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December 12, 2018

48 letters

The 48 letters are apparently in, according to UK political reporters who have been briefed by various sources. A string of false alarms in the past has made us cautious, and we must preface the following with the usual health warnings. But this time, it seems for real that at least 48 disgruntled Conservative MPs now want to go ahead with a challenge to Theresa May as party leader, and by extension as prime minister. For non-UK readers it is important to note that this is not to be confused with the no-confidence procedure in the House of Commons, which is also currently under discussion. The latter constitutes a precisely worded motion - to be brought by the official opposition - which, if accepted, would trigger a process that could either lead to a new government or an election. 

The 48 letters, by contrast, refers to an internal Tory party procedure. It is a political high-wire act because it will lead, by necessity, to one of two extreme results. It will either destroy May, or massively strengthen her. To win, the rebels will need to secure the support of 158 Tory MPs willing to state in a secret ballot that they have no confidence in May. There are no lobby doors through which they have to walk. If the motion is passed, a leadership challenge is triggered which could take over two months. But some Tory MPs say that it might be short-circuited given the current circumstances.

If the rebels lose, May will be immune to a new challenge for one year even is she wins by only one vote - a landslide in the current circumstance. She could then trigger elections if she obtains a two-thirds majority for it in the House of Commons. She could threaten her party with a referendum over the deal. But it wouldn’t make her immune to a vote of no-confidence in the House of Commons.

This leadership contest is the first of the big dramas in the final act of the Brexit saga, with potentially big implications for the ensuing Brexit process. A new leader may find it easier to sell the deal as a fait accompli - an agreement that is not great, but good enough. The EU might also become more flexible once it has confidence that a new leader can deliver a Commons majority. It makes sense given the current political chaos in the UK that the EU is currently not open to a renegotiation of the withdrawal agreement itself.

In a desperate attempt to secure support for her deal, May is now seeking - and likely to obtain - a legally-binding statement by the European Council. We do not think this will be enough. If May stays in power, and survives a defeat in the so-called meaningful vote, there will have to be a second round of voting, probably at the end of January or maybe even later.

We think it is possible that a new leader might shift the red lines, for example by proposing a Norway deal, or alternatively press ahead with immediate no-deal preparations and wait for the EU to respond. The EU itself will this week step up its no-deal preparations, as will the UK. It will happen on both sides, and it will also create new facts on the ground that in turn will impinge on the political process. 

Despite its many unique features, Brexit has the characteristic of a classic EU negotiating procedure, starting out as a multiple-choice catalogue but always ending up as binary. So when we predict - as we do - that the decision will be deal-versus-no-deal, we are cutting through a lot of the politics that still needs to happen between now and then. But, in the end, we believe the UK parliament will face that binary choice. Alternative options, like the second referendum or another deal, will then no longer be on the menu. 

The reason we see a rising danger of a no-deal Brexit is our assessment that the UK parliament lacks the alternative majorities needed to push through a referendum or an outright revocation. It is also possible that the political impasse might end in new elections - in which the electorate will have a choice either between May’s deal and Jeremy Corbyn’s unicorn version of Brexit, which transgresses several of the EU’s red lines. It is possible that Labour would change its position during an election campaign, for example in favour of a second referendum. That would be the only second referendum scenario we could somehow envisage. 

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December 12, 2018

A sense of deja-vu

There is a category of stories you think you read before - and we think we wrote before. The ECJ’s ruling yesterday has a clear sense of deja-vu about it, and is reminiscent of exactly the same legal procedures and rulings in respect of Mario Draghi’s OMT programme. A bunch of unhappy German eurosceptics goes to the German constitutional court. The court sympathises with them, but requires guidance from the ECJ on the interpretation of EU law. ECJ says ECB acted within its legal remit. Case goes back to Karlsruhe, which decides reluctantly against the defendants, after having expressed sympathy with their position throughout. Story repeats case after case.

In this case about QE, the ECJ accepted the ECB’s argument that it needed the instrument of asset purchases in order to fulfil its mandate. How it can attain the price stability objective in a severe recession otherwise? 

The question now is whether Karlsruhe will relent once again. The court has already expressed the view that there were good reasons to think that the ECB’s asset purchases transgressed into the competences of member states. Transgression of competences remains its last legal lever. But it would have to rule that not only did the ECB transgress its competences but also the ECJ. It would be the long-averted nuclear bomb ruling, with enormous legal and political implications. It would trigger a constitutional crisis between the ECJ and Karlsruhe. We don’t expect it. Karlsruhe has been in a serious legal depression over European integration for the last 25 years, but seems to have reconciled itself with the reality of a eurozone with wider competence that the narrow remits set out in the court’s own Maastricht ruling. 

What is different this time - and what may embolden the court -  is that we are not in acute crisis situation. Karlsruhe yielded on the OMT and the ESM in part because it would otherwise have triggered an acute financial crisis. Its QE ruling will not come until after the period of net asset purchases has ended. The ruling might still matter in respect of how the ECB manages the stock of public sector assets after the programme of net purchases has ended. 

An editorial in FAZ, written by Reinhard Müller, defends the assertion that the German constitutional court is a more senior court than the ECJ because it has final responsibility over European integration - while the ECJ is only concerned with the interpretation of European law itself. History might have been different if only somebody had mentioned this little detail to the Conservative Party in the UK. But on this point, we think the British eurosceptics are right. The idea of national courts overriding the ECJ is counter-factual. 

But we find the degree to which German commentators maintain that illusion has a fascinating pathological quality to it. FAZ also reports on a group of German businessmen who yesterday called the ECJ’s ruling a provocation, which we consider an odd phrase to use with respect to a court. We conclude that conservative forces in German society are by and large not reconciled to the existing legal infrastructure of the EU and the eurozone, which is why we should not hold our breath on Germany’s current willingness to extend it further.

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