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October 08, 2018

A renewed willingness on both sides to cut a Brexit deal

We like the description in the Financial Times of the status quo of the Brexit negotiations as an Escherian stairwell. No matter where you go you always end up at the same point. This is a good way to characterise the remaining points of gridlock what appears to be the compromise to which both sides are converging: a temporary customs union followed by a Canada-deal. The big obstacle always remains that an absolute Irish backstop written into the withdrawal agreement itself carries more legal weight than the words on the future relationship in the political declaration. By definition, a backstop kicks in if there is no trade deal after Brexit. At that point you would end up with a border inside the UK, and this transgresses Theresa May’s red line. 

There is no shortage of fudges and grey-zone proposals, of hidden regulatory and customs borders, but as long as the Irish backstop and May’s internal customs border red lines are absolute, there can be no deal. We expect both sides to budge, but so far they have not done so, at least in public. Over the weekend we noted however a number of comments that could suggest a renewed willingness of both sides to move towards a deal. On the EU side, both Jean-Claude Juncker and Donald Tusk said that, while a full agreement at the forthcoming EU October summit was unlikely, they now confidently expected a deal later this year. Juncker, in an interview with three Austrian newspapers, mentioned without elaborating further new reasons for optimism - this we interpret as Juncker-speak to hint that the UK government is budging from its pre-Birmingham stance. Tusk, using similar language, spoke of a new expectation close to certainty that a deal would be struck before the end of the year. Obviously one of the politically hairier problems remaining is the Irish-British border conundrum. Arlene Foster, leader of the Northern Ireland unionist DUP, is expected in Brussels tomorrow to discuss this with Michel Barnier. We don’t expect the Foster to show herself more accommodating at this stage than she has until now. But if history is a guide, the EU side will seek to work out a deal on the Irish problem through a series of technical provisions so complicated that only a small handful of experts will understand them.

In the UK, the Daily Telegraph noted that Theresa May has been in talks with about 25 Labour MPs to secure a majority for her proposals. Given the numbers, it does not appear that this in itself could be sufficient if the DUP does not support the government. It is possible that Theresa May pursues a deal against the eurosceptics in her own party - and then resigns after Brexit. It is also conceivable that she sides with her eurosceptics and stays firm on her red line, and waits until the EU moves. Another possibility is that she might find a way to isolate the DUP - which would require a broad degree of unity in the Tory party plus support from at least some Labour MPs. The outcome of such a dynamic situation is impossible to predict. We continue to believe that a deal is possible, and it remains in our view the single most likely scenario especially as we are nearing the cliff-edge.

Another positive sign is a new move by the European Research Group, who say they are now willing to accept EU officials stationed at UK ports after Brexit. We note that this does not solve the contradiction in principle between the two fundamentally incompatible backstops - the inner-Irish or NI-mainland border, but it could facilitate a smoke-and-mirrors version of Brexit.

As the FT writes, the fundamental issue is how to lock in the temporary nature of the transitional customs union and make it consistent with the Irish backstop. There are differences of views on this inside the EU too, with France taking the most hawkish line among member states. The article says that there is now a debate on a revamped temporary customs arrangement, a previous proposal by May.

But that leaves the EU with an important political question they need to agree on among themselves. Do they want an arrangement that leaves the UK in a temporary customs union far into the 2020s? There is always the danger it could turn into a permanent state of affairs, as the UK might conclude that the intermediate stage is preferable to any final deal that could realistically be negotiated.

An alternative proposal under discussion is the possibility to extent the transitional period, but that does not remove the issue of the final cut-off point either. Wolfgang Munchau notes in his FT column that the no-deal scenario is unlikely to be as scary as it sounds, as the UK and the EU will then have to agree a multitude of technical deals. These include the customs logistics for WTO border, on the inner-Irish border and whether to apply for exemptions that are possible under the WTO rules, and on technical solutions to mitigate the presence of the EU’s external border.

Munchau dismisses threats by the EU not to enter into such discussions. They would have to do so, not out of sympathy with the UK but out of solidarity with Ireland. Furthermore, the UK could still end up paying the agreed exit fees. Such a negotiated version of a hard Brexit would still be hard and have negative economic effects, but it would not be the disaster that some people fear. This also means that no-deal might lose its role as a useful bogeyman to force fearful MPs into compromising. If the Commons vote comes late in the process, many companies will have made their hard-Brexit preparations in any case, so a portion of the costs will have been borne already. Munchau’s overall conclusion is that the cliff edge, while not desirable, is not the end of the world, and that some of the negotiations results could be folded into this.

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October 08, 2018

Latvian politics in turmoil after huge populist gains

It is impossible to say what kind of government will emerge from the elections in Latvia this past weekend. With massive gains for populist anti-establishment parties, the main question is now whether the Russia-friendly Harmony party, the strongest with 19% of the vote, will continue to remain locked out of government as a result of other parties working together against it as a matter of principle.

