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January 30, 2019

Stages of mourning

We note a despairing comment by an old friend of ours - Will Hutton (@williamnhutton), the former editor of the Observer:

"There is so much to deplore about Brexit. But most deplorable is how the rupturing of a 45 year relationship and the trashing of the soul of our country is being driven solely to keep the Tory party together. So short-sighted and tribal. It will never be forgiven."

We would like to make two points about this comment, which we think are relevant to the post-Brexit environment. The first  relates to the last sentence: "It will never be forgiven". This reads like a battle cry for a civil war. We believe that both of the extreme options - a second referendum or a no-deal Brexit - have the capacity to unleash harm. In either of those scenarios, it is very likely to expect that some people will die, whether in a terror attack, in a two-day long traffic jam, or in a hospital failing to procure medicines.

The second point relates to Hutton's reference to the "soul of our country". It is interesting that this point was never made by the Remain campaign, which focused entirely on economic gain and loss. Any successful campaign for the UK to re-enter the EU will need to be based on cultural identity.

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January 30, 2019

Ireland bracing for a no-deal Brexit

Ireland is bracing itself for a no-deal Brexit. The Irish finance ministry and central bank predict a cumulative reduction of GDP growth by 4 percentage points over the next five years. Paschal Donohoe, finance minister, said yesterday that this may well be a conservative forecast given that the impact of a disorderly Brexit deal is highly unpredictable. One of the biggest uncertainties is what will happen immediately after a no-deal Brexit. How bad would delays at ports and airports be? What would be the impact on businesses? Could it effectively bring trade in some sectors to a halt?

Over the medium term it is clear is that there will be a hit to growth, jobs and public finances for Ireland, and that the hit will be unevenly felt across sectors, with labour-intensive ones like agriculture and small and medium-sized enterprises in rural Ireland likely to be the most affected.

The finance ministry expects some immediate effects on public finance, with the surplus turning into a deficit of 0.2% of GDP this year and 0.5% next year. Donohoe assured he intends to stick to his budget plan this year even if there is no deal, but there is no doubt that plans for future budgets will have to be revised and that the current debate about how to spend the surplus will be turned upside down. 

Yes, no-deal can still be avoided, but there has to be a feasible way forward. Just demanding that the current backstop be replaced by an "alternative" as the House of Commons did yesterday – after 18 months of negotiations failed to find one – is deeply worrying, writes the Irish Times

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January 30, 2019

The gilets jaunes' effect on purchasing power

Remember why the gilets jaunes came together for protests in the first place? It was about the government's plans to raise diesel taxes for environmental purposes. Their protests started out with people being fed up (ras-le-bol) with their high tax burden. Since the early days in November the debate moved on. The government effectively scrapped its diesel tax plans but the gilets jaunes now want to revolutionise the French democracy.

The irony is that, with respect to the initial objective of the gilets jaunes, the government did deliver. According to the OFCE research institute the fiscal burden on households is to fall by 0.5 percentage points of GDP, the first fall for households in more than a decade. Since 2007 the fiscal burden has increased by 3pp of GDP, and this year the fall marks a turnaround and a real fiscal shock, so the institute. About €11.4bn will be injected through the public purse to improve household purchasing power, of which €10.3bn are directly related to the measures Emmanuel Macron announced in December. This will have knock-on effects on growth: the institute expects GDP to grow 0.5pp more this year, of which 0.3pp come from the gilets jaunes effects alone. These measures include the next stage in the abolition of the housing tax, and the tax-free overtime pay.

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