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November 20, 2018

How the German diesel scandal is driving voters away from the grand coalition

The financial crisis was the big economic story of the last decade. Here in Europe, the decline of the car industry is the big story of this decade, and possibly the next. It is not only a story of shifting technologies and consumer preferences, but also a political one. We would, for example, attribute the extreme decline in the popularity of the grand coalition in large part to the decision to shift the costs of the diesel scandal to the consumer. This would explain the flow of voters from both CDU and SPD towards the Greens.

To outside observers, it seems improbable that what is primarily an industrial development could have such big political implications. The reason is that Germany remains the country with the lowest rate of home ownership in Europe. As a result, the car constitutes the main asset of the median household. As successive governments have been subsidising diesel technology, diesel car ownership is widespread. A combination of scandals, emissions tests, future emissions ceilings and court decisions to allow diesel bans have reduced the residual values of diesel cars. As a result, the median German household has taken a significant financial hit.

Germans will this morning be reminded once again of the government’s handling of the crisis when an expert commission of the ministry of transport produces its report. As Tagesschau noted, the report has already been overtaken by events. The government short-circuited the process by accepting the car industry’s demand to provide only minimal compensation for diesel owners. 

The Commission favours a forced upgrade to make old diesel cars compliant with the requirements of the current Euro 6 norm. This would have cost some €3000-5000 per car, but the industry has rejected that categorically. Instead, the government and the industry have already agreed on a scheme that would give diesel car owners a small premium to buy new cars - but only in areas affected by a ban. But, since nobody in their right mind buys a diesel car in the current circumstances, these premiums have turned out to be only a theoretical subsidy. In reality, nothing much is happening.

The number of cities imposing bans is growing fast. For the first time, the ban is now affecting a motorway - in the densely populated Ruhr area. And German newspapers are reporting that the cities are getting more efficient at policing the ban, with cameras that manage to detect non-compliant cars. 

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November 20, 2018

Two victories for Theresa May, and one setback

People don’t write letters any more. This sad fact should perhaps have been taken into account by British eurosceptics, who at the end of last week appeared certain to would get the 48 MP's letters needed to trigger a leadership election. It appears this morning that this latest attempt to unseat Theresa May has failed. The Daily Telegraph is saying so and, since no newspaper wanted a leadership contest more badly, we tend to believe them on this.

Another illusion went out of the window yesterday. The withdrawal agreement will not be renegotiated. Michael Gove and his gang-of-five wanted to persuade Theresa May to reopen the discussion, but they were told that this is not possible. This goes for both sides. France is trying to secure fishing rights in UK waters while Spain wants assurances on Gibraltar. There are demands for side-declarations, according to the FT. They will no doubt be discussed, but also fiercely resisted by May. The withdrawal deal as it stands constitutes a finely-calibrated compromise that, in our view, would unravel if re-opened. Michel Barnier is also strongly resisting this pressure.

There is room, however, for discussion on the political declaration, which so far only consists of seven pages. The declaration does not have the same legal weight as the agreement itself, but it matters because it sets the parameters for the upcoming talks on the future relationship.

The noisy eurosceptic rebellion seems to be losing some steam as people are slowly acquainting themselves with the political reality that there is no alternative to this specific deal - other than no Brexit or no deal. May seems to have persuaded Gove and some of the eurosceptics who visited her yesterday - including the former leader Ian Duncan Smith - to hold their fire.

The parliamentary arithmetic to pass the deal has not changed. May will need to compensate for any majority MPs voting against the withdrawal agreement by securing support from Labour MPs. We believe that the strategy will be to split the sceptics, and to persuade wavering Labour MPs that there would be no election in case the deal is voted down. We believe that the EU will collude with this strategy - rather than accept a process that would lead to a second referendum.

The DUP, however, remains intransigent. The informal agreement to sustain May’s minority government was thrown into doubt yesterday when the DUP abstained at a vote on the finance bill - the budget. The purpose of yesterday’s abstention was to signal to May that the party is willing to use its voting power. 

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