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May’s EU aid package

MICHAEL WHITE on a pitied prime minister whose weakness may turn into a negotiating strength

Jeremy Corbyn has come a long way at the Commons dispatch box since his first fumbling sessions of Prime Minister’s question time. And when he quoted Liam Fox back at Theresa May after her latest statement on the Brexit negotiations I thought of the late lamented John Smith, who would have eviscerated the lot of them in batches of six.

Having admitted to a ‘sense of Groundhog Day’ about these ritual reports of slow progress the Labour leader noted that the international trade secretary is still insisting that a ‘no deal’ Brexit on March 29, 2019, ‘would not be the Armageddon that people project’. ‘Does the Prime Minister agree that an outcome that is not Armageddon might be setting the bar a bit too low?’ Corbyn mused.

Nice one, Jez. John Smith would have smiled at that, though less enthusiastically than the then Labour leader might have done if your teenage Bennery had ever allowed you to support his policies on Europe in the 1980s and 1990s. Never mind that now. Inch by inch, Corbynite Labour is grudgingly moving towards coherence on Europe under Keir Starmer’s guidance. Its votes might actually become relevant quite soon.

As for May, it is hard not to feel sorry for her, presiding over a divided, disloyal and very mediocre cabinet, ‘stricken and stunned’, given to long silences and no evident zest for a task she knows is contrary to the national interest. And that description comes from Tuesday’s Times, not from Sunday’s edition of the Frankfurter Allgemeine Zeitung (FAZ).

By way of a brief diversion, did you catch the scary reference to a ‘Minsky Moment’ looming over China’s heavily over-indebted banking system? It’s the moment when stability generates so much complacency that it lurches into dramatic instability – like the West’s 2008-9 banking crash and similar events. Britain’s self-absorbed Brexit, anyone? Eurosceptic election wins in rich and centrifugal regions of Italy? A ‘Czech Trump’ elected in Prague?

I nearly missed mention of the late Hyman Minsky’s name check in Beijing last week, but even in distant Europe we may have reason to shudder at his insight. There are confrontational Hard Brexit players on both sides in the Davis-Barnier talks. If they don’t accept that their own complacency is misplaced in these dangerous times we may all go over Nigel (‘there is no cliff’) Lawson’s cliff together.

That’s what the CBI and other business lobbies were loudly telling ministers (again, but louder) on Monday as details of ‘tormented’ May’s ‘begging for help’ dinner with Jean-Claude Juncker leaked in the usual way into Sunday’s FAZ. Juncker’s chief of staff, Martin Selmayr, denied being the paper’s source this time. Who knows, the denial may be true. He now may have a man to leak it for him, to the same reporter too. But someone did it and it wasn’t May or her Brexit Bulldog, David Davis.

In Beijing the outgoing governor of the People’s Bank of China, Zhou Xiaochuan, has also been sharing tormented thoughts. They make Mark Carney, his combative counterpart at the People’s Bank of England, look like tact incarnate. During the Communist party’s congress Zhou highlighted the risk of over-optimism in markets, to mistakes that lead to tensions, triggering ‘a sharp correction – what we call a ‘Minsky Moment”.

Wow. Coming from a highly-disciplined communist apparatchik that sounds like an incitement to panic and the Hong Kong stock exchange duly panicked, though it bounced back for now, as markets do. But China’s household debt reportedly rose to 45% this year – high for an emerging economy – and total debt is three times Chinese GDP, ie a lot (the austerity-embattled UK’s is 89.3%).

Unlike surplus-rich Germany, China helpfully expanded domestic demand to help it – and us all – through the Great Recession. But it’s led to a lot of zombie debt of the kind it’s hard to unwind without a crash. The US Federal Reserve chairman, Alan Greenspan, learned that the hard way when he ineffectually deplored ‘irrational exuberance’ in Wall Street ten years before the 2008 smash. Minsky brought him down in the end.

