Both sides of the Brexit negotiation are probing each others' intentions and capabilities, whilst keeping a close eye upon their own restive and growing populist voters. Their reactions to the growing populist threats come straight from the same page. Prime Minister May has recently rolled out the Conservative Party version of Fabian research, originating in Beatrice and Sidney Webb's Minority Report, into the conditions of the underprivileged in society and remedial solutions to their plight. The reciprocal European Union (EU) initiative, to be inclusive and to enable social mobility, mirrors that in Britain. This positioning complies with the new G20 agenda and IMF managing director Lagarde's latest buzzword, "inclusiveness"; so that everything remains in globalist compliance. The resulting political parameters of these two focus points is setting the agenda and driving the Brexit negotiation process.
(Source: Guardian)
Neither side of the negotiating table has a clear internal strategy, since everything is set by these two external parameters. Apparently based on Game Theory and the time value of options, there is an advantage for each party in concealing its strategic objective until the last minute in order to maximize its negotiating power at the table. As the clock runs down, however, the value of this advantage is eroded.
A position will be reached, or may already have been reached, at which a clear declaration of intentions and capabilities actually creates a negotiating environment that is extremely competitive and, therefore, risks harming both sides of the negotiations. The EU has signalled that it is time to get more serious and more transparent about the negotiations. This should be viewed as an attempt to set the terms of the negotiations. Military doctrine states that one condition for victory is in making an opponent play by one's own rules. The EU has seized this initiative back after Britain unwittingly seized it through the Brexit vote.
As the Great Powers of France and Germany took the initiative, with an informal summit at Ventotene in Italy on how to keep the EU together in the face of populism and Brexit, the hosting nation's current government placed an item onto the agenda. The Renzi government would like to see a renewed EU focus on economic stimulus rather than deficit cutting. Hoping to strike a positive tone, Italy's spokesman Sandro Gozi avoided pressuring Germany to ease up on its insistence on EU nations adhering to Growth and Stability Pact limits. By avoiding this red line, the Renzi government hopes that Germany will respond with alacrity on the stimulus front. According to Gozi, France is already onside.
Prime Minister Renzi is desperate; he needs miraculous economic growth in the second half of the year to meet his promised targets. Failure to hit his predicted numbers will go very badly for him in his upcoming confidence vote - that he needs to change the constitution in order to increase the longevity of his own and following administrations. So far, observers don't rate the economy's chances or his own of success very highly. The odds on Renzi and his economy lengthened when Angela Merkel, despite praising him, indicated that EU budget rules will not be bent in favor of Italy.
(Source: CFR)
Chancellor Merkel should be careful on how much criticism she piles upon her Italian ally. The data shows that Germany has been the biggest transgressor in state support for its banking system, and that Renzi's demands for wiggle room still put his state aid programme well behind that afforded to Ireland and Spain. Merkel's rhetoric is a little hollow and presumably aimed at the German electorate. Furthermore, since Spain and Portugal avoided fines for breaking deficit guidelines Italy can logically expect some kind of favourable compromise.
The ECB remains less certain to respond with alacrity to any such calls to participate in an economic stimulus. The minutes of the last Governing Council meeting showed that whilst the ECB is concerned about the disruptive headwind created by Brexit, it is waiting to see the manifestation of this impact before reacting. Such a stance is in stark contrast to the Bank of England, which has already moved to anticipate any such headwind.
(Source: Bloomberg)
The economic backdrop immediately post-Brexit vote, against which the tri-nation summit was cast, is an interesting one. The eurozone was slowly growing going into the vote, and continues to do so on the same trajectory despite all the doomsaying surrounding it. If anything, the Germany economy is showing signs of the greatest weakness.
(Source: Bloomberg)
Specifically, it is the negative sentiment of the corporate executives in the big German manufacturers which stands out the most. Despite no visible signs of Brexit impact, they have become extremely pessimistic about the future. This may have something to do with their perceptions of the loss of the credulous British consumer, who accounts for a significant portion of their exports. The German BGA trade association signalled that this may be the case when it recently slashed its forecast for export growth in 2016. Since the same credulous British consumer has also significantly contributed to net wealth transfers to his less wealthy EU counterpart, which have then been spent on German goods, the loss is a double whammy. It may also have something to do with their perceptions of the way that the German consumer has expressed a liquidity preference, at the expense of consumption, in response to the negative interest rate environment in the country.
