David Fuller and Eoin Treacy's Comment of the Day
Category - General

    If Theresa May Is Not Prepared to Walk Away from Brexit Talks, How Will She Get a Better Deal Than Cameron?

    While Theresa May was serving notice of Britain leaving the European Union, David Cameron was in Kiev discussing his own downfall. His heart was never really in the European project, he said, making him a rather unconvincing salesman during the referendum campaign.

    But he skipped over his biggest mistake: entering talks with the EU with no plan for what to do if talks failed. He promised a new deal for UK membership but came away with almost nothing. Now he’s giving speeches for Ukrainian oligarchs. The moral of his sad story: never enter a negotiation unless you’re genuinely prepared to walk away.

    Yet the Prime Minister now looks as if she might repeat the same mistake. She has said “no deal is better than a bad deal” but has never elaborated – and shows every sign of being terrified of the “no deal” option. She finds herself in precisely the same bind as her predecessor. She is aiming for success in her negotiations, so doesn’t want to talk about failure. But if the EU senses that she is not serious about walking away, and would sign anything, why should they be generous? 

    When Mrs May talks about accepting “no deal” she can only be referring to one thing: World Trade Organisation rules under which countries trade if they have no other arrangement. This, the WTO option, is spoken of as a calamity, the hardest of hard Brexits, the cliff edge, the suicide option – and worse.

    That it would mean losing access to European markets, tariffs coming up and walls being built around an island nation that naively thought it was voting for global free trade. Ministers have not dared to calculate what WTO deal might mean.

    Which is odd, given that WTO rules are those which govern Britain’s trading relations with 111 countries – including our largest single customer, the United States. It’s hardly a disaster, given that our trade with such countries has grown much more quickly than it has with the EU for the last couple of decades.

    There’s no question of Britain losing “access” to European markets: every country from Afghanistan to Zimbabwe can sell its wares in Europe. The only issue is tariffs, and everyone who signs the WTO rules (ie, most countries on earth) agree to keep the tariffs pretty low.

    This is the point of the WTO: its rules are a huge achievement, a global ceasefire in trade wars, a worldwide truce that has lasted for decades. So the EU could not, really, punish Britain – now matter how much Jean-Claude Juncker might like to. It is unable to treat us any worse than it treats the US, which would mean – at worst – a tariff averaging about 4.5 per cent on our exports. As high as 10 per cent for cars.

    But if Britain retaliated then the sales of BMWs and Renault would be hit hard. A fall in the pound would more than make up for tariffs on our exports, while imports (especially cars) would be pricier than ever. The most difficult question for Nissan’s plant in Sunderland is whether they’d be able to cope with demand.

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    The Markets Now

    We filled the Morrison Room on Monday with several people from overseas and far more delegates from across the UK than London.  We are fortunate to have experienced delegates and we all learn more thanks to their contributions.

    Euro-Pound Hedging Costs Rise on Brexit Trigger, French Election

    This article by Vassilis Karamanis for Bloomberg may be of interest to subscribers. Here is a section:

    The premium on one-month options over the rate of actual market swings remains near a 10-week high set on Tuesday. It may increase further should Brexit-related negativity be less than feared in the near term, which would reduce realized volatility, and also as the implied rate should rise on capturing the second round of the French elections due May 7.

    Realized volatility could find support as the euro-pound pair’s prospects look increasingly bearish on charts, with current market positioning significantly skewed toward sterling declines. Leveraged net short positions in the pound this month are at the highest level since November.

    Not all investors have given up on the pound, with the British economy performing better than expected. BlackRock Inc., which reduced some of its exposure to sterling ahead of the triggering of Article 50, has said it is still marginally long as an expected slowdown of the U.K. hasn’t materialized.

    With the latest reports suggesting that the European Central Bank isn’t anywhere close to reducing economic stimulus, a short-squeeze on the pound could materialize.


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    As Britain Exits, India Gets Single-Market Religion

    This article by Andy Mukherjee for Bloomberg may be of interest to subscribers. Here is a section:

    Currently, selling across the borders of India's 29 states means paying a central sales levy, which can't be set off against tax paid on raw materials procured from within a company's home jurisdiction. Those input credits will now be available under a GST.

