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December 17, 2018

A second referendum is no closer today than last Friday

As Brexit day approaches, expect the noise level in British politics to hit fever pitch. Over the weekend, The Sunday Times reported that Downing Street started preparations for a second referendum. The list of conspirators allegedly included David Lidington and Gavin Barwell, Theresa May’s de facto deputy and her chief of staff respectively. Both denied the story. We would not exclude the possibility that Downing Street is running strategic scenarios on all the options. But we don’t think there is a conspiracy simply because there are no Tories now in a position to topple Theresa May. May herself reasserted her strong opposition to a second referendum over the weekend. On this point, she sounds as categorical as she can be.

It is always worth recalling that a second referendum would require the following things to happen: a parliamentary majority robust enough to agree on referendum legislation, and a government that supports a referendum. Jeremy Corbyn's current opposition to a second referendum ensures that the first condition will not be met unless and until he changes his mind or the Tories support it in large numbers. May's opposition to a second referendum means the government will not support it either. So expecting a second referendum to happen, requires either betting on both Corbyn and May changing their minds simultaneously, or on a successful confidence vote that either triggers new elections or brings about a short-lived government of national unity with the sole task to organise a second referendum. We are not saying any of the above is impossible. It would not be the first time that a politician - or two for that matter - have changed their minds. But there are no other options than a collective change of mind, new elections, or a government of national unity. 

It is the combination of Art 50, the accompanying UK legislation, and the Fixed-Term Parliaments Act that sets the procedural framework. And it is politics that decides the outcome among the limited options within this framework. There are two big political arguments against a second referendum. 

The first political argument is the internal politics of the Labour party. In a brilliant column in the Observer Nick Cohen notes that Corbyn’s interest is not served by frustrating Brexit. On the contrary.

"...To put it in Marxist language, a crisis in capitalism will allow the left intelligentsia to lead the proletariat to victory. Corbyn and McDonnell hardly dare talk about their hopes for fear of alienating pro-European supporters. But it’s clear that they want a Brexit that allows them to deliver socialism in one country, free from EU rules: a utopia they cling to even after leftwing economists have exposed it as an empty fantasy."

The second is the political self-interest of the Tories. Just put yourself into May's position. She spent the last two years negotiating what she thought was a reasonable agreement. She will also not fight another election. Brexit is her one and only legacy. She will use every trick in the book to assemble a majority. The discussions about a second referendum are useful to her because they scares some of her own MPs.

But we really struggle to see how May herself could agree to a referendum. It is not as though it would deliver support for a deal. The polls do not suggest broad public support for her deal. The Conservative Party would be at war, and most likely split into pro-European and anti-European wings. It would be political suicide. 

A far superior option is for her to continue negotiating, running down the clock, and in the end open up to moderate Labour MPs by offering a compromise on the future relation with the EU. But the final choice will be the deal versus no deal. At that point she will also need the EU's cooperation. The EU will need to foreclose on the second referendum option at some point. The EU would need to say that it would only extend Art. 50 in order to make time for ratification - but only in the deal is approved in principle. This is why we see March 29, 11pm, as the final voting deadline for the Commons.

Thomas Klau looks at the second referendum from an EU perspective and concludes that there is nothing more terrifying for the EU than the UK overturning Brexit. It would strengthen the damaging elites-versus-people narrative, and heighten the political and geographical divisions within the UK. Most importantly, perhaps, the UK would end up blocking EU reforms.

"If the EU wants to ensure its survival, it will have to make far-reaching changes to the way it responds to migration, fights climate change and poverty, manages its security and common currency. For this, it must become easier to govern, easier to understand and more democratic. The last thing the EU needs, faced with these huge tasks, is a traumatized UK using its power and diplomatic savoir-faire to freeze the EU in its present state."

And finally, we would like to offer an observation on Sherlock Holmes’ much-cited elimination of options. Second referendum supporters are turning Holmes on his head. You cannot say that once you eliminate all the bad options, only the second referendum remains. We acknowledge this is a nice piece of sophistry worthy of a debating prize in an English public school. The logical error is that no-deal is a legal default option that cannot be eliminated. That is what will remain when all else fails.

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December 17, 2018

Philippe expects 3.2% deficit next year

The gilets jaunes tide was in flow last Saturday. Only 66,000 came out to protest, half as many as the week before. We expect numbers to drop further as next weekend will be just before Christmas. Even if the numbers drop, the protest still matters because it has changed the political context.

The government aims to re-establish trust with the electorate and design an exit strategy from the crisis. This is not easy if the partner is a movement that is not really available for a constructive dialogue with the executive or makes a point of not being predictable. An avalanche of measures has been evoked by the government, and avenues for increased citizen participation in French democracy are being explored. For now the measures Emmanuel Macron announced last week are on the table. The delivery has to be fast enough and have enough of an impact.

In an interview with Les Échos, Édouard Philippe fleshed out some of the government's measures and their financing. Philippe expects the costs of the measures to be around €10bn, though economists have put the figure more around €15bn. Based on the €10bn figure the budget deficit is expected to reach 3.2% of GDP in 2019. To mitigate the costs, the government is limiting the reduction in the corporate income tax rate from 33% to 31% to companies with a turnover of less than €250m next year. Larger companies will have to wait for another year to benefit from the reduction. This will free about €1.8bn for the state budget next year. In total Philippe plans €4bn in savings. The assembly will discuss the revised 2019 budget today, and a separate bill with the measures themselves will be presented on Wednesday.

Some details already emerged about the measures.

  • Pensions below €2000 will not be affected by the increase in social charges. This exemption is meant to cover 70% of all pensioners. 
  • About 5m minimum-wage households will benefit from an in-work subsidy of €100 net per month. It is not a raise in the minimum wage, which would have rippled through the wage system. The work subsidy would also cover the self-employed and civil servants close to minimum wages, and rises to €200 for families with children.
  • Year-ed premiums of up to €1000 for employees earning less than three times the minimum wage will be free of taxes and social charges. This is a voluntary measure that companies may or may not decide to grant their employees. 
  • Overtime pay will be exempted not only from social charges but also from taxes.

All measures follow the logic of making work pay. They increases the incentives to work and marks a more pronounced difference to social benefits. It benefits certain groups in society not others, in particular those on lower incomes rather than middle earners. A flat decrease of work charges could have worked better, but this would have required some more pronounced spending cuts, writes Olivier Auguste in l'Opinion.

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