The parties making up the existing ruling coalition received only 27% of the vote together; anger about the huge corruption and money-laundering scandals that have engulfed the government were a major election issue, and a big boost for the anti-establishment vote.

Donald Tusk had warned on Saturday that the Latvian elections could become a dramatic turning point for the whole region, as the first instance of successful Russian electoral interference in an EU member state. We find it interesting that Harmony argues for closer economic ties with Russia and an end to sanctions, but no longer calls for Latvia to leave Nato or the EU. However, the concern in Brussels is that, if Harmony joins a Latvian government, Moscow might acquire a new lever to influence EU policy by overt and covert means. 

Russia is doing everything in its power to undermine the EU, said Tusk, who wants the topic to be discussed at the forthcoming EU summit in the wake of the recent highly-publicised arrest of several Russian intelligence operatives in the Netherlands.

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  • February 05, 2020
  • Russia and Turkey on collision course
  • Politics of rupture - Ireland edition
  • What drives Italian parties to support or reject early elections
  • January 06, 2020
  • A decade that started with a bang
  • What to expect of Spain's next government
  • Divide et impera: Macron's pension reform strategy
  • December 09, 2019
  • The next three days
  • November 11, 2019
  • Grand coalition agrees to continue grand coalition
  • Can Greens and conservatives agree on priorities?
  • Germany - self-content and without energy
  • October 16, 2019
  • After Goulard, von der Leyen needs to show leadership
  • Franco-German relations are so backward-looking
  • September 20, 2019
  • Violence in Northern Ireland - not so far-fetched after all
  • German coalition fails to agree climate deal, but negotiations continue
  • August 27, 2019
  • Remain’s narrowing pathway
  • Macron's diplomatic masterstroke
  • July 19, 2019
  • Instex shows the EU is caught between the US and Russia
  • Johnson’s two Brexit options
  • June 26, 2019
  • How would the EU react to Do-or-Die?
  • Merkel Procrastinates? Surely not.
  • June 05, 2019
  • Let’s talk about Boris
  • Will Kinal be the kingmaker in Greek elections?
  • May 15, 2019
  • Why an anti-Macron vote may mobilise in this EP election
  • May's last throw of the dice - a meaningful vote on June 4 or 5
  • April 26, 2019
  • How Brexit has given rise to different perceptions of reality
  • The EP, not Madrid, will boost Spanish clout
  • How realistic is a Gaullist Europe?
  • April 08, 2019
  • Welcome to the new Brexit grand coalition
  • Waiting for Macron's next move
  • March 20, 2019
  • EU is hardening position on long delay
  • Trump's man in Berlin is wrong on form, but right on substance
  • March 04, 2019
  • Macron's two-month sprint
  • May's numbers are not there yet
  • Greening QE
  • On the "hope" of a rate raise
  • February 15, 2019
  • Syriza suffers defeat in constitutional reform
  • A cautionary tale about experts
  • January 31, 2019
  • EU will play hardball until February 14, and stick to backstop beyond
  • French left and right moves ahead of EP elections
  • Tighten the belts as the economy prepares for landing
  • January 17, 2019
  • How Irish insistence on backstop backfired
  • Will Germany blink? Probably not
  • How Tsipras' confidence vote and Prespes vote are linked
  • January 04, 2019
  • Will the AfD become the Dexit party?
  • Romania's corruption problem in the spotlight of its EU presidency
  • December 10, 2018
  • ECJ says UK free to revoke Article 50, even inside extension period
  • A turning point in Macron's presidency
  • China has added Portugal to the list of its key EU partners
  • Belgium's coalition implodes over Marrakesh pact
  • November 30, 2018
  • May’s one and only trump card
  • Are the gilets jaunes as powerful as the 1995 protests?
  • Tsipras is dishing out more goodies
  • November 21, 2018
  • The need and limitations of plan B Brexit options
  • The revenge of the left behind - French edition
  • November 13, 2018
  • Peak Salvini?
  • Protest uberisation
  • November 05, 2018
  • Macron trails behind Le Pen in European elections poll
  • How the CDU will organise leadership campaign
  • October 29, 2018
  • Why the EEA is no longer a Brexit option
  • Behold the rising superpower: post-catholic Ireland’s European miracle
  • October 22, 2018
  • A week of intense political tension in the UK
  • Poland's local elections reveal deeply-split country
  • October 15, 2018
  • Black Brexit smoke
  • Bettel can relax and stay in office
  • Solving the crime vs solving the problem
  • October 12, 2018
  • A deal so close, and yet so far
  • AfD leaves Germans speachless and helpless
  • October 10, 2018
  • EU forces car industry to speed up modernisation
  • Still waiting for the French reshuffle
  • Arlene Foster is not for turning - or is she?
  • October 09, 2018
  • Can Le Pen and Salvini pull it off?
  • The next ten days
  • Don't shoot the social democratic ambulance
  • October 08, 2018
  • A renewed willingness on both sides to cut a Brexit deal
  • Latvian politics in turmoil after huge populist gains