Aiming off the flimflam

31 December 2017

This final blog of 2017 is intended to point to matters heroically overlooked this year by home-grown Cassandras. It seeks to aim off their flimflam, draw out a conclusion or two and chance a biggish prediction. In doing so, it tests the robustness of some of Brexit2016's own longstanding positions.

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To summarise, a wave of electoral discontent is causing power to drift away from the EU’s customary leadership of Europhile member-states. It is moving to formerly laggard states, now undergoing some change of heart about the European project, for these purposes characterised as Eurosceptics. Some power is also shifting to Brussels itself. Overall, this process is slow and uncertain.

First the economics: in 2017 these turned out better than feared, with no systemic bank failure and a generally stable passage for the Eurozone system. On the other hand, Italian banks in particular are far from out of the woods and the ECB will face challenges, as the Fed leads the way to the next stage of the cycle and begins unwinding its extended balance sheet.

By contrast in 2017 and looking forward into 2018, European politics show the signs of travel over a hard road. Eurosceptic politicians and parties have gained votes widely. In the Netherlands, the success of the “Party for Freedom” came at the expense of the minor coalition partner, the Labour Party, whose vote collapsed. This led to a post-WW2 record of 208 days to form a coalition.

Germany saw a remarkably similar outcome, with Merkel’s CDU dropping its share of the vote by 8% for its worst result since 1949; and her coalition partner, the SPD, getting its worst result since WW2. This has prevented the formation of a government for 98 days at the time of writing - also a post-WW2 record. (The previous record was 86 days after the 2013 election, so this is not necessarily a harbinger of prolonged inertia; then again, it is hardly a signal of political effectiveness.) In Poland and Hungary, Eurosceptic politicians were already in power at the beginning of the year; during its course they have come into government in Austria.

Spain faces an existential challenge unrelated to the EU, with Catalonian independence bursting upon our attention after the October referendum, Madrid’s clumsy responses and the separatists’ reinforcement by their success in the December election. The Italian election in March 2018 is hard to see as stabilising event. By contrast, France presents the sole instance of electoral success for an EU partisan, in an extraordinary personal triumph for Macron. But now he faces the challenges of following through on reforming a famously wayward nation.

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The weakness of Europhile governments might be expected to lead to de facto power shifts to Eurosceptic governments and the EU itself. In the event, however, Eurosceptic governments have no experience of and often little inclination for leadership responsibilities. This could change, particularly if issues arise encouraging them to work together. At first sight it is hard to see how this might occur, as (for example) the loss of income which might upset Hungary and Poland, as net recipients of EU funding, would look very different to Austria, a net contributor.

Nor does Brussels really know what to do. The EU parades its hammer of ever closer union, turning every problem into a nail. This flirts with risks in provoking Eurosceptic sentiment, whether alarmed by costs, as the Netherlands and Germany; or political land-grabs as the nations of Eastern Europe. Regardless, it is no help to the UK in Brexit negotiations, as rules-bound civil servants are all the more inflexible in the absence of political direction.

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For its own part, the UK presents chaos aplenty. There has been no rest from those whose aversion to the referendum outcome leads them into promiscuous attacks on the government’s personalities, stance and achievements. This maintains an inflamed national mood, without thus far altering opinion on the underlying topic. May managed to make bad worse with her botched election, but astonishing to relate, she looks strong compared to Rajoy and at this point even Merkel. And paradoxically Tory weakness is May’s strength. Even so, her position is too uncertain for us to write off the grandees seeking to frustrate the Brexit process, though we have a funny feeling that history will see them as doing little more than railing against the changing of the guard. Tough business: the record suggests that the national mood is more peevish than at any time since Suez.

So to Brexit itself, where we may fairly conclude that the joint communiqué of 8 December offered the best quality fudge, to the implications of which we turn below. Looking to 2018, transition is not really a problem: eighteen months or twenty-four months make never no mind. The real issue is the intended end-state. The UK objective is to combine the best of the past: that is current levels of trade in goods and services with Europe; and the best of the future: that is premium growth in services and international trade beyond Europe. The former calls for high levels of conformity to EU regulations (applauded by Remainer diehards as soft Brexit); the latter to tolerated divergence (stigmatised by the same crew as hard ditto). Freedom of movement is an aggravating factor, in a debate notable domestically for its lack of good temper and good sense.

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So what next? Best to expect more blow-ups at home and abroad. There’s no shortage of earache from those looking for domestic troubles, so let’s rebalance accounts by looking overseas. We have touched on politics above, to which we should add the commitments which Brussels has made from time to time to recognise the interests of Ireland and Spain. At present, the former seems to have been kicked into touch by the recent fudge and we hear little of the latter. Nonetheless either could derail a deal. They will, however, have to contend with the economic pressure-points now likely to come to the fore.

The EU itself, its member-states and the private sector which it hosts are all beneficiaries of access to cheap money from London’s capital markets.

France and Germany host exporters to and joint-ventures with the UK, all of which have economic consequence and some of which bear upon strategic interests, either political or military.

The Netherlands too hosts joint ventures with UK interests and these could not be more central to its business model. It also hosts the Continent’s maritime hub, deeply linked to the shipping and insurance markets of London.

State bodies in France, Germany and the Netherlands own transport franchisees in the UK.

French state bodies own utility operators in the UK. In addition, France hosts public-service contractors operating in the UK and economic interests in the principal cross-Channel links.

Spain hosts fishermen seeking access to UK waters and is the beneficiary of private-sector capital flows from resident UK expats.

Poland and its Eastern European neighbours are beneficiaries of private-sector capital flows originating from their expats now resident in the UK.

It would be foolish to overlook these issues as they bear upon the second stage of negotiation. They will encourage the EU to make this work, as well as also to avoid revisiting the financial settlement under which Eastern and Southern Europe remain the beneficiaries of EU funds underpinned until 2020 by British budget contributions.

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And so we turn to the trillion dollar question: deal or no deal? I’ve always been a pessimist about this. On the other hand, the December communiqué gave me pause as showing all sides getting over a major hump and conveying a powerful commitment all round to make a deal. Flimflam of another kind, perhaps, but raising the question of whether diplomacy - forms of words - can work the trick once again. I still feel that there are enough moving parts to justify my doubts that a deal can be achieved. But then again, I accept that I may have to modify my pessimism, by recognising the political momentum for an amicable outcome. If so, it is set fair to surprise the Cassandras with a decent result for UK, as the realities of political and economic circumstances set out above come to prevail. On this optimistic note, a happy new year to all our readers..