15 October 2018

New Open Europe Report: No Deal – The economic consequences & how they could be mitigated

In a new macroeconomic study, ‘No Deal: The economic consequences & how they could be mitigated’, Open Europe finds that a UK withdrawal from the European Union without a preferential trade deal would be sub-optimal and would entail material costs. However, this medium-term cost would be limited in absolute terms, but also relative to other factors likely to affect the UK’s growth trajectory in the coming decade.

There are two parts to our study: The first quantifies the impact of a No Deal Brexit against a baseline projection of future UK economic performance. The second quantifies the UK’s ability to mitigate the effects of a No Deal Brexit by unilaterally removing all import tariffs, and moving the UK to globally least-restrictive standards in services and foreign direct investment. The modelling suggests that the cumulative effects of a No Deal Brexit would see the UK’s real GDP growing overall, but with the economy 2.2% smaller in real terms by 2030 than would have otherwise been the case. Unilateral liberalisation would see the UK recover up to 1.7% of that reduction in real GDP over the same period, with the net effect leaving UK real GDP 0.5% lower in 2030 than would have otherwise been the case.

The report was cited in was cited in The Daily Telegraph and The Daily Express. Open Europe’s Stephen Booth writes in ConservativeHome, “While Brexit will doubtless have a material effect on the UK economy it won’t – in of itself – be the most important factor shaping our growth over the next decade or so, whether we leave with a deal or even without a deal.” Elsewhere, Open Europe’s Henry Newman writes in Politico, “The economic consequences of no deal are often wildly overstated…Our model finds that British GDP would grow by 30 percent over the period to 2030, even if we leave the EU without a deal and both sides put up tariffs.” Open Europe’s chairman and CEO of Next, Lord Wolfson of Aspley Guise, also appeared on The Andrew Marr Show on Sunday to discuss the UK’s contingency preparations.

Source: The Daily Telegraph The Daily Express Conservative Home Politico BBC Andrew Marr Show

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Brexit divorce deal falters after Barnier and Raab meet

A provisional deal on the Brexit Withdrawal Agreement was reached at technical level between EU and UK negotiators yesterday, but subsequently fell through after a meeting between EU chief Brexit negotiator Michel Barnier and UK Brexit Secretary Dominic Raab. This came after Raab made an unscheduled trip to Brussels, after indications of the deal emerged yesterday afternoon. The Guardian reports that the Northern Ireland backstop, in particular the UK’s insistence that it be time-limited, was the main obstacle to the deal. Barnier later wrote on Twitter, “We met today [Dominic Raab] and UK negotiating team. Despite intense efforts, some key issues are still open, including the backstop for [Ireland/Northern Ireland] to avoid a hard border.” A UK official told Politico that there remained “big issues to resolve,” whilst an EU official told Sky that Raab’s arrival in Brussels yesterday had sent negotiations on the Irish border issue “back to square one.” There are now no further negotiations scheduled ahead of Wednesday’s European Council meeting. However, officials on both sides have told Politico that technical negotiations are largely complete, with an EU source adding that it is now “time for politicians to step in and take over.”

Elsewhere, Irish Deputy Prime Minister Simon Coveney warned on Friday that Ireland could not accept a time limit on a backstop arrangement to avoid a hard border, saying, “If the issues aren’t resolved in three years you can’t do away with the insurance mechanism. We can’t accept a time limit, but we can accept it will only be there unless and until something better is agreed in the future, which is what everyone wants.”

Separately, the Telegraph reported on Friday evening that EU negotiators have proposed a one-year extension to the post-Brexit transition period in an attempt to solve the impasse over the Irish border. The longer transition period would last until the end of 2021, rather than the current agreement of December 2020. The Chancellor, Philip Hammond, said on Friday that “there needs to be a period – probably following the transition period that we’ve negotiated and before we enter into our long-term partnership – just because of the time it will take to implement the systems required.” Conservative Eurosceptics immediately expressed opposition to this plan, which they say would add up to £17 billion to the financial settlement with the EU and mean that the UK would not have left the single market or customs union ahead of the next scheduled general election in June 2022. The chair of the European Research Group of Conservative MPs, Jacob Rees-Mogg, said, warned that extending the transition would be a “very high-risk strategy,” adding, “we would be liable for our share of the bills without having a say in the Budget.”

