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May 22, 2019

Better start those no-deal preparations right now

It is probably too early for a discussion on when Theresa May's premiership failed. Our best guess at this stage was the moment when she herself took no deal off the table in February. We have argued before that the only way to push a Brexit deal through a Brexit-wary House of Commons was to threaten a no-deal Brexit as an alternative. That strategy would have split her party, but would have found a majority in the Commons. Her strategy has now run its course. 

Yesterday, May made what we presume will be her final offer to MPs, essentially her deal with an embedded second referendum vote - but crucially only after the bill has passed. The new bill pleased nobody. The Brexiters were incensed at the very idea of a second referendum, while the Remainers say that it is not a concession. Since nobody expects a second referendum to succeed unless May herself came out in favour, its inclusion has turned out not to be such a big deal. 

As the afternoon and evening progressed, the number of MPs on both sides who came out rejecting May's deal steadily increased from a trickle to a flood. The newspaper headlines this morning are more devastating than anything we have ever seen. We expect that she will today come under strong pressure to drop the bill and to quit, but as of last night Downing Street was adamant that the vote on the second reading of the withdrawal bill would go ahead during the first week of June. Even loyal ministers were struggling yesterday to put a brave face on the situation. 

As hopes of a breakthrough recede, the risk of a no-deal Brexit rises - not only for the technical reasons we outlined earlier this week but more importantly because of the political dynamics. The Tories expect to suffer a catastrophic loss at this week's European elections. The latest YouGov opinion poll for the European elections has the Brexit Party at 37% and the Tories at 7%. The Brexit Party would become the single largest national contingent in the European election in this scenario.

The worse this week's result will be for the Tories, the better the chances for assorted Tory eurosceptics in the ensuing leadership election. Just as there was nothing to stop Nigel Farage to unite the pro-Brexit vote in the European election, there is nothing to stop a freshly elected Tory leader leader from doing exactly the same in reverse. You don't need 52% to win an election. 40%, or sometimes even less, can translate into an overall majority - especially since the pro-Remain parties are split. The Daily Telegraph has a story this morning according to which the 60-strong group of so-called one-nation Tories might end up supporting Boris Johnson, not so much because they like him but because they like Dominic Raab, the former Brexit secretary, even less.

Is there still any chance MPs might support the legislation? As of now, pro-Remain MPs do not see anything new in her proposals, nor are they sufficiently scared by a no-deal Brexit yet - though the latter might change. The hard-line eurosceptics will definitely not support her. The only way we can now see for the withdrawal agreement to pass would be for her successor to pitch it against a no-deal Brexit in the UK parliament. 

But there are other scenarios. The successor may actually advocate a no-deal Brexit - as nothing else could unite the party and maximise its election chances. It is also possible that the Tory Party self-destructs over the whole thing and that the Brexit Party emerges as its logical successor.

A second referendum is not, and never has been, a zero probability outcome. But we still do not see a well-lit pathway to it. The only plausible route goes through a general election and a subsequent Labour-led minority government. That scenario is certainly possible. But even from there, the route to a Brexit reversal would be littered with obstacles. 

And finally, why did she bring this legislation? One explanation is that the official end of the parliamentary term would give her another chance to represent the same bill in the new parliament. This is not quite as simple as it sounds. But we think this calculation is way too complicated, and now overtaken by events. We see no chance that the Tory Party will allow her to go on for much longer - let alone to prepare for yet another vote on her deal. This is now all about her, not the deal.

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May 22, 2019

Europe's real transfer union is from east to west

Federico Fubini has a terrific comment in Project Syndicate in which he makes a couple of important points explaining the rise of populist parties in eastern Europe. One is the effect of emigration from the east to the west, the other is the persistence of the wage gap. Emigration is now becoming a problem for Italy too. 

Fubini argues that the extent of emigration from the east to the west is underestimated, as many workers are simply not registered. He argues that emigration constitutes a massive economic transfer from east to west, and especially to Germany. Immigration stabilised the German working population during a period of demographic decline. It also produced a more direct transfer in the sense that Germany did not have to pay for the education of those workers. Fubini puts the accumulated transfer value at €200bn for 2009-2017. That adds a whole different dimension to the notion of a transfer union. 

He makes a separate important point about the persistence of the wage gap, citing the examples of Audi's car manufacturing plants in Hungary and Bavaria. The monthly wage in Hungary equals the daily wage in Germany. Because of a combination of policies at national and EU level - which Fubini explains in some detail - the wage gap between east and west remains persistent even though productivity has converged. The impoverishment of the middle classes in Eastern countries is thus a driver of political extremism. 

The rise of political extremism is not accidental, but a direct consequence of the failures of policies. We very much agree with his overall conclusion: 

"Regardless of what happens in the European Parliament election, the EU will have a decision to make: ignore its regional disparities and allow Western member states to continue extracting value from newer members, or accept that unless those disparities are addressed, Europe’s enemies will only get stronger."

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