An authoritarian regime like the one that China’s President-for-Life Xi is busy reinforcing in a very personal way may be better placed than most to get tough. It can lock up its Minskys on trumped-up charges. But such regimes also make bigger mistakes when no one dares challenge their decisions, as Xi’s role model, Chairman-for-Life Mao, showed more than once.

Millions died, as they did in Lenin’s Russia – its centenary commemorated this month. In our own time Zimbabwe’s Robert Mugabe – briefly and comically a crony-appointed goodwill ambassador for the World Health Organisation (WHO) – serves to remind us of the point. Yet Twitter is awash with angry people who routinely compare the faltering EU with Soviet Russia or the Third Reich.

So how does the faltering Brexit process now measure up to the Minsky test in the wake of the EU’s Friday summit? The 27/1 decided not to open trade talks yet, but to prepare to open them – Stage 1.5 of the negotiation as a Times headline put it. Led by Chancellor Merkel, EU leaders were seen on camera being nice to Theresa May, they even spoke to her. Juncker kissed her and – on Monday – denounced as untrue the FAZ briefing that Selmayr didn’t give. Frau Merkel was said to be cross.

Friday’s conciliatory mood music was enough to drive Brexit off Fleet Street front pages for the first time in weeks, though not for long. If the FAZ leak wasn’t enough to enrage the Daily Dacre, May’s answer to Iain Duncan Smith during Monday’s Commons exchanges set the cat among the chlorinated chickens.

It appeared to raise the prospect that we couldn’t have that two year transition period – ‘implementation’ in May-speak – without a clear outline of the future trade relationship, something Michel Barnier says will take much longer to hammer out, Canada-style, than two years.

When challenged by Labour’s Yvette Cooper, May seemed to confirm the answer which also underlines what the Brexit Bulldog said (‘a transition phase will be triggered only once we have completed the deal itself’) last week. That will alarm the CBI and other anxious business groups, so expect No 10 ‘clarification’ in due course after other CEOs echo Goldman Sachs’ Lloyd Blankfein’s joke about the weather in Frankfurt (where he expects to be ‘spending a lot more time’).

Whether or not May’s remark – let alone Blankfein’s – was merely a slip of the tongue, the hardest negotiations are yet to come. But beneath the radar we may be near the end of the ‘phoney war’ stage – not the beginning of the end, but the end of the beginning, as Churchill said of a famous 1942 victory we’re too polite to mention.

What next? My hunch remains on the optimistic end of the spectrum, not because there aren’t plenty of idiots out there – just look at Madrid and Barcelona’s ineptitude this month – but because the alternatives to a deal are stubbornly worse for both sides and not getting better.

Worse for the Brits, of course. We sell 7.5% of our GDP – around half our exports – to the EU, but they only sell 2.5% of their GDP to us. Even so, it’s 2.5% of the world’s second largest economy, so it’s a lot. In 2016, Germany’s trade surplus with the UK was 50 billion euros or 1.6% of German GDP. German business and industry would feel the loss (26,000 car jobs?) as well as the disruption to supply chains, those manufacturing parts which traipse across EU borders for example.

Even more to the point, as Angela Merkel puts together a new coalition with the liberal FDP and the Greens, she will find herself strapped for cash. As the DUP’s deal with May reminded Westminster and David Cameron’s Lib Dem coalition demonstrated to Nick Clegg, junior partners always pay the larger price when things go wrong. So they need goodies up front to persuade their supporters that compromise is justified.

Merkel will probably have to cede the finance ministry to the FDP and to spend more, an extra 1% of GDP on some estimates. So she won’t want to lose too much of the UK’s EU budget contribution, not until she has to. Nor will the 14 member states, the smaller and/or poorer ones that are net EU budget recipients, want to lose UK cheques that are paid under assorted headings.

