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March 20, 2019

EU is hardening position on long delay

We have just heard that Jean-Claude Juncker is calling for a special Brexit summit right at the end of next week - and that Theresa May has ruled out a long extension as a result of rising pressure from within the Conservative Party. We are not surprised by either development.

The rejection of a long Brexit delay is a rare example of an alignment of the interests of the Conservative Party and the EU. In the last few days we were a bit surprised by how a long delay suddenly emerged as a favoured scenario. The EU is now pushing back against it. France is hardening its position. Perhaps more importantly, so are the Tory Party grassroots.

A long delay was certainly the preference of the UK's civil service, as famously expressed by May's adviser Olly Robbins at a bar in Brussels. But this is not a decision over which Robbins is likely to have much influence. There are bigger political considerations at stake, on both sides, that will take priority.

May was reportedly shocked by the strength of the pushback by some of her ministers in cabinet yesterday. The starkest warning we heard came from Liz Truss, the chief secretary of the treasury. It is worth quoting her comment just to get a sense of the tone of the conversation. This is from the Telegraph:

"A two-year extension is going to divide the party if there is an election... Britain will be a barren land ruled by Jeremy Corbyn with all of us here in the gulag."

The Tory eurosceptic ministers - around Truss and Andrea Leadsom, the leader of the House of Commons - gathered for a strategy meeting last night. More important than the habitual threats of resignations is their warning that the Conservative Party is unlikely to survive a long Brexit delay. We agree with that political judgement. The country is as divided over Brexit as ever. But a hard version of Brexit remains hugely popular among the Tory grassroots and the party members.

The admirably clear words of Michel Barnier may also have contributed to May's expected decision to ask only for a short delay. Of course, the EU is not going to accept a long extension without a plan. Barnier was wise not to say what such a plan should entail. But we have noted before that only a single scenario requires a long extension - the second referendum. General elections can be held very quickly under the provisions of the Fixed Term Parliaments Act, which only foresee a minimum gap of 17 working days between the dissolution of parliament and the election date. Agreement in favour of an alternative future relationship, like the customs union or a single market arrangement, can also be reached relatively quickly. There is no need for concrete negotiations. All it would require are relatively small changes to the political declaration. This could be done over a weekend. Only a second referendum requires a long extension, especially given the inherent lack of an obvious question.

We note with interest that UK journalists have just woken up to the reality that the EU is an active partner in this process, and that the question of an extension cannot be settled unilaterally by the UK. We heard Tony Blair on BBC Newsnight last night saying that a no-deal cannot happen because neither May nor the European leaders want it. But we think this is too static a view. The no-deal Brexit is never the result of a conscious decision or a vote by either the EU or the UK. It would be an accident of interaction - like two players dropping a ball. 

We think that the risk of a no-deal Brexit remains elevated. Here is one scenario how it can happen. Assume May now asks for a short Brexit extension. EU grants extension until May 22, with option to extend. May loses final meaningful vote next week. She then opens up the Commons process to indicative votes. No outright majority arises for any of the alternatives - outright revocation, second referendum, customs union or single market. May's deal remains the relatively most popular option, but short of a majority. Under pressure from her party, May is forced to resign. Tories elect a new pro-Brexit leader. A bust-up at the June summit ensues. No agreement. No-deal Brexit.

As ever, this is no prediction, merely one of many plausible scenarios.

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March 20, 2019

Trump's man in Berlin is wrong on form, but right on substance

Remember that there are always two people involved in a provocation. On this occasion, the person who did the provocation got exactly what he wanted. The provocation came from Donald Trump's ambassador to Berlin, Richard Grenell. He made the same observation we have made, that

"reducing its already unacceptable commitments to military readiness is a worrisome signal to Germany’s 28 NATO allies."

The reaction in Germany was furious. Leading politicians from SPD and FDP have called on the German government to dismiss Grenell - which for practical purposes would be tantamount to an ending diplomatic relations with the US. The criticism by German politicians - like Wolfgang Kubicki, the deputy FDP leader, and previously also Gerhard Schröder - was that Grenell conducted himself like the proconsul of an occupying power.

Which he does, of course. 

Angela Merkel also yesterday rejected the criticism with a comment we think is bordering on a lie: she said that Germany was increasing the defence budget after all. This is both misleading, as it does not address the nature of the criticism, and not even true in the narrow sense in which Merkel framed it. As we reported in detail, the German defence budget is scheduled to remain at the current level of 1.37% of GDP this year, before falling to 1.25% in 2023. The 2019 budget involves a small nominal increase, but the total spending over the budget period is falling as a percentage of GDP. The issue, however, is not whether defence spending is rising in nominal or even real terms, but that the budget is not consistent with the Nato's commitment to a defence budget of 2% of GDP by 2024.

We expect that Donald Trump will almost certainly raise the issue during the commemorative Nato summit in Washington next month. We also think that the persistent reluctance by countries like Germany and Italy to meet their spending commitments will undermine Nato in the long run. Trump has addressed the issue with a level of aggression Germany's self-centred political class is not used to. The reluctance by successive German governments to prioritise higher defence spending is deeply embedded, and unlikely to change even if Trump were to issue a final ultimatum with the threat of the US abandoning Nato. 

Germany's persistent reluctance is also a reason why European defence co-operation is likely to remain high on ambition but low on delivery.

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