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January 31, 2019

EU will play hardball until February 14, and stick to backstop beyond

The EU reaction yesterday tell us two things. the House of Commons votes on Tuesday night and Theresa May’s subsequent shift in her negotiating stance have substantially increased the likelihood of a no deal-Brexit - unless, that is, a majority emerges in the Commons to accept either the backstop or a close-enough permanent relationship making the backstop unnecessary. Second, any concession to make the required cave-in of the Commons slightly less painful will leave the substance of the backstop and the rest of the withdrawal treaty essentially unchanged, and will only be delivered when the prospect of the UK falling into the economic and political abyss of no-deal Brexit is close enough to bring the Commons – as the EU side sees it –to their senses.

A codicil –perhaps a joint interpretative instrument such as the one agreed to facilitate the signing the CETA deal with Canada – is all that is conceivable. But it will only state, albeit with more legal force, what the EU has been repeating time and again anyway. The backstop is not intended to be permanent and the EU is eager to see it superseded by a negotiated framework making the insurance policy obsolete or unnecessary. What the EU will not concede is a time limit to the backstop, a unilateral right for the UK to exit from it, or an agreement to discard it for untested and hypothetical technology that allegedly makes physical border checks unnecessary. ` 

All this is the conclusion we draw both from the substance and tone of the responses by the leading Brussels players yesterday, as well as from the statements, signals or silence from EU capitals. At an EP debate in Brussels Donald Tusk, Jean-Claude Juncker, Michel Barnier, Guy Verhofstaft, Elmar Brok and others all spoke to the effect of leaving Theresa May no prospect to bring home any meaningful concessions when she reports to MPs on February 14 on the attempt to negotiate the backstop away. The EU’s unmistakable current intention is to leave the prime minister essentially empty-handed, and the EU side is counting on a worsening sense of crisis in London, fuelled by uncertainty about the EU’s ultimate negotiating stance, before making - if it does - any last-minute concessions of its own.

Why such an unbending stance? In part, the answer is tactics. But this is now very clearly underpinned by a growing sense of dismay and anger, felt across the institutions and political groups in Brussels, about the way the UK’s political establishment continues to handle the looming crisis. Brok, in an interview, spoke of his sense of despair. Barnier, with emotion in his voice, charged May in the EP with distancing herself from the agreement she herself had negotiated. Juncker said that the Irish border issue was not an Irish border issue, but an EU border issue, and this is something that London must understand. Both he and Barnier stressed that the integrity of the single market was at stake here, and not just the Good Friday agreement - the unspoken part of the message being that, without an adequate deal with the UK or border checks, there would be massive smuggling from Northern Ireland into the EU. 

We note that the UK is now haemorrhaging soft power virtually by the day, with an erosion of faith in London’s ability to act as a competent and responsible counterpart when the time comes to negotiate a permanent framework for the future relationship. What is in question is not the good faith of British officialdom, or even the good intentions of Theresa May. It is the current and future ability of the UK’s main political parties to rise above ideological trench warfare even at a time of national crisis. It was astounding, said Brok and Verhofstadt, that there had not been any serious attempt in the Commons to put country before party until now.

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January 31, 2019

French left and right moves ahead of EP elections

The political landscape ahead of the European elections is moving in France. With less than four months to go, there are some new trends to watch out for.  

Laurent Wauquiez' choice to nominate François Xavier Bellamy as head of Les Républicains' list is a lucky win for Emmanuel Macron and his LREM. Bellamy is bright, smooth, young, but politically inexperienced and far too deeply catholic and traditional to represent the whole party spectrum. Party heavyweight Gérard Larcher voiced his reservations publicly, as did Éric Woerth. Bellamy is likely to get some traction with bourgeois voters on the far right, but he also may end up pushing quite a few moderate conservatives to LREM - even if he talks a good talk on ecological issues. 

There is movement on the left, too. The French left is still splintered after a long period of tribal warfare and the clash of strong egos. The Socialists remain devastated after their crushing descent into electoral irrelevance. Their last presidential candidate Benoît Hamon is running his own show with his own party list, and an omnipresent Jean-Luc Mélenchon is on the heels of the gilets jaunes. Meanwhile, the ecological party under Yannick Jadot prefers as of now to run solo in the European elections. And then, since last November there is another new party, Place Publique, led by three intellectuals, Raphaël Glucksmann, Claire Nouvian and Thomas Porcher. Place Public is pro-European, located somewhere between Emmanuel Macron and Mélenchon, with about 20 personalities from the civil society on their list for the European elections. They are far from the gilets jaunes and their grievances.

Could there be a common list among them? Somewhat astoundingly, an alliance between the Socialists, Hamon's list and Place Publique for the European elections may well be on the cards, and even some environmentalist are opening up to this perspective, writes Cécile Cornudet. It is still early days, but there is an opening after Ségolène Royal's decision to renege on her intention to run for the Socialists. And Hamon's ego is under challenge even inside his party after he claimed in a radio interview that he will run the only list on the left in the European elections. 

The question will then be what voters such an alliance could possibly attract. Perhaps, the strategists of such an alliance must hope, some disappointed voters from Macron?

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January 31, 2019

Tighten the belts as the economy prepares for landing

One of the structural problems of grand coalition is that it is the worst of all political constellations in a sharp economic downturn. The CDU/CSU rejects spending increases that could otherwise find the support of the SPD, and the SPD rejects the CDU/CSU's preference for lower taxes. Since both parties are enthusiastic subscribers to the balanced-budget rule, this means that a grand coalition can never produce a discretionary fiscal stimulus. The prayer is that the downturn may be shallow enough that none is needed. 

As FAZ reports this morning, the CDU/CSU is demanding cuts in various categories of corporate taxes and firms' social insurance contributions. Olaf Scholz said this was irresponsible and would reduce the government's long-term solvency. He himself is proposing a rise in the top tax rate from 42 to 45%. Since the 1970s, the SPD has transformed itself from a Keynesian party into a fully subscribed supporter of fiscal tightening in a downturn. If one wants to understand the deeper reason behind the party's astonishing decline, there is more to it than just demographics and the shifts in the labour force. Macroeconomics is not a subject of political discussion in Germany, but that does not mean it is without effect.

The Greens are the only mainstream party in Germany that is now demanding a counter-cyclical fiscal response to the increasingly apparent economic slowdown. The party's fiscal spokeswoman yesterday criticised the continued fall in the ratio of public and private-sector investment to GDP. She noted that investment had fallen off the government's to-do-list. 

We already reported on the economics ministry's downward revision of the 2019 growth forecast from 1.8 to 1% when it was leaked. This was confirmed officially yesterday.

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