By Vulcan Consulting
KEY EVENTS THIS WEEK:
BREXIT
UK secures Brexit Breakthrough
A historic Brexit deal was reached in the early hours of this morning that will allow for negotiations to move on to the second phase of trade talks. The agreement covering the UK’s financial liabilities, EU citizens’ rights, and crucially the Irish border satisfied all sides. Prime Minister Theresa May flew to Brussels early this morning to sign off on the deal with the European Commission President Jean-Claude Juncker which will allow EU leaders to grant ‘’sufficient progress’’ on first phase issues at next week’s European summit.
After an initial draft agreement was scuppered by the Democratic Unionist Party (DUP) on Monday with fears that it would lead to divergence between Northern Ireland and the rest of the UK, the updated agreement included language that gave the unionist party greater reassurance but also satisfied the Irish government in Dublin. The new deal promises to ensure that there will be no hard border on the island of Ireland and that Belfast agreement will be upheld in all of its parts.
The text states clearly that the whole of the UK, including that of Northern Ireland, will be leaving the EU customs union but that in the absence of an agreed solution, the UK will ‘’maintain full alignment with those rules of the Internal Market and the Customs Union’’ which had supported and facilitated North-South co-operation on an all-island economy basis. The DUP, whom prop up Ms. May’s Conservative government in Westminster, were assured that no regulatory barriers would be allowed between Northern Ireland and the rest of the UK.
The agreement also saw the UK committing to pay into the EU budget for the years 2019 and 2020 ‘’as if it had remained’’ and that it would continue to ‘’contribute its share of the financing’’ for any liabilities incurred before the end of 2020 that fall due over the following decades. No figure is given but estimates range of a financial settlement varying between €40bn-€60bn. On the area of citizens’ rights, the deal promises EU citizens living in Britain will be able to claim permanent residency status through a ‘’transparent, smooth and streamlined process’’.
The agreement reached was welcomed by all sides, with Irish Taoiseach Leo Varadkar claiming that ‘’we have achieved all that we set out to achieve’’, while even some Tory euro sceptics granting their blessing. The deal will allow talks to now progress to the crucial second stage of a future trading relationship but as the updated text and its interpretation contains language that is purposely ambiguous, further obstacles and no real clarity can be gained until trade discussions have concluded.
British Brexit Secretary admits no impact papers exist
David Davis, the UK’s Brexit secretary, disclosed this week that the government has not carried out ‘’impact assessments’’ of how Britain’s departure from the EU will affect the country’s economy. Speaking in front of the House of Commons Brexit committee on Wednesday, Mr. Davis said that while the government had produced a ‘’sectoral analysis’’ of different industries, it had not conducted a ‘’forecast’’ of what would happen post-Brexit.
The admittance was met with shock by MPs and led to accusations against Mr. Davis that he has been misleading parliament with previous statements he made before the committee. The Brexit secretary stated in December of last year that ‘’we are in the midst of carrying out about 57 sets of [sectoral] analyses’’ and only last October he informed MPs that the sectoral reports existed in ‘’excruciating detail’’.
Despite these contradictions, Mr. Davis avoided being censured for alleged contempt of Parliament after the Brexit committee passed a resolution in his favour by 11-8. Further calamitous admissions by the British government continued when the Chancellor Philip Hammond revealed this week that the cabinet hadn’t had a formal discussion about what the future trade relationship with the EU should look like.
GERMANY
SPD members give green-light to enter government talks
Members of the Social Democratic Party (SPD) gathering yesterday for a federal party conference gave their backing on a proposal to hold exploratory talks with their former coalition partners the Christian Democratic Union (CDU). In the initial aftermath of September’s election, SPD president Martin Schulz vowed that he would never join another government led by the current chancellor Angela Merkel.
Yesterday however, he successfully lobbied members to do just that but promised not to commit either joining a formal coalition or backing a minority government from the opposition benches. Certain conditions were attached to holding any exploratory talks such as a commitment for real European integration, highlighted in particular by Mr. Schulz call for a United States of Europe by 2025.
On the domestic side, the SPD have set out a number of political priorities including the abolition of Germany’s two-tier health system; pension reform; stronger climate change goals; and an end to a ban on some refugees brining family members to Germany. The SPD leader revealed in the days before the conference that fellow European leaders such as France’s Emmanual Macron and Greece’s Alexis Tsipras urged Mr. Schulz to enter coalition talks.