It goes up and down according to economic factors. Currently the overall British cheque is £16.9 billion in 2017. That’s £8.1 billion net after Margaret Thatcher’s 1985 rebate of £4.8 billion is deducted in advance, not forgetting the EU funds dispersed in Britain (£4.1 billion), or the easily-overlooked £1 billion worth of EU competitive contracts won by British firms and bodies.

Does that actually make it £7.1 billion net? Closer to the £156 million per week claimed by Remain campaigners? By jingo, I think it does. But you decide. Boris Johnson still prefers the gross figure of £350 million per week for the NHS.

May indicated in Florence that HMG would pay its full dues until we leave in March 2019 – that’s the £18-20 billion we’ve all read about – and will honour other ongoing commitments, pensions as well as programmes in which we wish to remain involved. As Europe’s economic powerhouse since the ‘miracle’ recovery of the 1950s, Germany has always been the largest net contributor – 24 billion euros gross, 13 billion net in 2015. Britain is variously second, third or fourth with the French, Dutch and Italians.

So it is a big British budgetary hole they will have to fill and they all know it. This weekend’s ballots for greater autonomy in Veneto and neighbouring Lombardy, the election as prime minister of the Czech Republic, of pro-Russian billionaire, Andrej Babiš, are further signs of nationalistic reaction at work far beyond Dover.

But we’re bluffing too when we threaten to walk away or say we don’t owe them what Jake Rees-Mogg affectedly calls ‘a brass farthing’. Only those too dogmatic or cynical, blinkered or ignorant, still believe Britain can just walk away without inflicting immense self-harm. Emmanuel Macron was right about that – though he’s got problems too.

May’s Hard Brexit bulldogs may think they’re being helpful to her and Bulldog Dave by talking tough. They have a point when they say we should do some preparatory work on a ‘no deal’ outcome in case of a breakdown. They even have one when the refuse to publish Whitehall’s sectoral impact studies, lest it weaken our negotiating team’s hand. But…

The trouble is that levels of trust are abysmally low, between voters, officials and parties, within the cabinet too. Is their ”no deal’ isn’t Armageddon’ riff merely a tactical point, as Macron says? Or do they really mean it? Either way, when a John Redwood or a Liam Fox say that Britain can manage perfectly well on World Trade Organisation (WTO) tariff regimes it does not foster trust. Most business folk, economists and commentators – not all, it’s true – who can claim to know what they’re talking about shake their heads in disbelief.

The fact-orientated websites are full of explanations as to why, their faith-based rivals mostly assert the contrary, though – as Jane Merrick pointed out in last week’s New European – they do so less confidently now than a year ago. In the Commons on Monday Redwood, briefly Welsh Secretary a generation ago, invoked the WTO option before wishing May ‘good luck in bringing back something better’. That’s progress of a kind.

The international trade secretary is a notorious case in point. No longer claiming that a free trade agreement (FTA) with the EU will be ‘one of the easiest in human history’, Fox is now sounding less confident that his pals in the Bush and Trump administrations will deliver a compensatory FTA with the US.

With Michael Gove insisting that UK food standards must not be jeopardised – bye-bye to cheap US beef and chlorinated chickens? – the FT noted this week that Fox’s emphasis is shifting away from goods and food to a deal on services. It is an ambition in the US that has thwarted the EU for years.

As Boeing’s unwarranted attack on Bombardier’s C-Series passenger jet (the one which supports 4,000 skilled jobs in Belfast) demonstrated – before it was snookered by that fancy European footwork at Airbus – the US talks free trade much better than it practises it. The British Empire was also good at protecting its own interests in its prime.

Yet Fox, a medic by trade, was still peddling the WTO fall-back position on Sunday’s sofa TV, still accusing the EU elite of wanting to punish the UK for having the ‘audacity’ to vote Leave.

Next day his political acolyte, Suella Fernandes MP, who is chair of Hard Brexit’s European Research Group (ERG) caucus, pushed the same line on the BBC. Despite being unpaid PPS to chancellor Hammond, she accused the CBI of being ‘EU funded’.

