LOW’s Crystal Ball predictions for 2018


1.     Apparently, the biggest fight will be over services

The crystal ball says that the problem for the UK negotiators is not goods but services, but the commentariat will ignore that and persist in boring everybody with long agonised discussions over what arrangements will be made for manufactured goods when the UK leaves the internal market, which ignores the fact that services represent nearly 80% of the UK's GDP, with manufactured goods making up only 10%.

After Brexit, firms based in the U.K. will lose their “passporting” abilities that allow authorized firms in the EU to sell services across the single market. To make up for that, the City has been lobbying hard for financial services to be included as a chapter in the final free-trade deal between the U.K. and the EU.

The City wants firms located in the UK to be solely supervised there under UK regulation, but to service clients across the EU without being supervised or regulated in the EU. However, Michel ‘I can’t negotiate with myself’ Barnier has said that financial services don’t belong in trade deals as he believes that there is no place for them, saying: “There is not a single trade agreement that is open to financial services. It doesn’t exist.” He said this was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.”

Barnier has moreover repeatedly insisted that Britain cannot have the bespoke deal that the UK government has set as their objective, and that the future relationship must be based on a pre-existing arrangement between the bloc and a non-EU country.

So, the real fight in 2018 will be between a UK government who cannot afford to be excluded from the EU market for services, especially financial services; and the UK's main competitors, France and Germany, who are understandably trying to make sure that is exactly what happens.

 

2.    The politicians will take over from the technocrats

2018 will see both Barnier and Davis increasingly side-lined and even undermined as May (who is putting more and more resource into ‘no deal’ planning) and her head of government colleagues (especially those like Ireland and the Netherlands whose economies would receive a fatal shock if there were to be no deal) on the Council realise they can't leave the negotiations to civil servants and second division politicians.

This situation will be made worse by the fact that both Barnier and Davis have barely concealed career agendas which will inevitably cause increasing levels of suspicion and distrust. Barnier's hard line stance (which he thinks will increase his chances of becoming Commission President) will end up being disowned by a panicking council; while Davis (who could only realistically replace May if she is ousted prematurely by Europhobe Conservative backbenchers) will be cut out of the loop.

 

3.    The next big fight inside the EU27 will be about money

While a Brexit deal may be the UK government's biggest problem, that's not true for the EU 27. Their real problem will be post Brexit money.

A study from the EU’s regional department DG Regio revealed that slashing the EU budget by an equivalent amount to the UK’s contribution (12.5pc, post-rebate) would mean that only those poorer EU states – with GDP per capita of below 75pc of the EU average, would receive so-called cohesion funds. These funds constitute a third of the EU’s budget and are aimed at “reducing disparities between the various regions and the backwardness of the least-favoured regions” according to EU law. Such a change would be a significant blow to richer states.

One remarkable aspect about Brexit thus far has been the degree of unity on the EU27 side. But 2018 will bring a major crisis over the budget. The UK may have settled the Brexit bill, more or less, but Britain’s departure still blows a big hole in the budget going forward, which the EC wants to fill with bigger contributions from the EU’s net contributor nations. EU leaders will air their views at a February summit, with a formal proposal on the post-2020 budget in May.

And (according to the crystal ball) what’s worse, we can expect that at some point during 2018 the UK government will remind the EU27 that without a trade deal they have no intention of signing any more cheques made payable to the European Commission.

 

4.    The two big ideas for 2018 will be a second UK referendum and the reappearance of the Singapore option

As a member of the EU, the UK has been included in trade deals the EU has negotiated. There are 22 trade agreements between the EU and individual countries, and five multi-lateral agreements covering multiple countries. This means that if the UK wants to retain preferential access to the markets of the 52 countries covered by these agreements, it would have to renegotiate trade deals with all of them.

There are allegedly forty-two possible variants of a trade deal between the EU and the UK, but realistically only four are thought to be viable-
1. The Norway model

Member of European Economic Area, full access to single market, obliged to make a financial contribution and accept majority of EU laws, free movement applies as it does in the EU. If May pursued this (which she won’t) she would be defenestrated within days. However, a Labour Prime Minister could probably get away with it, with SNP help.

2.The Switzerland model
Member of the European Free Trade Association but not the EEA, access to EU market governed by series of bilateral agreements, covers some but not all areas of trade, also makes a financial contribution but smaller than Norway's, doesn't have a general duty to apply EU laws but does have to implement some EU regulations to enable trade, free movement applies. But it does not have full access to the single market for its banking sector and other parts of the services sector, which together make up almost 80% of the UK economy, so this is not an option.

3. The Turkey model

Customs union with the EU, meaning no tariffs or quotas on industrial goods exported to EU countries, has to apply EU's external tariff on goods imported from outside the EU.
Turkey is not part of the EEA or the European Free Trade Association but does - like Andorra and San Marino - have a customs union with the EU. This means it faces no tariffs (taxes or duties on imports and exports) or quotas on industrial goods it sends to EU countries, but the customs union does not apply to agricultural goods, or services. Turkey has no say on the tariffs it has to impose on goods it imports from non-EU countries, as it has to apply the EU's common external tariff to those goods (and is not involved in setting it), so this is not an option either.