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The Sunday Times: May facing Cabinet revolt over possible Brexit deal

At least nine ministers are preparing to put pressure on Theresa May to change tack over a potential Brexit deal agreed with the EU, the Sunday Times reports. At least four of these ministers are expected to issue credible threats to resign; their main concern is the prospect of an Irish backstop without a clear time-limit. The House of Commons Leader Andrea Leadsom is said to be “considering her position”; she is reportedly under backbench pressure to resign, along with the Work and Pensions Secretary Esther McVey and International Development Secretary Penny Mordaunt. The three are reportedly meeting tonight to discuss tactics for tomorrow’s Cabinet meeting, together with Chris Grayling, the Transport Secretary, and Liam Fox, the International Trade Secretary. Former Brexit Secretary David Davis is encouraging the Cabinet to revolt. In an article for the Sunday Times, he wrote, “This is one of the most fundamental decisions that government has taken in modern times. It is time for the cabinet to exert their collective authority.”

Meanwhile, Matt Hancock, the Health Secretary, told the BBC on Sunday that the backstop must be “time-limited,” but suggested there were “different ways” to do this other than writing a fixed end-date into the withdrawal agreement. The Foreign Secretary, Jeremy Hunt, said that people should stand “rock solid” behind Mrs May.

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Scottish Conservatives warn May against border in the Irish Sea

The Secretary of State for Scotland David Mundell and the Scottish Conservative leader Ruth Davidson have written to Theresa May to warn her against a deal which results in Northern Ireland becoming economically separated from the rest of the UK. The pair argue that this would “undermine the integrity of the UK” and thereby strengthen the case for Scottish independence. A senior Tory told the Times that “Any differentiated deal that puts a hard border down the Irish Sea they [Mundell and Davidson] consider a resigning matter,” while a Scottish Conservative source told Politics Home, “If anyone thinks Ruth and David care more about the Tory party than the United Kingdom, they are kidding themselves.”

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The Guardian: EU leaders planning emergency ‘no deal’ Brexit summit for November

EU leaders are preparing to hold an emergency ‘no deal’ Brexit summit in November if such an outcome looks likely by that point, the Guardian reports. This would include plans for co-ordinated responses to a ‘no deal’ scenario in areas where member states have competence, particularly contingency measures to avoid delays at customs, in aviation or haulage. A senior EU diplomat said: “Preparations on contingency are really advancing in almost all member states… This is a parallel track. We’re going to do this anyhow whatever the outcome because… we can never exclude the possibility that negotiations will break down.” Meanwhile, the Republic of Ireland’s ambassador to the UK, Adrian O’Neill, told Westminster Hour last night: “If at this week’s European Council meeting there isn’t some way forward… people could decide to avail of the opportunity for the November meeting to focus on preparations for a no-deal outcome.” He added, however, “I don’t think we are there yet.”

Elsewhere, European Commission President Jean-Claude Juncker told French newspaper Le Monde on Friday, “We are preparing for ‘no deal’ not because we want to, but because it’s a principle of good administration to prepare for something we do not want… Member states are also preparing, with some asking for faster progress…We don’t want to insist too much, as it would be seen as provocation in London.”

Meanwhile, the Times reports that senior UK civil servants have warned ministers to start implementing plans for ‘no deal’ immediately, regardless of whether a deal is concluded with the EU or passed by parliament. These preparations include stockpiling of medicines and instructing businesses to register for new customs processes.