    This would do two things: One, given enough competition, most manufactured goods should get cheaper, stoking demand. Two, more companies will want to engage in interstate commerce, which they avoid at present by moving goods (without selling) to their own small, inefficient warehouses around the country.

    Smaller Indian industrial firms -- those with less than $1 billion in revenue -- end up carrying more than five times their annual sales as inventory, compared with just 36 percent in China. A narrowing of this gap would boost profitability. More centralized warehousing would also boost demand for higher- tonnage trucks made by Tata Motors Ltd. and Volvo AB. 

    But GST is also causing some anxiety. As Gadfly wrote last year, India is planning to employ Jeff Bezos of Amazon Inc. as its tax collector. All e-commerce marketplaces will deduct 2 percent from what they pay sellers of merchandise and deposit the money with the government. Sellers would then have to claim input-tax credits. The increase in working capital may be problematic for small businesses working on thin margins. Amazon India estimates that 180,000 jobs could be at risk.


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    The Great Nevada Lithium Rush to Fuel the New Economy

    This article by Paul Tullis for Bloomberg may be of interest to subscribers. Here is a section:

    Although electric vehicle adoption has been slower in the U.S. than expected, the price of battery packs has been dropping fast, to the point that auto industry observers see electric cars as poised to become cost-competitive with gas-powered vehicles—and thus to become popular outside the specialty markets of luxury buyers and those seeking green cred. Tesla’s soon-to-arrive Model 3 and the Chevy Bolt now in dealerships are priced at about $30,000 after subsidies, but a battery assembly that a few years ago might have cost Tesla $300 per kilowatt hour (a Model S uses 60 to 90 kilowatt hours’ worth of lithium ion batteries) today costs General Motors $145 per kilowatt hour for its Bolt. And the figure is hurtling toward $100, the number that HSBC Securities (USA) Inc. and consultant Wood Mackenzie Ltd. agree will make electric vehicles as cheap as gas-powered cars, freeing mass-market EVs from their current dependence on subsidies.

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    Britain is the Least of European Problems

    The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.

    Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.

    While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.

    Along an expanding arc across the East, the EU faces a pact of autocrats. Russia and Turkey are moving closer to an outright alliance - an ideological hybrid like Molotov-Ribbentrop - that cuts at the heart of Nato. Both are openly at war with the post-Second World War liberal order.

    The Kremlin is meddling in the Baltics, the Balkans, and the EU’s internal democracies. Vladimir Putin acquired a military edge during the energy boom - when the EU was disarming to meet austerity targets - and now enjoys a window of opportunity to extract maximum advantage.

    In the West, the EU faces Donald Trump. This is a US president who refused to shake the hand of German Chancellor Angela Merkel. For the first time since the launch of the European project in the 1950s, the US no longer sees the EU as an asset in the diplomatic equation. Many in the White House would happily see it broken up.

    This means that Washington will no longer allow the eurozone to use, or misuse, the International Monetary Fund for its own internal purposes. The implications are already apparent in talks over Greece, but they do not stop there.

    It would be lamentable statecraft for EU leaders to pick a fight with Britain in these circumstances. For all the noise over Brexit, the UK is really the least of their problems. A clash would be worse than futile, as Italian premier Paulo Gentiloni said in London. Key figures in Germany, Poland, and Spain have repeatedly made the same point.

    As the initial bitterness over Brexit fades, EU leaders are pleasantly surprised to learn that they, like many, misunderstood the referendum. Britain is not resiling in any way from Western liberal principles. It upholds all its strategic commitments to Europe through Nato, and is stepping up its defence EU’s eastern border with infantry and aircraft; it remains a champion of global free trade (more so than the EU itself); it has stuck by its climate pledges.

    The country does not have a populist government. The Prime Minister could hardly be more cautious and proper, a child of the vicarage. She has defended the European cause in US Republican circles, almost as if she were its ambassador. Her cordial overtures have for the most part been received well in EU capitals and the upper echelons of the Commission.