Given that Chancellor Merkel is already unpopular at home because of her handling of the immigration issue, she may actually be more accommodating to British exit proposals, in addition to proactive economic stimulus initiatives based on the feedback from Germany Inc. This presumes that the Germans have an innate Anglo-Saxon aversion to immigrants and, hence, empathy with Britain; which appears to be a reasonable presumption based on the fortunes of UKIP and the Alternative for Deutschland party.
Her opening remarks at the tri-nation summit suggested that these risks are on her mind. She tried to frame the Brexit as Britain's loss, whilst opining that the remaining EU should show tangible signs that it can do without the British consumer and taxpayer. Adopting a positive tone towards Europe, whilst being conciliatory to Britain, she opined that Theresa May will be given time set Britain's exit strategy even as the EU project goes full steam ahead.
Britain's symbolic loss was then projected by a leak from Merkel's close ally, Michael Fuchs, who said that British banks would lose their privileged passport access to all EU nations as a result of Brexit. Hopes of an enlightened debate and compromise with Britain were dealt a severe blow by German Vice Chancellor Sigmar Gabriel. Since Gabriel represents the opposition half of Merkel's coalition government, his comments dictate the domestic position that Merkel will have to take in order to be re-elected. Gabriel attacked Merkel's handling of the immigration issue, signalling one domestic election battle line. He is also of the view that Britain should be given no quarter in the Brexit negotiations. The German domestic political default position is therefore becoming antipathetic towards Britain.
German Foreign Minister Steinmeier provided a view of what the ultimate EU configuration may be, which takes into account the need to balance tough negotiating with Britain and also with deficit breaking EU nations, whilst keeping the EU project alive. In his view, a more flexible approach to the EU project should be taken, in which consensus on the big issues is achieved, whilst latitude is given for nations to exert sovereignty over specific issues. In such an amorphous EU, basically anything goes, so its future would only be threatened by big issues which are presented as such by the same consensus. Ironically, it is this laissez faire approach which has infuriated populists and sustained the Brexit vote in Britain.
Perhaps more important than Italy's positioning, in anticipation of the Franco-German summit, was the tactical Brexit positioning of the British government. Britain hinted at its intentions and capabilities to proactively cooperate with the EU as much as the Brexit vote parameters will allow, by suggesting that it will trigger the Article 50 exit procedure in early 2017. This would then provide clarity for the incumbent president of France and chancellor of Germany to start their own attempts at maintaining political power in their upcoming parliamentary elections.
The message trying to be sent is that Brexit is going to be an amicable divorce, which mitigates the magnitude of the impacts of the negative economic outcomes, if not the political ones, for both the EU countries and Britain. Prime Minister May will also have her eyes on capitalizing on her current honeymoon period with the British people by going to the polls early and strengthening her mandate and legitimacy. Brexit is not a win-win for Britain and the EU, but the political leaders are trying their best to mitigate the lose-lose dynamics that currently frame perceptions of the event. Angela Merkel confirmed that Theresa May is trying her best to coordinate with the German and French election timetables when Merkel immediately went into campaign mode on the road in Germany after the signal from Britain.
The exercise of portraying an amicable divorce is extremely disingenuous and ignores the fundamental obstacle which is the common denominator for both sides. To be fair, President Hollande has already noted this elephant in the room; but since then, he has avoided drawing further attention to it. Even Chancellor Merkel made a passing reference to it, when she euphemistically framed Brexit as Britain's loss as the EU project moves forward. The signal that the British banks will be excluded from the eurozone capital markets also outlined the beast. The elephant in the room is, of course, the core EU principle of freedom of movement of people, capital, goods and services.
