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February 07, 2019

Forget Tusk - the real action is elsewhere

There is a lot more movement regarding Brexit than it appears if one judges from the soundbites. Donald Tusk's much-reported remarks tell us nothing we did not know already, starting with the perception of Tusk himself. The more important development is the ongoing rapprochement between the Labour Party and Theresa May. Some Labour MPs are already hinting that they will support a deal. The news that Theresa May is considering primary legislation to enshrine into UK law the current EU level of employment protection could persuade some Labour MPs to support a withdrawal agreement. And, as the Guardian reports this morning, Jeremy Corbyn has set his own five conditions for supporting a deal. They reflect a subset of Labour's six tests - all minus the demand that the exact same benefits as with membership are achieved. The remaining conditions still include the customs union. We see no solution on this point, except a general opening of the political declaration to different designs of a future relationship. This does not need to be cast in stone right now. 

In Brussels, meanwhile, there are growing fears that a no-deal Brexit is becoming very likely. The simple reason behind that perception is the knowledge that the EU will not be able to make any more promises to May simply because she cannot guarantee a majority in the Commons. What if she loses the next vote and comes back with more demands? This is not a game the EU is in a position to play. Consequently, we have no expectations that today's meeting will produce any tangible results, except perhaps on some technicalities such as codicils, or an Art. 50 extension which is now inevitable under any scenario.

What we thought most remarkable about Tusk's comment yesterday was his resigned acknowledgement that Brexit is actually happening. He said there were no majorities for Remain. He made a specific reference to the pro-Brexit stance of both May and Corbyn. Like so many other Europeans, Tusk has only slowly woken up to the possibility that Brexit might actually happen. There has been a lot of denial over this in Europe, coupled with hopes that the UK would find a way to re-run the referendum. In the UK, too, we followed the progression of second-referendum advocates through various stages of mourning - with some only now reaching the anger phase. They, too, did not expect Brexit would happen.

Alex Barker reports in the FT that the focus in Brussels is no longer about preventing a hard Brexit, but about finding someone to blame for it. He quotes one senior EU official involved in the Brexit process as saying that the central expectation now is for a no-deal Brexit, perhaps not on March 29 but in June at the latest.

Our own experience is to treat such comments with a pinch of salt. Every success in EU diplomacy - without exception - was preceded by a period of projections of existential gloom by the most senior officials. This is both expectations management and a sign that the negotiations are terribly difficult. This experience in itself does not make us optimistic. The risk of an accident remains high. If the EU ends up humiliating May with a careless and thoughtless aside - and with Tusk you never know - we would not rule out the possibility of the British retreating to their shores and breaking off the talks. 

In the absence of such an accident we expect both sides to run down the clock. We see little chance of the UK parliament being able to take control of the process. It is hard to legislate against the UK government. And, before any such coup could succeed, we would expect to see elections. 

One crucial figure to watch is Angela Merkel, who has kept a very low profile but who is keen on preventing a hard Brexit at a time when the German economy is slowing down and several elections loom. We see Merkel's role as a possible go-between. Of all the EU's leaders, she seems calmest and has made the fewest enemies. 

The most worrying part of Barker's story in the FT is the comment by an EU ambassador who noted that the accelerating Brexit preparations are creating their own dynamic. This is something we feared might happen: is people believe - rightly or wrongly - that they can handle it, the cliff-edge loses its potential to scare. We believe that there are very strong arguments against a hard Brexit - but long queues at Dover and temporary shortages of some luxury foods do not scare the majority of voters. 

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February 07, 2019

On David Malpass and the Trump legacy

The election of Donald Trump and Brexit may have been a series of freak events. But even if voters were to return to less disruptive choices in the future, the political upheavals of the second half of this decade will continue to reverberate regardless.

The supreme court justices appointed by Trump will outlast him, some for decades. There is a still a very small chance that Brexit is reversed, but relations between the UK and the EU will remain strained one way or the other. And, if David Malpass gets the job at the World Bank, he may not only outlast Trump but make important decisions that could, in the long run, weaken an institution that sits in the core of multilateral global governance perhaps more than any other. 

Steve Mnuchin has held talks with member governments, and is increasingly hopeful that a majority of the 25-member executive board will approve Malpass' nomination. The Europeans will not oppose him, for otherwise they would lose their privilege to run the IMF. And don't expect Brasil's new strongman or the Indian government to raise deep objections either. We expect a smooth appointment process despite the massive backlash that Malpass' nomination received in the media. We noted attempts to discredit him on the grounds of his infamous failure to predict the financial crisis in 2007. His comments on the strength of the US housing market were indeed stupid. But we note that a failure to predict the future does not in general appear to be a disqualifying criterion for economists. There would not be many left if that were a universal rule. 

The bigger concern about Malpass is political. Malpass has been opposing World Bank programmes for China, has been a supporter of Trump's America-first policies, and is mostly focused on the World Banks' efficiency or lack thereof. The biggest problem we see with Malpass is not that he would engage in some reckless act of destruction, but that of a likely failure to provide leadership to adapt the institution to the multilateral investment needs of the future - for example, by increasing its role in the funding of climate-change projects. We expect to see crimes of omission, not commission.

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