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DUP leader: Bad Brexit deal worse than ‘no deal’

Arlene Foster, the leader of the Democratic Unionist Party (DUP), on which the Government relies for its majority, said on Saturday that the “dangers of a bad [Brexit] deal” are worse than those of a ‘no deal’ Brexit. In an article for the Belfast Telegraph, Foster wrote, “I fully appreciate the risks of a ‘no deal’ but the dangers of a bad deal are worse… This backstop arrangement would not be temporary. It would be the permanent annexation of Northern Ireland away from the rest of the United Kingdom and forever leave us subject to rules made in a place where we have no say.” Foster also said the EU’s argument that the backstop proposal would allow Northern Ireland “the best of both worlds” in terms of access to both the UK’s market and the EU’s single market was “a lie.” She added that not only the pro-Brexit DUP, but also “unionists who voted Remain” and MPs “across the House of Commons” shared her opposition to a border in the Irish Sea. This comes as Foster will hold talks today with Irish Taoiseach Leo Varadkar in Dublin, while a Sinn Féin delegation will be meeting Prime Minister Theresa May and Labour party leader Jeremy Corbyn in London.

Elsewhere, leaked emails seen by the Observer reveal that Foster is now “ready” for a ‘no deal’ Brexit, and now regards this as the “likeliest outcome” following “hostile and difficult” talks with EU chief Brexit negotiator Michel Barnier.

Separately, the DUP’s Westminster leader Nigel Dodds writes in the Daily Telegraph today that the party could not support a backstop proposal which would not be time-limited, warning, “We will not be party to the abandonment of fundamental principles and harm to the Union to be codified forever in a Withdrawal Agreement. We could not support such a proposition.”

Meanwhile, Politico reports that the DUP is planning “guerrilla war” in Parliament if the Government’s backstop proposal is accepted, with a DUP official cited as saying that the party would block a Northern Ireland-only regulatory backstop if it was put to a vote in the Northern Irish Assembly.

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63 Conservative MPs sign letter criticising Treasury’s Brexit forecasting

63 Conservative MPs, as well as four peers and dozens of donors, have signed a letter to Chancellor Philip Hammond criticising the government’s economic forecasting for different Brexit scenarios. The signatories include former Brexit Secretary David Davis, his former deputy Steve Baker, and European Research Group chair Jacob Rees-Mogg. The letter reads, “It is unacceptable that the Government leaks the results of its modelling when it suits but simultaneously hides what lies behind these forecasts from the public… We therefore propose that you publish in full detail the cross-Whitehall Brexit analysis and the underlying models and assumptions so that experts from all sides can study its methodology, assumptions, and conclusions.”

Separately, the Sunday Times reports that the number of letters of no confidence in Theresa May’s leadership has now reached 44, just four short of the 48 required to trigger a leadership contest. Four letters were reportedly submitted last week, and a further three during Conservative Party conference. This comes as the Times reports that Number 10 will be hosting sceptical backbenchers for lunch and dinner over the next two days in order to win them over to May’s Brexit plans.

Meanwhile, Labour MP Caroline Flint suggested on Sunday that she and other Labour MPs could support a “reasonable” deal brought back to the House of Commons by Theresa May. Flint, who has rebelled against the Labour whip on Brexit previously, told Sky News, “I think if a reasonable deal is on the table the question for some of my Labour colleagues is ‘why wouldn’t you support a deal, why would you stand along (with) Boris Johnson or Jacob Rees-Mogg who want us to crash out without a deal?’” This comes as the Guardian reports that the Labour leader Jeremy Corbyn and the Shadow Brexit Secretary Kier Starmer will address the Parliamentary Labour party this week to reinforce the party’s intention to vote against May’s Brexit deal.

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Bavarian elections see Merkel's coalition partners suffer painful defeats

Yesterday’s elections in the German state of Bavaria saw Chancellor Angela Merkel’s sister party, the arch-conservative Christian Social Union (CSU), drop to 37.2% of the vote, down from 47.7% in 2013. Merkel’s other coalition partner, the Social Democratic Party (SPD), saw its votes halved, from 20.6% in 2013 down to just 9.7%, the party’s worst-ever finish in a state election. The far-right Alternative fuer Deutschland (AfD) entered the Bavarian Parliament for the first time with 10.3%, and the pro-immigration Greens double their vote from 8.6% to 17.5% to finish second.

