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October 04, 2019

Is the EU about to make its first serious error in the Brexit process?

We are at a dangerous point in the Brexit process - where at least some people are about to make big mistakes. The number of mistakes made by various UK prime ministers and MPs has been amply documented. But we think that the EU is now at risk of a big tactical miscalculation due to an insufficient understanding of UK politics. We see the early signs of this happening as a result of the flat-out rejection of Boris Johnson’s proposal. We agree that there are many problems with the proposal, including giving Stormont a veto. But the proposal is solid enough as a starting bid, for which it was designed.

The EU could inadvertently trigger a no-deal Brexit. At the moment, the consensus in Brussels is that a Brexit extension is certain, so that there is no real hard deadline. Fraser Nelson, the editor of the Spectator and who knows Johnson well, writes in the Telegraph this morning that the prime minister privately says that he will probably have to extend. So game, set and match for the EU?

We would agree that the risk of a no-deal Brexit on October 31 is vanishingly small, but risk of it happening eventually is rising. At Eurointelligence we have been warning for some time that the risks of a no-deal Brexit have been widely underestimated. But we were cautious not to elevate the no-deal scenario to becoming our baseline. 

If the EU were to reject the current proposal flat out, that would change. The EU should consider very carefully that Johnson yesterday managed to receive support not only from the DUP, but also from the rebel Tories who lost their whip over the Benn extension legislation. The EU does not want to give Johnson a believable excuse for a no-deal Brexit: having come up with a reasonable proposal whose rejections indicates that the EU was not serious even to engage with the idea of a dual border - one for customs and one for regulation. We think that duality is not only a reasonable starting position, but in fact the only way to bridge the differences over the backstop. Once we pass the October 31 deadline, Johnson would then campaign on a theme of no-deal Brexit. That position could command a majority at that point, especially in view of Labour’s confused position. 

The reaction from Dublin to Boris Johnson's proposal was firm but without shutting doors. The major objections against the plan remain - customs union and the veto right of Northern Ireland. But in coordination with Brussels the Irish government put out the message that Johnson's proposals are not the basis of a deal, but the basis for discussions. Their expectation is that there will be an extension followed by an election which will give both sides time to work on this proposal for an agreeable compromise. 

Are the difficulties surmountable? Dublin would find it very hard to agree a deal involving checks on goods moving between North and South. And, while it would likely concede some role for the parliament in Stormont, the Irish government views a veto for the DUP as unsellable domestically, writes the Irish Times.

Is it possible that the EU secretly speculates on a second referendum? We think this would also be a miscalculation. But the more important point is that without a deal there can be no referendum - unless the EU wants to pitch Remain vs. no-deal. We disagree with Leo Varadkar’s optimism that Remain would win.

In any case, there is no majority in the UK parliament in favour of a referendum.

Is it possible that the EU is sceptical of Johnson’s proposals, not only because of the backstop but because of a general reluctance to accept regulatory divergence? If so, that position would validate the fears expressed in the UK about the backstop - that the EU would seek to trap the UK in an arrangement that allows no escape. The EU should therefore clarify within itself the ultimate goal of its position, rather than just hide behind Dublin. Do they want to avoid a no-deal Brexit to minimise disruption? Or do they want to stop regulatory divergence? There are overlapping, but not identical strategies to achieve those goals. This is also where the difference in views between France and Germany lies. The Germans are seeking to avoid disruption, but are not afraid of competition. Emmanuel Macron is not afraid of disruption, but very afraid of competition. 

We would agree that the Johnson plan has big problems, especially the part that gives Stormont veto power. And it remains to be seen whether the unity in the UK parliament would still hold if this aspect were negotiated away. But in our view it would be a miscalculation for the EU to reject the principle of separate borders for regulation and customs. If there is a solution to the backstop problem, it must be organised around this principle. It is also important to keep things in perspective. The amount of trade between the UK and the EU was over £600bn. Intra-Irish trade flows were about £5bn. Should the EU really want to endanger a large portion of the £600bn on the grounds that it is possible to blame Johnson for a no-deal Brexit? 

That would strike us as an entirely irrational strategy.

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October 04, 2019

Socialists on track to win elections in Portugal

Portugal is going to elect its next government this Sunday. The latest polls suggest the Socialists will win the elections but without an outright majority. Unlike everywhere else in Europe Portugal is an island of political stability, with the Socialists in a minority government backed by the Left Bloc and the Communists in parliament. This deal that was ridiculed initially as unmanageable and yet it lasted through the entire legislative period. And the success was tangible too: the economy stabilised, austerity ended after years under the bailout programme, and confidence returned. This success is why António Costa and his party are likely to return to office even if they will have to rely on other parties again. 

But controversies came up during the campaign that cost the Socialists the extra points which could have enabled an outright majority. The most damaging was the scandal about the theft from a weapons depot in the town of Tancos, which implicated Costa's defence minister in an alleged cover-up. The media coverage of the case pushed security issues to the forefront in the public debate, and thus helped the conservative PSD party to gain in the polls. As a consequence the gap between the two parties narrowed from 18pp in August to 10pp now. Still, the latest polls suggest that the Socialists would get 37%-38% of the vote, enough to win though not to form a government without a partner. 

Will there be a coalition government? The current set up is a minority government backed in parliament by an agreement with the Left Bloc and Communists. Both of those two parties are stable in the polls around 10% and 7%. This basically offers two options: a re-run of the current arrangements, or a deal with the Left Bloc alone. All depends on the election arithmetic and the list of concessions the parties will bring to the negotiation.

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