Lots of meat in this article on EU & Brexit stance

Bang up to date with so many elements you need to be on top of; in addition, it identifies areas of weakness in the European position - these can be used as "potential issues ahead" as they won't [probably] have arisen by the time of the exam. This really useful stuff- if you can't assimilate it all, come and speak to me. Very interesting times indeed...

Europe is in no fit state to handle the risks of its own Brexit brinkmanship

The EU's Michel Barnier said in Strasbourg that the risk of a no-deal has never been so high. Yet the Commission says not a word of the Withdrawal Agreement can be changed

 Ambrose Evans-Pritchard

16 JANUARY 2019 • 9:43PM

Half the eurozone is either in recession or close. The currency bloc has again mismanaged cyclical policy at a crucial turning point, allowing a downturn in global trade to metastasize into something worse. While Europe’s leaders have been distracted imposing their economic settlement on Britain, the world has been imposing its economic settlement on them. A crisis has crept up on the EU. 

Whether or not they fully understand the financial forces at work - and they did not in 2008 or 2011 - some must be wondering whether the eurozone can endure the shock of a ‘no-deal’ Brexit in these circumstances - at least of the kind that entails a rupture in trade flows, and if it entails no such rupture then Project Fear is shown to be an empty threat.

Michel Barnier said the “risk of a no-deal has never seemed so high”. For the first time since the Brexit saga began the EU side faces the consequences of its own maximalist strategy.

It misread British democracy, thinking it enough to stitch up a weak Prime Minister. Few ever imagined that the Meaningful Vote would be turned against them.

With the exception of the Dutch, perhaps, the EU is not remotely prepared for a cliff-edge divorce in 10 weeks. The Commission’s contingency plan for a no-deal scenario is mostly political theatre, an instrument of negotiation pressure.

Brussels, Berlin, and Paris suddenly confront an economic threat that they never took seriously and could all too easily spin out of control. A no-deal scenario is “scary for everybody”, said France’s Emmanuel Macron on Tuesday. Well, that is progress. Until this week he has been dismissing it as a British nuisance.

This showdown comes at a hazardous moment for Europe. Germany escaped a technical recession in late 2018 by the skin of its teeth. It is now in a soft slump,  a casualty of China’s deepening slowdown and the Asian credit crunch.

French industrial output is contracting and business confidence has crashed to levels last seen in the eurozone crisis. Barclays has pencilled in GDP growth of 0.1pc in the fourth quarter.

Fading growth and the gilets jaunes have between them derailed the Macron presidency. It is taking all his energy and policy arsenal to contain an 1848 insurrection entering its tenth week. Little remains of his reform drive, and even less of his grand bargain with Germany to fortify the eurozone.

Italy is in full recession. Oxford Economics has pencilled in growth of just 0.3pc for the whole of this year. This sort of lingering malaise plays havoc with the country’s knife-edge debt trajectory. Investors know that a seemingly stable ratio of 131pc of GDP can spiral up towards very quickly 140pc once the denominator effect kicks in, and from there it is a parabolic rise into insolvency.

Rome must refinance debt worth 17pc of GDP this year without the shield of quantitative easing by the European Central Bank, that is to say without a marginal buyer or lender-of-last resort standing behind the Italian debt market. It will take no more than a spark to set off this powder keg. 

What is extraordinary is that the ECB persisted last year with its pre-announced plan of bond tapering even though real non-financial M1 money for the whole eurozone had dropped to recession levels. It then continued to dial down stimulus as the real economy buckled. 

Bond purchases have dropped from a peak of €80bn a month to zero. This is equal to a string of rate rises under the Wu-Xia model. The ECB has been tightening pro-cyclically into a slowdown, repeating the policy errors of 2008 and 2011. 

Mario Draghi must know that this is a mistake but his hands are tied. Germany is no longer willing to tolerate QE, deemed a backdoor transfer to the South. The result is to entrench deflationary forces and undermine the debt solvency of weaker EMU states. The eurozone is now in a Japanese trap. 

The Stability Pact and the Fiscal Compact, married to the ‘rules culture’ of the Commission, inhibit any form of counter-cyclical fiscal stimulus. If it comes at all, it will be too little, too late.

There is still no banking union beyond punishment and surveillance, leaving the sovereign/bank doom-loop of 2012 ever menacing. Nor is there any fiscal union or sharing of debt liabilities. The eurozone is defenceless.

By miraculous twist, the UK has somehow eked out higher growth over the last nine months, which is not to pretend that the British economy is in glorious condition.

We are a long way from the peak EU hubris of December 2017 when Europe’s leaders mistook a catch-up recovery for self-sustaining cycle of growth, and thought they had Britain’s back against the wall. That is when they sprung the trap of the Irish backstop.

In my view, the EU is playing with economic and financial fire even to contemplate a no-deal outcome at this juncture, with all it implies for broken supply chains, severed transport links, lower exports, and lost access to their banker in the City of London.

The EU has a £95bn trade surplus in goods with the UK. This is 4.5pc of British GDP. To the extent that tariff and customs barriers cause this precious demand to be diverted from European exporters to UK producers - or to the rest of the world -  it is a pure net loss to the European economy. Britain gets some degree of net stimulus, ceteris paribus.

The Treasury and academic critics of Brexit like use to ‘dynamic modeling’ to ratchet up the putative losses in British GDP from a no-deal. I have yet to see analysis under such modeling of what it would mean for a European economy that never cleaned up its banking system and is on the cusp of its third recession in a decade. Debt levels are 30pc to 50pc of GDP higher across France and the Latin bloc than on the cusp of the Lehman crisis.

Europe’s leaders have been lining up to say that there can be no renegotiation of the Withdrawal Agreement and no change to the Irish backstop. It is up to the UK to “clarify its intentions,” said the Commission’s Jean-Claude Juncker.

You might equally say that it is up to the EU to clarify its intentions. Is it going to persist in demanding a permanent veto over whether Britain can leave the backstop, and therefore whether it can leave the customs territory and the EU legal orbit.  

Will it demand an arrangement that strips Britain of sovereignty - or would “downgrade Britain to the status of a trade colony” in the words of the German IFO Institute this morning? Will it continue to threaten trade rupture to force submission after having heard the thunderous riposte of Parliament on Tuesday?

Mr Barnier took a fateful step in weaponizing the Irish border, exploiting a neuralgic inter-community issue to push an ulterior agenda, and invoking the Good Friday Agreement even as it ignored one party to that accord.

The perverse logic of this gamble is that in a bid to save Ireland the EU may instead end up injuring Ireland very badly, and do more damage to Anglo-Irish relations than a friendly Brexit would ever have done.

If there is no deal, the EU will face an Irish crisis of its own. The weapon will recoil. Either Brussels tries to force Dublin to erect a hard border - a maniacal proposition - or it accepts ‘British’ border solutions based on technology and trusted traders. This is to admit that the Backstop was a charade all along.   

Perhaps Mr Barnier does not believe his own words about the rising risk of a no-deal. Perhaps the Commission aims to sit back and wait for the Remain majority in Parliament to impose a softer settlement: Norway Plus or revocation.

I leave it to colleagues closer to Parliament to judge how likely this is, and what the odds of a no-deal may be. My guess is that Brussels will get its way.

Yet it is an existential gamble. If the EU refuses to change a single word of its withdrawal ultimatum and by misjudgment causes Britain to walk away, my prediction is that Europe itself will be engulfed in the maelstrom.

It will again expose the fundamental deformities of monetary union. It will trigger the Italian denouement, set off a German banking crisis, and shatter the euro. Could the European Union survive such a chain of events? Possibly.