Thursday, June 30, 2016

EU to UK on Brexit: “What About ‘Nein’ Don’t You Understand?”

As we described yesterday, it was evident when British Prime Minister Cameron spoke at a regularly scheduled session of the European Parliament that Cameron’s demand for what amounted to a special deal as part of a Brexit, in terms of concessions on immigration, was a non-starter as far as the Europeans were concerned. We inferred from the write-ups of the meeting in what is effectively the house organ of the Conservative party, the Telegraph, that the Tories were ignoring the message.

Apparently it was so clear at the European Parliament meeting itself that the UK representatives were in their own bubble that European officials took the atypical step of not simply reiterating their position, but stating it even more firmly in an effort to puncture the delusion. From EU leaders harden stance against Brexit concessions in the Financial Times:

Europe’s leaders have dug in their heels over uncontrolled migration in the single market, scotching UK hopes for a favourable deal in a direct snub to prime minister David Cameron’s plea to recognise British voters’ concerns..

“There will be no single market à la carte,” said Donald Tusk, the EU Council president, as the group met to set out the terms of engagement for any divorce talks following the Brexit referendum.

Diplomats said the joint statement was deliberately toughened up after Mr Cameron said he would have avoided Brexit if European leaders had let him control migration.

With the explicit consent of German chancellor Angela Merkel, a sentence was unexpectedly added to the statement yesterday saying that “access to the single market requires acceptance of all four freedoms”, a reference to EU principles on the free movement of capital, labour, services and goods.

“That was our response to Cameron,” said one senior EU diplomat, who added that leaders were not expected to go into policy issues at this stage.

This is very significant from a negotiating perspective. Details can always be horse-traded but principles are another matter entirely, and the EU members are taking a unified position.

The UK has pushed the Europeans for years for concessions and received them many times, resulting in them getting a particularly favorable deal. But the Brits went too far, particularly since their demand for even more waivers comes of what the EU leaders correctly regard as a power play within the Conservative party that has gone disastrously awry. Moreover, they view giving in to the UK as feeding separatist movements. That’s bad enough for an EU member. It would be disastrous for Eurozone members like Spain (Catalan and Basque) and Belgium in particular. Making sure the UK gets no coddling is also important to tamp down Front National in France. While the UK leaving will be traumatic and costly, any fracture of the Eurozone would strike at its fragile structures and would precipitate a full-blown economic crisis. Accordingly, the most exposed EU members are also opposed to Scotland’s idea of coming in as a member without joining the queue of applicants seeking membership. Again from the pink paper:

On Scotland remaining an EU member, Spanish prime minister, Mariano Rajoy, said: “I am radically against it, the treaties are radically against it, and I think everyone else is radically against it.”

In fact, it is not clear if Spain’s position is as widely shared as Rajoy claims. But as we’ve also stressed, Eurocrats take very strict interpretations of their agreements. If Rajoy is correct that the existing treaties do not accommodate Scotland’s desire to come in as a current member when it is not a signatory and has gone through various entry procedures, Rajoy may indeed be accurately presenting the state of play.

The EU statement also formally reiterated their position that there would be no pre-negotiation, that talks would commence only after the UK formally initiated the departure process:

“There can be no negotiations of any kind before this notification has taken place,” the statement said.

In addition, the Europeans made clear that a UK exit would lead to some immediate, unfavorable changes:

Seizing the chance offered by Brexit, French president François Hollande said the eurozone would repatriate the clearing of euro-denominated trading from the City of London, claiming the current situation was “exorbitant” for France. “As soon as the UK is not part of the EU, there is no reason that this continues,” he said.

The European Central Bank is preparing to resurrect its so-called “location policy” on clearing houses, according to officials — a move that had been thwarted by the UK after a four-year battle through the European courts.

The reason the UK prevailed was that moving Euro clearing out of London was deemed to be discriminating against a EU member. No EU membership, no discrimination.

For a quick reading on whether the European message to the UK is beginning to get through, I again used the Telegraph as a quick proxy. UK reader input on reactions in the tabloids say would be very helpful.

Unfortunately, the initial signs were not good. The Telegraph is consumed with the withdrawal of Boris Johnson for the Prime Minister race, as well as the upheaval in Labor. But this article is on the front page: Freedom of movement reform ‘on the table’ for Brexit talks, suggests French minister as he breaks ranks with rest of EU.

