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March 08, 2019

A hard-Brexit scenario

The big difficulty we and all other analysts have with Brexit is that none of us really knows what is going on inside Theresa May's head. The few accounts we have read that claim to have special cerebral insights contradict each other. A second-best strategy is to rely on her revealed preferences. She has changed her views many times, but has been doggedly persistently in her strategy of running down the clock.

So, how about this version of a hard Brexit? Next week's votes go as expected. The meaningful vote is another No - with a smaller margin. It will be followed by two meaningless votes the following day on whether to take no-deal off the table and whether to ask for an extension. Of course, MPs will take no-deal off the imaginary table, and of course they will want to extend. By the end of next week, Brexit will be 14 days away. 

14 is an important number. It takes 14 days for parliament to replace a prime minister through a vote of no-confidence. Come Friday evening next week, May can do pretty much whatever she likes. After she won the Tory leadership contest in December, neither the Tory Party nor the House of Commons have any tools to stop a no-deal Brexit. 14 days is also not enough time to pass legislation without government support.

Now assume the following sequence of events. May will announce a final attempt to rescue the deal. She will make another proposal to discuss Brexit at or around the summit - which starts eight days before Brexit. The goal is to confront everybody with a choice between a revised deal or a crash. 

We admit that this sounds cold-blooded. The Cooper amendment would have prevented that course of action. But May would still be acting, at least formally, in accordance with the outcome of next week's vote. She does not have to ask for an extension until 10.59pm UK time on March 29. And, by tabling a third meaningful vote, she would have given parliament a final chance to comply with its own wish to take no-deal off the table.  

It is possible that she may confront the European Council with an ultimatum on the backstop. In this context we noted a small story about industrial action by French customs officials, who are warning of huge queues in case of a no-deal Brexit, and who are saying that the French government has made inadequate preparations. As ever the protests also have a lot to do with working conditions, but we would agree with the overall assertion that the EU is just as unprepared for no-deal as the UK. The Federation of German Industry, one of the cheerleaders of the European Commission's approach to the Brexit negotiations, noted with horror that a quarter of German companies responded in a survey that they are planning job cuts as a result of a hard Brexit. 

Again, we don't know what is going on in May's head. But if she wanted to she could deliver a hard Brexit on March 29, or blackmail the European Council, the House of Commons or both to back her deal, followed by a very short technical extension. 

This is not a prediction. But we consider this scenario more plausible than a long extension, let alone a second referendum. In short any option that relies on non-existing political majorities. And it is consistent with what we know.

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March 08, 2019

The geo-strategic significance of the China-Italy belt-and-road deal

There seems to be an unofficial competition going on among commentators about which events of our time future historians will consider as most important. Our own view is that Trump and Brexit will probably go down as footnotes in a larger story - which is that of China emerging as the leading power in the wider Eurasian continent as the EU struggles to maintain unity. The latter is to a large extent related to how the euro was created and how it was subsequently managed. 

Italy is playing a critical role in this evolving story. Consider together the biggest Italian news stories of this week. The first is that the Italian government is stalling the high-speed rail-link between Lyon and Turin, probably the single most important trans-European network project of our time. It would connect two of Europe's most important - yet geographically largely unconnected - regions: south-eastern France and the north-west of Italy. 

The second story is that the Italian government is signing a deal to join China's belt-and-road (B&R) initiative, which is probably one of the most important geo-strategic developments currently under way. And yes, it also includes a rail link.

In an excellent analysis, James Kynge notes that B&R is not an organisation. There is no membership. It is a concept. We see it as the political equivalent of a social network - not immediately understood by people with analog-wired brains. But opening up to China gives Italy's investment-deprived economy the best chance it has to raise investments domestically. Specifically, Italy hopes to buy goodwill from China in the hope of flourishing bilateral commerce. We would add that the catastrophic economic management of the eurozone, which has trapped Italy in a state of near-zero growth, is making such action entirely rational from an economic perspective.

Kynge looks at some of the numbers. Italy has been one of the more prominent targets of Chinese investment in Europe, but  flows have recently ebbed. Italy is an unusual candidate for B&R, the only G7 country in it. B&R has so far attracted mostly smaller countries - of eastern Europe mainly, and Portugal most recently. One of the suggestions is that Italy could offer China much lower security barriers to inward investments, allowing China to use Italy as a base to penetrate the rest of the EU with the help of the single market.

One of the potential projects China could support is a high-speed rail link - not the one between Turin and Lyon, but towards the east via the Balkans.

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