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Europe - Data Flash - Dieter Braeuninger

The Brexit talks were just as hard as expected. Even with the UK’s Prime Minister, Theresa May, demonstrating a much softer stance during her Florence speech in late September, Brexit negotiations were basically stalled with no actual progresses achieved since then. Mainly due to EU’s hard stance on settling the exit bill first before any talks on transition and other issues, and the tension regarding the Irish border, as well as UK’s internal divergence on the exit bill, the possibility of delayed trade talks and “Brexit with no deal” significantly increased during the past two months. Only until recently, breakthroughs have been achieved: 1) UK finally agrees to fully honor its financial obligations with the EU budget and prepares to pay around EUR 40-50 billion; 2) a broad outline on the Irish border is under discussion between UK and Ireland and an agreement is expected to be achieved as soon as this week.

The comparison with Britain is instructive. London is gambling the health of all its trading and geopolitical relationships on the dubious claims of a bunch of serially disproven political hucksters and is drifting into territory that no-one, said hucksters included, seem to have a clue how to navigate. Germany’s problem, by contrast, is a deadlocked coalition negotiation—a novelty in the federal republic, as the country’s president Frank-Walter Steinmeier noted in his measured address yesterday, but one for whose management and resolution the constitution provides clear procedures. Exports are booming, growth is strong and the state is running an surplus of about €20bn ($23bn). One factor in the talks’ breakdown was disagreement about how to spend all that money. Britain could well use a problem like that.

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    Last night the FDP unexpectedly retreated from the exploratory talks on theformation of a Jamaica coalition and it is unlikely that the Liberals will comeback. Party leader Lindner blamed the CDU/SCU and the Greens for theirunwillingness to markedly modernize Germany, the Liberal’s key request in theelection campaign.

    From the UK’s original hard stances of “no deal is better than a bad deal” to the recent compromises made to satisfy EU’s demands, it has verified our previous view that the UK does not have much leverage in Brexit negotiations and the “no-deal” scenario is the most harmful to UK itself. Thus, it is not surprising to see that, in order to kick off the most important trade talks, the UK has made further concessions to the EU on its financial obligations. Unlike May’s Florence speech which agreed to pay the exit bill depending on reaching the transitional deal, the UK now agreed to fully honor its financial commitments depending on nothing. The gross liability is assumed to be worth up to EUR 100 billion, including contingent liabilities that unwind overtime, and the net payment is expected to be around EUR 40-50 billion (very close to EU’s initial bid of EUR 60 billion), spreading over years. The exit bill is expected to be signed this week, and the actual number may not be disclosed to the public to avoid possible political oppositions. As Germany, France and other EU members appeared to be satisfied with the outline of the exit bill, this could remove one of the biggest obstacles to the Brexit trade talks.

The reality in Germany is as distinct from the all-consuming, deer-in-the-headlights shemozzle of British politics as it is from the greatest crises of the country’s own recent history. It does not compare to the political turmoil of, for example, the Berlin Wall’s construction in 1961; of the collapse of Willy Brandt’s chancellorship in 1974 over an espionage scandal; of the “German autumn” in 1977 when the Bonn government seemed powerless against bombings, hijackings and assassinations; of the terminal crisis of Helmut Kohl’s chancellorship amid donation scandals in the 1990s; of the huge weekly demonstrations at soaring unemployment in the early-2000s.

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