    The constitutional caveat, of course, is that Britain will act as an independent nation. It cannot accept the permanent jurisdiction of the European Court over almost all areas of UK law and policy, the baneful and masked consequence of the Lisbon Treaty.

    It was always on the cards that the UK would have to extract itself from a venture that spends most of its energy trying to hold the euro together. Monetary union must evolve into a full-fledged federal state, with a single EMU treasury, fiscal system, and government, if it is to survive. Britain obviously cannot be part of such a structure. Trying to obfuscate this constitutional fact helps nobody.

    In short, nine months after the referendum, Europe’s leaders are reconciled to the necessity of separation. The debate has moved beyond the false dichotomy of soft and hard Brexits. Most welcome the clarity of British withdrawal from the single market, recognising that it may be healthier for both sides than a messy fudge based on the hybrid Norwegian model. Scotland’s Nicola Sturgeon is barking up the wrong tree if she really thinks that the EU is pushing hard for Brexit Britain to stay in the single market.

    There are, of course, discordant notes, especially in France, where much of the political elite is stuck in a time-warp. Emmanuel Macron, the electoral boy-wonder, offers little beyond ideological pedantry and the old EU Catechism when it comes to Brexit.

    He is apt to dictate absolutist terms with an imperial tone. No such terms are imposed on Canada in its trade pact with the EU, and for obvious reasons: Canada is an independent state.

    I doubt he will succeed in trying to chastise Britain since he also wants an unbreakable “Franco-German position” on Article 50 talks, and Germany has different interests. The old Rhineland axis was in any case rendered obsolete by the fall of the Berlin Wall. Any attempt to reconstitute it will merely underscore France’s painfully subordinate role in what has become (to the dismay of the German people) a German Europe. Better for France to hang on to the tight Franco-British defence and security pact for a little strategic ballast.

    With or without Brexit, the EU has to keep living with the error of monetary union, so destructive that one leading voice of the French establishment has written a book, La Fin du Rêve Européen, calling for the euro to be broken up in order to save what remains of the European project.

    The eurozone is horribly split into the creditor and debtors blocs, each with clashing macro-economic interests, and each clinging to their own narrative of what happened in the debt crisis. Quantitative easing by the European Central Bank and a cyclical economic upturn have masked the tension over the past two years, but the underlying North-South rift is still there.

    The ECB will have to taper and ultimately end its bond purchases as global reflation builds. The markets know that once Frankfurt rolls back emergency stimulus, as it must do to avert a political storm in Germany over rising prices, Italy, Portugal, and Spain will lose a buyer-of-last-resort for their debt.

    The core problem remains: the conflicting needs of Germany and the South cannot be reconciled within EMU. The gap in competitiveness and debt burdens is too great. They should not be sharing a currency union at all.

    As matters now stand, Italy’s anti-EU Five Star movement leads the polls by a six-point margin with 32pc of the vote. The four anti-euro parties are likely to win over 50pc of the seats between them in the Italian parliament in the elections early next year.

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    The Markets Now

    We filled the Morrison Room on Monday with several people from overseas and far more delegates from across the UK than London.  We are fortunate to have experienced delegates and we all learn more thanks to their contributions.

    Britain's Article 50 letter: The full text of the Brexit trigger

    Thanks to a subscriber for this link which may be of interest. Here is a section:

    The United Kingdom wants to agree with the European Union a deep and special partnership that takes in both economic and security cooperation. To achieve this, we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU.

    If, however, we leave the European Union without an agreement the default position is that we would have to trade on World Trade Organisation terms. In security terms a failure to reach agreement would mean our cooperation in the fight against crime and terrorism would be weakened. In this kind of scenario, both the United Kingdom and the European Union would of course cope with the change, but it is not the outcome that either side should seek. We must therefore work hard to avoid that outcome.

    It is for these reasons that we want to be able to agree a deep and special partnership, taking in both economic and security cooperation, but it is also because we want to play our part in making sure that Europe remains strong and prosperous and able to lead in the world, projecting its values and defending itself from security threats. And we want the United Kingdom to play its full part in realising that vision for our continent.

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