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.
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