenda. The SPD got Maaßen fired. And there are no border controls for secondary refugees. Yet the voters simply do not honour any of that, all they see is the grotesque infighting. 

What we are witnessing is one of those tectonic political shifts against which no force holds. Nahles can pass as many laws as she likes, she still looks doomed. 

We conclude that the era of the grand coalition is ending, faster than even we predicted. Merkel feels this political shift, and is preparing her exit. Nahles does not. The SPD leader decided to dig in by rejecting a leadership debate and any discussion about the future of the grand coalition. The SPD remains committed to a half-term review of the grand coalition in the autumn of 2019. But there are important elections until then, including the EU election in May. The latest Forsa polls put the SPD at a historic low of 13%. We think these numbers would be at least partially reversible under a new leader who takes the SPD into opposition. But, for so long as the SPD clings on to the ministerial limos, the numbers are more likely to get worse than better.

Seehofer has not caused the tectonic shift that is shaking up German politics. But he surely has accelerated the tempo by a lot. Meanwhile, the AfD is busy trying to recruit Maaßen as its law-and-order frontman.

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