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Chancellor of the Exchequer Philip Hammond in his Budget speech yesterday suggested the possibility of a “double deal dividend” if the UK and the EU strike a Brexit deal, pointing to “a boost from the end of uncertainty and a boost from releasing some of the fiscal headroom that I am holding in reserve at the moment.” He also announced an additional £500m to prepare for a No Deal Brexit and said he was prepared to upgrade the Spring 2019 Statement to a “full fiscal event” if necessary. This comes after the Prime Minister’s spokesman yesterday said that “All of the spending commitments that the Chancellor will set out today are funded irrespective of a deal,” adding that the Chancellor would “use the fiscal reserves that we have built up through hard work and sound economic management to ensure that Britain will succeed whatever the circumstances…If economic circumstances change, [the Chancellor] would consider economic interventions.”
Meanwhile, the Office for Budget Responsibility (OBR) yesterday published its economic and fiscal outlook, writing that “The big picture in this forecast is of a relatively stable but unspectacular trajectory for economic growth – close to 1.5 per cent in every year – plus a gradual further decline in the budget deficit and in net debt as a share of GDP.” Due to a greater than expected reduction in borrowing, the OBR has revised down borrowing of £11.9bn for the year 2018-19. The OBR noted that “this forecast assumes a relatively smooth exit from the EU next year” and takes into account the transition period due to last until December 2020. It added, “A disorderly [Brexit] could have severe short-term implications for the economy, the exchange rate, asset prices and the public finances. The scale would be very hard to predict, given the lack of precedent.”
Elsewhere, the DUP’s Sammy Wilson said the party was not yet planning to oppose the budget, explaining, “To date we haven’t seen the outcome of the withdrawal agreement so it would be reckless of us to oppose the budget on the basis of something we haven’t seen.” Wilson added, “However, the government will need support when it comes to the finance bill…So they shouldn’t take it for granted that just because they get the budget passed that they can do whatever they like with Northern Ireland.”
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German Chancellor and leader of the Christian Democratic Union of Germany (CDU), Angela Merkel, said yesterday that she will stand down as party chairwoman at its conference in December, a position she has held for eighteen years. She will remain in post as Chancellor until 2021, but will not contest the federal elections to be held in that year. The announcement follows a slump in support for the CDU in elections in Hesse last Sunday, and in Bavaria in mid-October.
Open Europe’s Leopold Traugott was cited in CNN saying, “Germany will become even more inward-looking in the near future – a trend we have seen since last year’s general election already. This means there will be less German involvement in key European debates, but also on global issues the country is less likely to take a leading role.” He added, “It will be particularly painful for French President Emmanuel Macron, who was hoping for Merkel’s support in his plans for wide-reaching European reform. It seems ever less likely he will receive this support from Berlin.”
Meanwhile, Open Europe’s Pieter Cleppe is quoted in the Daily Express saying, “Merkel is likely to remain in charge of Chancellor, as her party prefers an orderly transition, with the new party leader leading it into the next general election. However, if the SPD [pulls] the plug and the CDU-CSU [continues] with a minority government propped up by the SPD, Merkel may be forced to allow the new party leader to become Chancellor.”
Elsewhere, European Finance Commissioner Pierre Moscovici said, “The fragility of a country like Germany is always a threat for Europe,” adding that it is more difficult to carry out budget reforms in Europe with “a [German] chancellor who has not got the same strength as before” and a “coalition that is trying to find its feet.”
Separately, the leader of the Swedish Social Democratic Party, Stefan Löfven, yesterday said he has been unable to form a coalition government after an inconclusive election in September, leaving Sweden without an obvious candidate for prime minister.
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The European Commission vice-president, Valdis Dombrovskis, has provided reassurance to EU companies that they will temporarily be able to use derivatives clearing services based in the City of London in the event of a No Deal Brexit. The measure, which reportedly reflects the findings of a joint working group of Bank of England and European Central Bank officials, follows months of warnings from the European financial industry that EU companies would face significant increased trading costs if they lost access to clearing services overnight. Dombrovskis, who is responsible for EU-level financial regulation, told the Financial Times that the measure would be strictly short-term. “Should we need to act, we would only do so to the extent necessary to address financial stability risks arising from an exit without a deal, under strict conditionality and with limited duration,” he said.
Separately, the UK Treasury has announced that, in the event of a No Deal Brexit, it will introduce a provisional tax of £16 a tonne on carbon emissions. The tax will broadly replicate the EU Emissions Trading Scheme, which raises the price of coal for power plants and factories in order to disincentivise its use and reduce pollution.
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Transport Secretary Chris Grayling yesterday said that formal UK-EU discussions over the continuation of flights after Brexit have not yet begun, explaining, “I have had plenty of talks with both the [European] Commission and other transport ministers. We will start formal talks as soon as they are willing to start formal talks.” Grayling also said, “I haven’t met one single person either in the Commission or a member state who believes there will be an interruption to aviation…There is no way that flights will stop between the UK and the EU after March.”
The Dutch financial markets authority (AFM) yesterday said it was making preparations for an increase in financial trading as many trading houses would be relocating to the Netherlands, especially in the event of a No Deal Brexit scenario. The AFM said in a statement, “While border and customs negotiations are attracting attention, there is a fairly invisible shift taking place in European capital markets…The AFM is conducting conversations with more than 150 parties that are interested in a [Dutch trading] license.”
In a new blog, Open Europe’s Leopold Traugott assesses German Chancellor Angela Merkel’s decision not to seek re-election as leader of her party and to leave politics at the end of her current term. He writes, “German politics will become even more inward-looking, following Merkel’s announcement… As all governing parties are struggling with their own internal dynamics and trying to maintain power, they have less resources and political capital to spare on pushing through European or global projects. With Merkel’s succession now being openly discussed, this will intensify.” Traugott concludes, “This development is particularly problematic for French President Emmanuel Macron…Hopes for meaningful progress on Eurozone reform and the banking union at the December summit, for example, can safely be shelved for now. So can any hopes, if they were still held, that Merkel would weigh in more actively in the Brexit debate.”