The backing by SPD rank and file members to enter coalition talks with the CDU will end the current impasse of the post-election deadlock but a long road still remains before a final government is formed. Exploratory talks are scheduled to begin next week, though no result is likely until Easter.
EUROPEAN UNION
EU draws up tax-haven blacklist
Finance ministers from the EU28 agreed this week to place seventeen countries on a tax-haven blacklist that will see them face restrictions on EU funding or potential investments from the European Investment Bank. The list of states featuring the UAE, Samoa, Panama and a host of others were deemed not to have fair tax rules, which the EU states as not offering preferential measures or arrangements that enable companies to move profits to avoid levies.
In addition to the seventeen countries placed on the blacklist, EU finance ministers also drew up a so-called grey list compiled of 47 nations. The states placed on this list, such as Switzerland, Turkey and Hong Kong, are those that are pursuing reform in their tax practices in order to comply with international standards.
Although both lists are noteworthy, Brussels acknowledged that more needs to be done to clamp down on tax evasion, with the Economics and Financial Affairs European Commissioner Pierre Moscovici recognising that the blacklist was an ‘’insufficient response to the scale of tax evasion worldwide’’. Mr. Moscovici called on the member states to ‘’set a precise timetable’’ to examine the grey listed countries. Current plans have granted grey-listed developed states one year to deliver on their reform promises, while developing countries have a longer period of two years.
EUROZONE
Commission unveils roadmap of proposed euro-area reform
The European Commission’s plan to ‘’deepen Europe’s Economic and Monetary Union’’ was set out this week in a detailed roadmap that included action on several concrete measures. Following on from the commitments made by Commission President Jean-Claude Juncker in his 2017 state of the union address, the next 18 months has been targeted by Brussels as a window of opportunity to implement the necessary steps to achieve this deepening eurozone.
The main package included in the road map sets out four main initiatives. The first is a proposal to establish a European Monetary Fund (EMF) that is anchored within the current EU legal framework and builds upon the already established structure of the European Stability Mechanism (ESM). Two additional ambitious proposals included in the package is the creation of new budgetary instruments needed for a stable euro area and a communication outlining the possible functions of a European Minister of Economy and Finance that could serve as a Commission Vice-President and Eurogroup chair.
The fourth main proposal of the package proposes the integration of the substance of the Treaty, Coordination and Governance into the Union legal framework. The reforms had been expected for some time and while there is some consensus among the 19 eurozone states that there is a need to move forward with a plan on a common banking backstop and some form of EMF, there is a significant lack of enthusiasm about the process.
The election of French President Emmanuel Macron has provided some political purpose but the proposed reforms will face stiff resistance from the eurozone’s stronger players such as Germany and the Netherlands. The prospect of a EU ‘’stabilisation’’ tool to help out some states will be dismissed by such countries and with Berlin still bogged down by continuing government coalition talks, it seems likely that these latest proposals will face an uphill battle.
Portuguese finance minister elected as next Eurogroup President
Mário Centeno, the Portuguese Finance minister, was last Monday elected president of the Eurogroup after a majority of his eurozone country counterparts voted for him to succeed the current incumbent Jeroen Dijsselbloem. The 50-year old Harvard trained economist will be the first president of the group from southern Europe and is highly significant given his centre-left’s government’s anti-austerity policies.
The leader of the Socialist group in the European Parliament, Gianni Pittella, welcomed his election, stating that ‘’this is a victory for the future of Europe and for all of us that fought to get rid of blind austerity’’. The Eurogroup has long been criticized for pushing economically punishing policies that favour its larger northern European creditor members such as France, Germany and the Netherlands.
Mr. Centeno will take over the position on January 13th. He played a central role in his national government’s tenure that saw unemployment fall by over half since its peak to 8.5 percent and growth forecasts jump from 0.9 percent in 2014 when the country was emerging out of a recession to 2.6 percent this year.
For a country that endured a three-year bailout programme, Mr. Centeno’s election will be widely lauded but his victory may have arisen out of political accident rather than design. Potential strong contenders such as Spain’s Luis de Guindos, France’s Bruno de Marie and Italy’s Pier Carlo Padoan all ruled themselves out early in the process as they either eyed more lucrative jobs on the table or were hampered by upcoming national elections.
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