This is in contradiction of a memo agreed by Eurozone leaders, including Hollande himself. Unlike the Greek negotiations, which were handled by the Finance ministers, any Brexit negotiations will be led by the foreign ministers. Recall that when the news of Brexit broke and the group of founding EU member foreign ministers met, they took a very hard line and Merkel has been working to soften it. With that said, the finance ministers will be very deeply involved on the trade issues. But the message so far from the European leaders is that the existential threat posed by a Brexit is more important than the economic issues. If that view holds, the normally very powerful finance ministers will be curbed by their national leaders. So Sapin is speaking out of school.

In addition, hat despite the important role of finance ministries in the Greece negotiations, it was Hollande, not Sapin, that called the shots at key junctures in the 2015 Greece negotiations. Now perhaps Sapin can turn Hollande and the French foreign minister around, but the Telegraph emphasis on this story over the big bath of cold water dispensed in the formal statement after the European Parliament meeting looks like a case of Tory confirmation bias.

Similarly, Ambrose Evans-Pritchard, who is typically a very astute commentator, also seems unduly optimistic about the strength of the UK bargaining position. Recall that he has long believed the UK should depart and issue a particularly forceful appeal for a Leave vote. Also recall that, perhaps reflecting his Euroskeptic views, he repeatedly said during the Greek negotiations that Greece had the better set of cards, when that was clearly not the case.

The economic part of the analysis in AEP’s latest piece, Was Brexit fear a giant hoax or is this the calm before the next storm? is compelling. He gives a careful, balanced recap of many of the key risks that may be triggered as a Brexit progresses, such as:

More worrying is what S&P also said: that debt coming due over the next 12 months is 755pc of Britain’s external receipts and large sums have to be rolled over continuously. This is the highest for all 131 rated states, thanks to London’s role as a global financial hub. We will not know whether there is any mismatch, either in currencies or maturities, until the repayment deadlines hit and the skeletons come out of the closet. The test lies ahead.

But in his next paragraph, we have this:

What we have learnt from the market moves since Brexit is that Europe is just as vulnerable as Britain. The vote has already triggered a banking crisis in Italy, where the government is struggling to put together a €40bn (£33bn) rescue but is paralysed by the constraints of euro membership.

Huh? Italy has been in a banking crisis for quite some time. The government already tried to get Eurozone support earlier this year for a “good bank/bad bank” bailout vehicle but was rebuffed.

The rationale for Italy trying again was that emergency circumstances allow for special support. From Bloomberg:

The government in Berlin rejects the argument that the U.K. vote to leave the EU constitutes an “exceptional circumstance” which, under EU basic law, can allow a national government to grant aid to a company outside of the state-aid rules.

The Eurocrats are keen to make Italy the test case of their shiny new bank bail-in rules, which require shareholders and creditors to take losses. The problem with this barmy idea is that depositors are also in line to take hits in a bail-in, as took place in Cyprus. That means bail-ins are almost certain to produce runs on Italian banks. Moreover, there are elections in Italy this fall. If Renzi can’t forestall a bank-in, his party is guaranteed to take losses to the benefit of Beppe Grillo’s Five Star movement, with the odds decent that Renzi will be out. Merkel is likely to come to regret not giving Renzi his bank rescue.

This is the part of AEP’s article that gives pause:

Yet it should be dawning on European politicians by now that the economic fates of the UK and the eurozone are entwined, that if we go over a cliff, so do they and just as hard, and therefore that their bargaining position is not as strong as they think. They cannot dictate terms.

Um, the Europeans most certainly can dictate terms. It will come at a cost. It may wind up being much greater than they perceive, as with the Germans obstinate failure to move towards a workable system of integrated banking regulations, deposit guarantees, and other backstops. If the Europeans were economically rational, the Continent would not be sliding into a depression. The Germans have been cutting off their noses to spite their faces for decades. Why should now be any different?

From the EU perspective, Brexit economic and political considerations are diametrically opposed. Minimizing economic fallout would mean accommodating the UK. But that is seen as too dangerous on the political front, at least as of now. There’s no immediate reason to think that ranking of priorities will change.

The Europeans recognize that what the UK has asked for is a divorce. Unless the parting partners manage to re-marry well, divorce leaves both spouses less well off financially. The EU members recognize that they will wind up with lower living standards and are prepared to deal with the fallout. The Brits, by contrast, act as if they can still live in the same house, share the checking account, but sleep around and do no housework. Someone needs to tell the Brits that the days of the Imperial ability to get such one-sided deals are long past.

No comments:

Post a Comment