4. The Canada model

The CETA free trade deal with the EU, which has yet to come into force, gets rid of most tariffs on goods, but excludes some food items and services, and stipulates a need to prove where goods are made.

It also gives Canada preferential access to the EU single market without all the obligations that Norway and Switzerland face, eliminating most trade tariffs.

However, a CETA-type deal would not give UK financial services the EU market access that they have now. It would also mean that firms that export to the EU would have to comply with EU product standards and technical requirements without having any say in setting them.

This is not an option without services being included (so called Canada Plus), which the EU has no incentive to include; and every reason to exclude.

When, on the morning of Monday 22nd October,  the New York stock market crashes by 50% of its value, the resulting panic in London will be taken as the moment to strike and bring the issue of a second referendum to a head, first in business circles and their allies in the media (encouraged by such relics of the past such as Tony Blair and Michael Heseltine pushing the line ‘now is not the time to take any more risks with the economy’); then amongst UK MEPs; then in the Labour Party and the Scottish SNP; then in the House of Lords; then amongst Remainers and Reluctant Leavers; and then finally, the real tipping point, when buyer remorse really sets in, amongst Leave voters themselves.

 

5.    The Singapore model will become Brexit’s voodoo zombie: not dead, just lying in wait.

All of this above complexity will encourage some Leaver elements in politics, business and the media to start taking the Singapore model seriously.

The Singapore free trade model (a misnomer as in reality the Singaporean economy is tightly directed by a powerful machinery of regulation and patronage) simply means a state which does not impose any import or export tariffs.

There will be a growing suspicion in 2018 that elements in the UK government (despite what they say in public) are secretly moving towards the Singapore option (a concept which includes the abolition of regulations such MiFDII’s 1.4 million paragraphs of new rules).

When it was first raised, the UK Chancellor told Le Monde that Britain’s post-Brexit economy would remain “recognisably European” following his belief that having no tariffs of any kind would have a strongly negative effect on the UK's agriculture and manufacturing sectors, because importing goods such as food and steel would in many cases be cheaper than producing them in the UK.

But there are many in the Tory party and business who disagree, mainly because they fear (correctly) that Brexit will constrict inward investment (something confirmed recently by the Irish IDA); and while they are keeping quiet for the moment for tactical reasons, many would (when at some point during 2018 the talks inevitably look like they are heading for a stalemate, probably over the still unresolved Irish border issue) support any alternative to May who advocated the Singapore option.

When the EU wakes up to the fact the UK is secretly considering ‘stealing’  investment by eroding social and environmental standards, slashing corporate taxes, or diverging from EU rules on state aid and competition, then they will insist on trade deal provisions that allow it to punish the UK for any such undercutting in the future.

This situation will be made worse by the row that will break out in 2018 over the ability of the UK to negotiate and sign FTA’s with non-EU countries during the ‘implementation’ period leading up to 31st December 2020. When the UK government finally realises that the EU plans to ban them from signing any trade agreement before 2021 (on the basis that whatever the de jure of the situation, they haven’t de facto left the EU), the crystal ball says that relations will get very tense indeed.

 

6.    Despite what you think, there really is a plan, it’s to avoid the ‘Swiss trap’

UK Ministers will draw up plans for a sector-by-sector Brexit deal with the EU to avoid a “Swiss trap” that could undermine the long-term stability of any agreement.

In an attempt to get maximum access to EU markets while allowing the UK to diverge from EU rules and regulations, ministers will propose a free-trade deal that would set out the sectors of the economy where each side agrees to co-operate on regulation and standards.

Those sectors — such as the chemical and pharmaceutical industries — will get free access to each other’s markets in return for not breaching common regulatory standards. If either side breaches these rules, for example by offering unfair subsidies, that would trigger changes such as a switch to World Trade Organisation rules. In sectors of the economy not covered by the deal — such as restaurants or small companies that do not export — the government would be free to change regulations without any effect on the overall agreement.

As part of the plan the UK will also agree to abide by “level playing field” rules on areas of cross-cutting regulation such as environmental standards and state aid. The plan will be designed to avoid the Swiss trap, under which divergence in one area of the agreement could cause the entire deal to collapse, as is the case with the agreement that exists between the EU and Switzerland.

While the EU has previously maintained that it will not accept any kind of deal that allows the UK to cherry-pick access to the EU market, it will be revealed from carefully placed leaks that senior EU officials are in favour of a sector-by-sector approach, although they will still insist in excluding most financial services.

 

7.    Anti-immigration based populism will threaten EU27 unity

Hungary and Poland will resist quotas of asylum seekers and vow to protect their borders in a defiant alliance against the EU’s refugee agenda.

Mateusz Morawiecki, the new prime minister of Poland (who snubbed Brussels by making his first foreign visit to Budapest) will join with Viktor Orbán, the prime minister of Hungary, against all pressure to conform.

