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May 01, 2019

Labour votes against obligatory second referendum

It is interesting to see how the British media suddenly lost interest in Labour's decision on the second referendum, once the party's national executive committee voted in favour of Jeremy Corbyn's position not to change the party's current ambivalent policy. Yesterday's vote was a setback for the second-referendum campaign and specifically for Tom Watson, Labour's defiant deputy leader, who has argued in favour of an obligatory second referendum. 

The vote in the NEC became necessary because of the upcoming European elections. Labour's European election manifesto will thus continue to support a second referendum only as a last option - if the Tories were to push through their own version of a future relationship or in case of a looming no-deal Brexit. Since neither has a political majority in the House of Commons, that situation is unlikely to arise.

Yesterday's vote has a number of consequences. A victory for the second-referendum supporters would have unleashed a shift in the political dynamics. A Labour victory in the upcoming European elections could have been interpreted as a political signal in favour of a Brexit reversal. The only parties now openly dedicated to reversing Brexit are the LibDems, Change UK and the Green Party, plus the SNP and the Welsh Nationalists. 

The rejection of a second referendum also means that Labour is now less likely to change its policy before the next UK general election. The current policy would still allow Labour to support a second referendum, for example, if a new Tory leader were committed to a no-deal Brexit. 

But the most important consequence of yesterday's vote is the impact on the cross-party talks. If the second referendum supporters had got their way, they would have been able to frustrate any version of Brexit this side of a general election. 

Yesterday's decision to uphold Labour's ambivalent stance opens the way for a compromise. Theresa May said yesterday the talks with Labour would need to be concluded by the middle of next week. Labour is saying that the talks have been progressing well. We have noted before that the Brexit versions negotiated by May and the EU, and Labour's customs union, are not categorically as different as they may appear at first sight. On a technical level there is scope for a compromise, one that would allow Corbyn to claim that he managed to negotiate a customs union that protects the interests of UK workers and that protects the environment, an increasingly important subject in the Brexit debate. We think that May is ready to compromise - especially now that the future unity of the Tory party is no longer her main preoccupation. 

In this context, we noted the lead story in the Daily Telegraph this morning, which says that Tory eurosceptics fear that May would cave into Labour's demands. 

The main difficulty in these talks will be to find a majority of MPs to support any compromise. Second-referendum supporters have become increasingly extremist, to the point that they could reject a customs-union compromise. There are about 100 Labour MPs firmly committed to a second referendum. If they all were to refuse to endorse a deal, Corbyn would only deliver 140 votes or so in favour of a compromise, which means that May would need to deliver some 200 votes. That should be possible, but there are risks that Tory MPs might conclude that they are better off with a new leader and a new approach to Brexit. If both party leaders were to face simultaneous rebellions, a deal might be at risk.

We think, however, that Corbyn and May have a reasonable chance to deliver a joint majority in the House of Commons if they manage to agree among each other. May would be able to leave office having achieved her one and only political objective. Corbyn can focus on the social issues he likes to focus on, rather than Brexit. This is why we think the chances of a deal are higher than the zero percent probability UK political commentators are attaching to such an outcome.

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May 01, 2019

On the link between output gap measures and the rise of political extremism

Adam Tooze has a brilliant article in which he debunks the notion of the output gap, which he identifies as the main cause behind the catastrophic economic policies pursued by the European Union during the eurozone crisis. The output gap measure is a moderately useful concept for fast-growing economies during normal times - when you need it the least - but it becomes hugely misleading during periods of extreme economic weakness, like from 2008 to 2015. 

Tooze writes that a backward-looking measure of potential output, when combined with stringent fiscal rules, can have truly perverse effect. In the eurozone crisis, when output collapsed suddenly, the metric of potential output also fell. This had the effect of narrowing the gap between actual and potential growth, and thus reducing the need for fiscal stimulus. The result was an economic doom loop that was particularly dramatic in Italy, where potential-output growth measures were revised down by some 15-20%. As a result, even modest growth would push Italy to a (wrongly) imputed level of stable output. The result was pro-cyclical fiscal policy, and constant battles between successive Italian governments and the European Commission.

The failure of the output gap measure is the primary cause for the wrong fiscal stance forced by the Commission on Italy during the crisis. Tooze writes that the country was in need of a significant fiscal expansion (of the kind it is getting now, we would add). This is unlike Germany, which operates much closer to its potential. Tooze concludes that it was unconscionable for European institutions to produce data showing that the fiscal stance of both countries should be similar. He writes that the consequence of such methods is to normalise an economic-policy disaster, with the known political consequences. 

"If centrists want to win the political argument they must offer their own constructive vision of the future. A technocratic sliding scale, which limits the notion of a member state’s potential to mechanical projection of the last dismal decade, is not realistic but fatalistic."

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May 01, 2019

Berlin's inconclusive Kosovo conference

Should a territorial exchange be used to make Kosovo and Serbia ethnically more homogenous, paving the way to an eventual mutual recognition? Officially, this hot-button issue was not part of the talks Angela Merkel hosted this week in Berlin with Emmanuel Macron to discuss the situation in the West Balkans in general, and the recent deterioration in the relationship between Kosovo and Serbia in particular. The unofficial agenda was another matter.

Whether a land swap could work as the key to an elusive détente between Belgrade and Pristina is a question that is hotly debated both in Serbia and Kosovo, in the western Balkans overall and amongst the powers securing the region’s peace or otherwise involved in its dynamics. Washington is keen to facilitate anything that might allow it to cut back on its military presence. The EU itself is split over the issue, with Germany strongly opposed to the land swap and France open to discussing it. While Paris takes what it sees as a pragmatic approach, Berlin fears that an agreed land swap might open a Pandora’s box of territorial ambitions, encouraging ethno-nationalists from the rest of the Western Balkans to Russia and Ukraine to push for the changing of borders and the creation of ethnically homogenous territories.

The aim of the meeting was to get Serbia and Kosovo to pull back from their recent course of diplomatic and commercial confrontation, to demonstrate that the leading EU powers remain committed, and to display a degree of Franco-German harmony. Predictably, the Berlin conference brought no breakthrough in the matter, but then the process is ongoing.

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