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June 04, 2020

No-deal preparations start for real

For the first time, we noted that people are getting really scared about a WTO Brexit. We saw a couple of commentators yesterday - in the Times and the Guardian - who shared their Oh-My-God-This-Is-Happening moment. In truth, the risks themselves haven't changed at all since the December elections. Boris Johnson's has been consistent on Brexit. It is not that Johnson has discovered he can hide the effects of a no-deal Brexit behind the Covid-19 shock. The observation only relates to our ability to disentangle the two. It is a policy-wonk thing. Not a policy thing.

But it has taken some observers in Brussels and London a very long time to realise that the ultra-hard Brexit is for real. Even the passing of a UK law in early January, ruling out a Brexit extension, did not change perceptions.

We remain where we were back then, with the observation that a no-deal Brexit is a very serious possibility, but so is a deal. If the Barnier/Frost negotiations achieve a breakthrough on fish this week, which appears possible, then Johnson and EU leaders might strike a compromise on the level-playing-field conditions. The UK would have to give up its unreasonable cherry-picking requests. The EU would have to give up the insistence on subjecting the UK to its own competition policy and single-market regulations. This is especially relevant at a time when this policy is changing - see our separate story below. The EU is a deal-making machine. Getting the recovery fund and the next EU budget on the way will be really hard. By comparison the Brexit deal is technically easy. The problems are political. We think it was a mistake by the EU to overload the negotiating mandate. It had the effect that the talks never properly got off the ground. 

We think the commitment not to extend is hard. If there is a deal, it will of necessity be a small one. Economically, the difference between no-deal and a small deal is not all that large. But it makes a huge political difference whether Brexit ends up as an irreconcilable act of sedition or a friendly separation.

In the meantime, serious preparations got under way. The FT has two stories on the scale of the task. This morning, the paper reports that a WTO Brexit would hit medical supplies just as the UK government is struggling to rebuild stockpiles. A strategy needs to be in place this month for the job to be completed by the end of the year. During the Brexit extension wars a year ago we reported that the problem goes both ways. Hospitals in continental Europe are also dependent on medical supplies from the UK. They would need to source these elsewhere, which will take time to prepare. Given that lives are at stake, it would make sense for both sides either to agree that they need to make the preparations now, or to agree a transitional arrangement or a special deal covering a certain class of medical supplies.

In another report, the paper writes that Andrew Bailey called on banks to step up their no-deal preparations. The Bank of England is confident that most of the financial stability risks have been mitigated. This warning specifically relates to asset price volatility that might result from the failure to agree a deal.

We also noted a testy exchange in the House of Commons yesterday between Johnson and Theresa May, who requested that Johnson should secure the free flow of data on issues affecting health and security, like passenger-name records. Johnson replied that this would be so if the EU saw sense and adopted a reasonable negotiating position.

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June 04, 2020

How to respond to Turkish provocations in the Mediterranean?

Greece is mobilising a new round of responses from the EU, UN and Nato amid increasing transgressions and provocations from Turkey. The latest case is a map published by the Turkish government's official journal showing areas where the Turkish Petroleum Corporation (TPAO) wants to drill for oil and gas. These are six nautical miles away from the Greek islands of Crete, Rhodes, Kassos and Karpathos. Ankara claims the area as part of its continental shelf under the Turkey-Libya sea border agreement, and the Turkish national security council announced that they would continue to protect the country's rights in the eastern Mediterranean, without any compromise. Athens responded on several diplomatic levels, saying they are fully prepared if Turkey were to pursue its provocations and start illegal drilling on the Greek continental shelf. 

For the EU the conflict is a nightmare, as it exposes its ambivalent stance on Turkey. Josep Borrell might issue a statement warning Turkey to stop drilling in the waters of Cyprus and Greece, but what next? No one in Europe is prepared for a military escalation, but will an empty threat be enough? Their calculation is that Turkey does not have the economic means to fight both in the Mediterranean and on Libyan soil. Something has to give eventually. Provocations are likely to continue, though, and this is likely to reveal internal EU divisions over Turkey. Macropolis reports that Athens is currently trying to reach out to all EU member states in an effort to gauge their mood on taking measures against Ankara within a European framework. Many countries, including Germany, have often opposed severe measures against Ankara for the sake of either the EU-Turkey deal on migration, or developments related to Libya. Some EU member states seem sceptical about taking any action that could isolate Turkey, which is just what would suit Greece well. 

Greece is also looking to reach an agreement for the delineation of its Exclusive Economic Zones with neighbouring countries. An agreement with Egypt would be a game changer, practically negating the effect of the memorandum between Turkey and Libya's government of national accord. The recent alliance between Egypt, France, Greece, Cyprus and United Arab Emirates is a further step to keep Turkey at bay in the Mediterranean and in Libya.

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