Speaking after the vote, Open Europe’s Policy Analyst Leopold Traugott told CNN, “The mood within Merkel’s ‘Grand Coalition’ [consisting of the CSU, the SPD and her own Christian Democratic Union (CDU)] has been terrible for months now, and will be even worse following this election,” adding, “It is becoming increasingly clear to all parties involved that the current setup is not working in their favour.” Appearing on France24, he said that the rise of the Green Party represented a positive counter-narrative to the rise of the anti-immigration AfD.

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Austrian Chancellor Kurz warns against expelling Hungary’s Fidesz from European People’s Party

The Austrian Chancellor, Sebastian Kurz, has warned against expelling Hungary’s ruling Fidesz party from the European People’s Party (EPP), the main centre-right grouping in the European Parliament. “I don’t believe it would make sense to create another new party of Eastern Europeans, who are unevenly matched when it comes to morals,” Kurz told Frankfurter Allgemeine Sonntagszeitung newspaper in an interview on Sunday, further suggesting that the other centre-right parties in the EPP should seek to “informally exert influence” on Fidesz instead. This came after European Commission President Jean-Claude Juncker said earlier this week that Fidesz leader and Hungarian Prime Minister, Viktor Orban, “no longer has a place” in the EPP.

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Luxembourg election delivers narrow win for ruling coalition

The Prime Minister of Luxembourg, Xavier Bettel, has said that the country’s voters had “confirmed” the current government after his coalition narrowly won a national election yesterday. Bettel’s Democratic Party, in coalition with the Green Party and the Luxembourg Socialist Workers’ Party, won 31 seats out of 60, a slight decrease from 32 in the outgoing parliament. However, the Christian Social People’s Party, traditionally dominant in Luxembourg politics, won 21 seats, meaning that they could also form a coalition government.

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Reuters: UK automation expected to accelerate as EU migration slows

British manufacturers are expected to increase their use of automation to compensate for reduced immigration from EU member states as Brexit approaches, Reuters reports. Alan Cunningham, managing director at Muller Precision Engineering’s plant in Redditch, told Reuters: “a Brexit that reduces the amount of labour coming into the country, made us say we need to look at automation… we’re going to be replacing humans with robots.” Tony Hague, chief executive of PP Control & Automation in Cheslyn Hay, added, “Post-referendum, certainly we don’t have the surplus available low-cost, lower-skill labour that was there previously.”

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ECB President: Italy should not question the Euro

At a press conference on Saturday, President of the European Central Bank Mario Draghi said, “A budgetary expansion in a high debt country becomes much more complicated … if people start to put in question the euro,” with reference to a senior Italian official’s earlier comments arguing Italy would be better off without the Euro. The same official later confirmed the government had no plans to change its currency.

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Leopold Traugott: Why the Bavarian elections will cause new headaches in Berlin

In an article for The Times’ Red Box, Open Europe’s Leopold Traugott writes on yesterday’s elections in Bavaria, “The mood in German chancellor Angela Merkel’s grand coalition [of Christian and Social Democrats] has been sour for months and yesterday’s election in the state of Bavaria has done little to improve the situation […] the arch-conservative Christian Social Union (CSU), the sister party of Merkel’s Christian Democrats (CDU), has suffered its worst defeat since the 1950s […] Merkel’s other coalition partner, the Social Democrats (SPD), were also dealt a massive blow.”

He writes, “Where Germany’s traditionally dominant parties are in decline, new contenders are on the rise,” adding, “Germany’s political fragmentation, which was shown strongly in the 2017 federal elections, is continuing at full speed. Whether its traditionally major parties can still turn the tide, remains to be seen.”

Traugott concludes, “These political upheavals will leave Germany navel gazing even more. As its governing parties are fighting against their own decline, fearful of their new contenders at home, they are likely to spend less time on other issues — whether reforming the EU or taking a more active role on Brexit.”