British Brexit voters were particularly motivated to vote against the freedom of movement of people. This may have been framed as an issue of non-EU migration, but it is a fact that net EU immigration into Britain is still rising, and that Brexit voters are unhappy about this. In April next year, or whenever Britain formerly triggers the exit process, the issue of freedom of movement of people will come back with a vengeance. It may well come before then, based on the current rush of EU migrants to get into Britain.
Germany may be hoping to accommodate Britain by perhaps giving a qualification period of time during which EU migrants can avail themselves of the open door into Britain before it is closed. France may have an issue with this, since it vitiates strongly against the founding principle of the EU and effectively sets a new precedent. Theresa May's honeymoon will definitely be over if she is seen compromising on this issue. There is also no way she could go to the country and seek a new electoral mandate to govern if she does not address this matter. Having showed great skill and political dexterity thus far, she appears to be well aware of her situation and prepared to seize the initiative back from the EU.
UK government sources have indicated that low-skilled EU nations will have to apply for work permits post-Brexit. This suggests that a compromise can reached, in theory, that may be acceptable to the most rabid Brexiteers. Said sources have also signalled that the Prime Minister will automatically trigger the Article 50 exit switch without taking it before Parliament for a vote. Theresa May can, therefore, meet her informal agreement with France and Germany on timing, whilst satisfying the Brexiteers that the referendum result will be upheld. Perhaps an early election will then be announced to satisfy the voices in Parliament who have not been allowed to vote on the Article 50 trigger. The Prime Minister has thus briefly wrestled the initiative back from the EU, but not for long.
Merkel's political ally and foreign lawmaker Juergen Hardt gave Britain a chink of daylight - for which it may have to pay handsomely, though. According to Hardt, the model of Norwegian relations with the EU maybe applicable in the case of Britain. Norway pays for access to the EU - so Britain should, in theory, do the same. This may suit Britain if the net tax burden is lower than it currently pays as an EU member. The EU has thus taken back the initiative and also framed the real negotiation terms once Article 50 gets triggered. Britain is now effectively playing by the EU's rules, which is a tactical loss that may lead to a strategic loss. Theresa May and her team need to start driving the negotiations again rapidly.
In the frenzied exchange between the EU and the British government, it emerged that the Prime Minister's focus on this rally had exposed her back to the traditional Conservative Party blood sport of infighting. A new schism in the party has opened between those who believe remaining in the EU as an option to be ratified in Parliament should remain on the table and those who think Article 50 should immediately get triggered.
The remain faction appears to be led by Chancellor Philip Hammond, who allegedly advocates negotiating a position to retain access to the single market. In the fog of war surrounding this infighting, a narrative that in fact both Hammond and May have agreed upon a unique strategy that will give single market access for the British car industry and the banking sector only was hastily spun. Given the firm rejection of full single market access by all the relevant EU speakers, this unique deal seems to be wishful thinking at best. Only Juergen Hardt's Norwegian model could possibly fit the narrative. Drawing further attention to this schism, whilst taking a principled leadership position, above the squabbling in the moral high ground, the Prime Minister reaffirmed to the civil servants in charge of exiting process their "marching orders". The Prime Minister and the country have now crossed the Rubicon in practical terms, thus setting up a chain of events that is now out of their control.
(Source: Guardian)
There will be no more games without frontiers for Team GB within the EU, nor will the current Prime Minister have a free hand to negotiate the Brexit. In fact, one or both of her hands may now be required in self-defence. She has been portrayed in the press as a "Tudor Monarch", based on her alleged dictatorial style. The caricature is even more apposite when one considers the skirmishing that Queen Elizabeth I historically performed, both at home and against the Spanish version of the EU in her time. Suddenly, the expected political crisis that never was after the Brexit vote has just materialized. This timing is very awkward for central bankers, especially the ECB and Bank of England. Whilst the political leaders try to remain open and cooperative in their Brexit discussions, the political backdrop is rapidly degenerating into an adversarial relationship. Ultimately, in order to survive, the political leaders will be forced to adopt the appropriate adversarial positions. At this point, all hopes for an amicable divorce will have been lost.
