Vulcan Insight Analysis of the latest EU Developments 2 – 9 August 2019

Key Events This Week

Trump doubles down on China
The Trump administration heightened its trade war with China on Monday by labelling China a currency manipulator. The move came after the currency fell below 7 yuan to the US dollar for the first time since 2008. This is an extension of the downward spiral in diplomatic relations. In simplistic terms, a weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies and from the US perspective, it is seen as an attempt to offset the impact of higher tariffs on Chinese imports coming into America.

Only last week, President Trump decided to impose a 10% tariff on $300bn worth of Chinese goods, effectively hitting all of China’s imports to the US with duties. US Treasury Secretary Steven Mnuchin is attempting to engage with the IMF to “eliminate the unfair competitive advantage created by China’s latest actions.”

The Dow plunged 767 points, or 2.9%, on Monday. The Nasdaq tumbled 3.5%, suffering its longest daily losing streak since just before Trump’s 2016 election. The VIX (VIX) volatility index spiked 40% to a seven-month high.

The US-China trade friction has created uncertainties which will also pose direct consequences for the EU. The European Commission President-elect, Ursula Von der Leyen, may seek to ease the spill over effects by solidifying relationships in the Asia-Pacific region: The EU has already concluded bilateral agreements with Canada, Chile, Colombia, Japan, Korea, Mexico, Peru and Singapore, and has negotiations underway with India, New Zealand, the Philippines, Thailand and Vietnam.

No-Confidence Vote?
Dominic Cummings, special adviser to Prime Minister Boris Johnson has reportedly told colleagues that Johnson could defy a vote of no confidence from the House of Commons by refusing to resign. This comes after Jeremy Corbyn, leader of the opposition Labour Party, signalled he will call a no-confidence vote when Parliament returns in September.

Under the Fixed Terms Parliament Act of 2011, if a government loses a confidence vote in the House of Commons, there are 14 days in which an alternative government must win a fresh confidence vote, or else a general election has to be called. Johnson’s government has a majority of just one and with a band of Conservative rebels determined to stop a no-deal Brexit, a no-confidence vote is unquestionably plausible. The opposition Labour party may try to form a government with support from smaller parties, and there’s even speculation that a cross-party national unity government might be formed which would include rebels from the ruling Conservative Party.

It is highly doubtful that Conservative Party rebels will back Jeremy Corbyn to be Prime Minister but a compromise candidate could be on the cards if the Labour Party does not have the votes. A nightmare scenario would be if the ‘new’ government wins the confidence of Parliament but Johnson refuses to leave, this would trigger a constitutional crisis that could potentially bring the Queen into the fold. The last time a Monarch removed a Prime Minister was in 1834. (King William IV dismissed William Lamb, 2nd Viscount Melbourne).

Is No Deal the Likely Deal?
Taoiseach Leo Varadkar has said the UK government should drop their Brexit ‘red lines’ if they wish to renegotiate the current deal. Varadkar said that if a no-deal happens, it will be a consequence of the decisions made in London. The Taoiseach admitted that a no-deal looks more likely.

Since taking over as UK Prime Minister, Boris Johnson has taken a more hard-line approach to diplomacy with the EU, prompting concerns that a no-deal Brexit was becoming more likely than a negotiated UK exit from the EU.

Irish Minister for Finance Paschal Donohoe met with British Chancellor Sajid Javid in London on Tuesday. Donohoe acknowledged that the risk of a no-deal Brexit is growing and noted that the government will shortly make a decision as to whether a no-deal budget or a managed outcome would be unveiled in early October; “The Taoiseach and those of us who have the privilege of being in government will need to make a call as we approach October 31st regarding what we believe is the most likely scenario, and what is the appropriate economic strategy for our country, and political response to such a scenario unfolding.”

With little over 80 days to the October 31st deadline, a no deal, disorderly Brexit looks more likely than ever.

Key Dates
European Parliament Committee Week 2nd – 6th September
House of Commons returns from Summer Recess on 3rd September

Compliments of Vulcan Consulting, a member of the EACCNY