A cheap shot. Who funds the ERG, since Suella asks? According to reporters working for the Open Democracy website, at least £250,000 of its income comes from the UK taxpayer, courtesy of Tory MPs’ and ministers’ expenses claims for research – Fox, Chris Grayling, Sajid Javid among them.

Before becoming a DexEU minister, Steve Baker was the group’s driving force. ERG is a party within the party, say some Tories, May’s menacing Momentum. Can you imagine what the Sun and Daily Dacre would say if Remainers were doing the same?

Undeterred by lawyer Fernandes, the CBI’s DG, Carolyn Fairbairn, countered that the WTO’s web of rules cover tariffs and customs, but not services – financial, legal, architectural and the rest – which constitute 80% of the UK economy. The EU’s record on extending a full single market to financial services has been pretty spotty for decades now. But no wonder the CBI wants a clear transition agreed quickly lest fragile business confidence weaken further.

I am in no rush yet to join those who write May off, not least because they do not have a successor lined up. But her position shows no signs of strengthening to the point where she can put the fear of God into warring colleagues, call the cabinet session the Sun reports that she dare not hold, there to impose a consensus on the government’s ambitions for Brexit, one that will last more than 24 hours.

Ken Clarke went further this week and urged her to depute a ‘trusted minister’ to embrace Labour and the smaller parties in that consensus. Given their belief that they are pushing the Tories to the point of destruction (Corbyn has hired Lord Bob Kerslake to prepare him for government), that would be a tall order. May was hovering most of the week on a U-turn over universal credit (UC) which Corbyn will legitimately claim as a Labour win on behalf of society’s poorest. But Corbyn’s position, political and philosophical, is barely more comfortable than May’s. If she and most of her MPs do not really believe in Brexit, the Labour leader’s life-long record suggests he does not really believe in Remain. At heart he is a socialism-in-one-country romantic, a tried and tested recipe for failure on a Brexit scale.

But he has been persuaded to sign up to Keir Starmer’s six-red-lines offer to Remain Tories. It would include writing a parliamentary veto on any deal into the stalled EU Withdrawal Bill; likewise May’s two-year transition. It would excise the sweeping Henry VIII powers that allow ministers to amend or delete EU-based rights and regulations with only vestigial challenge; and it would entrench the EU Charter of Fundamental Human Rights, workers rights, consumer and green rights, as well as ensure the devolved administrations do not lose out.

Why is Corbyn giving ground on core beliefs? Some say that, like May, he is torn between belief and duty in these abrasive times when social media often constitutes a stone-throwing mob camped at the front door. A worldly friend puts it differently. ‘If Jeremy has to choose between his old friends on the left or his new young friends at Glastonbury, I suspect he’ll opt for the young ones.’

We have come to a strange pass when a leftwing anti-EU Labour leader visiting Brussels can be feted by fellow left-wingers as a UK Prime Minister in waiting, even though, politically and intellectually, the left is in retreat over most of Europe, except briefly in Catalonia which is likely to end badly.

As for May – in town at the same time – she evokes little feeling more positive than pity mixed with exasperation at the shambles over which she nominally presides. Yet the paradox remains that her plight, ‘weak and unstable’ since her ‘strong and stable’ election calculation backfired, has become a source of some residual leverage across the negotiating table. May may be bad, they calculate in Brussels and Berlin, British government as impotent as those of France or Italy in the 1950s. But the alternative Brexit negotiators (Corbyn included?) are visibly worse. The candidate they most mistrust is Boris Johnson, feared and despised in equal measure, vain but incurably frivolous.

He is prime candidate to be the Berlusconi of our decade. Alas for Europe, he is not the only one, nor London the only EU capital in such centrifugal peril.

‘I’ve changed my mind…’ The speech Alastair Campbell says it is high time Jeremy Corbyn made

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