They will both refuse to take a single migrant under the quota scheme passed by a majority of EU members to spread refugees among member states.

Slovakia and the Czech Republic will also refuse to take their share of asylum seekers to relieve pressure on Italy and Greece; and the new government of Austria will continue to take a much tougher stance towards migrants.

The Visegrad Group, or V4, which also includes Slovakia and the Czech Republic will grow stronger as the year progresses.

 

8.    Macron will buy a bicorne hat

While the rumours that Emmanuel Macron has a photo of Napoleon on his bedside table and has started calling his wife Josephine, are as yet unconfirmed, his policies are starting to look a lot like those of the Corsican tyrant.

First, he will conspire to steal business away from the nation of shopkeepers.

Second, having got rid of the most anti federalist country in the EU28, he will push hard for policies that increase federalism, like a European Intelligence Agency, greater harmonisation of tax policies, a Eurozone Minister of Finance, transnational MEPs, an EU army, a single, EU-wide tax on financial transactions, an EU carbon tax, an EC limited to 15 members, taxpayer IDs for all Eurozone citizens etc. Not least because that would keep Albion perfide out of the EU forever (or if they did re-join, involve the volte face of the century).

Third, the current Groko chaos in Germany will encourage him to think that he can replace the traditional metaphor of Europe being a German horse ridden by a French jockey, with the image of a matched pair, pulling Europe’s carriage together in perfect harmony.

The opposition to Macronisme (not a thing yet, but coming soon) at home has been largely vanquished (although anyone thinking that the last election was a defeat for the National Front is mistaken, it was easily their best performance ever) so he thinks can relax and turn outwards, pursuing his European En Marche plan for France to start rebuilding La Gloire and personally leading Europe towards the sunlit uplands of one currency, one government and one President (viz. Monsieur E. Macron-Buonaparte).

Meanwhile Sweden, Denmark and the Netherlands - as well as the countries of central and eastern Europe - want to avoid what they view as a protectionist, federalist France gaining the upper hand in EU debates (and maybe suffering the same fate as their ancestors, invaded, occupied and pillaged by Boney).

P.S. Madame Macron should beware. After a few years in power, the Emperor (for reasons of strategy) replaced his much older wife with a newer and very much younger version. Will 2018 be the year that Macron looks for a young German wife to seal the alliance?

9.    Berlusconi will return!

The bad soap opera which is Italian politics continues to entertain everybody except the Italian people, who are sadly forced to take it seriously.

On March 4 Italy will elect new members to both chambers of parliament, which will also be the first time a controversial new electoral law will be used. The Eurosceptic 5 Star Movement will emerge as the single largest party, but the new system won’t be able to produce a clear-cut winner, meaning old-style political bargaining will be needed to try to avoid an impasse.

Former Prime Minister Silvio Berlusconi will make a comeback this election cycle to lead his centre-right Forza Italia. He was ousted from public office after a tax fraud conviction in 2013, but will return rejuvenated to the political scene. Berlusconi will fail to overturn a ban against him taking office, forcing him to look for alternative candidates.

A regional vote in Sicily in November gave Berlusconi’s party hope that it could emerge as the election victor by teaming up with Matteo Salvini’s Northern League, but Salvini will quickly realise that his potential partner has commitment issues and will therefore approach prime minister Paolo Gentiloni’s PD. After the usual give and take, Forza Italia, Lega Nord and Fratelli d'Italia will form a government.

P.S. In other elections, Jirí Drahoš will beat incumbent Miloš Zeman in the Czech Presidentials; Prime Minister Viktor Orbán’s right-wing populist Fidesz party will have a big lead over its rivals in the Hungarian parliamentary elections; and the nationalist Sweden Democrats (SD) will make gains on September 9.

And finally, Alexei Navalny will emerge triumphant in the Russian elections and immediately put Putin on trial.

Just kidding, Putin will win comfortably, as usual.

10.The biggest event in 2018 will not involve Brexit, the Euro, or an important election, but some men in shorts, a round ball and a grass field of dreams.

My crystal ball’s prediction for the World Cup final to take place in the Luzhniki Stadium, Moscow, on the 15th July?

A Harry Kane hat trick will end German resistance in extra time after an off-course North Korean Hwasong missile lands in the six-yard box, distracting the French referee.

As the nation mourns, Merkel immediately resigns, while May’s poll ratings soar. Seizing the opportunity, the old Remainer will hold a snap second referendum in July which results in the UK staying in the EU, after the new German Chancellor ‘Röschen’ von der Leyen ceremonially rips up Article 50 at a ceremony under the Brandenburg Gate, surrounded by a jubilant Council of Ministers joyfully singing ‘An die Freude’.

All mention of Brexit will become illegal in the UK after the ‘Don’t mention the Brexit’ bill is unanimously passed by a cheering House of Commons. London diners en ville resume their previously peaceful aspect.

This all takes place after chaos reigns in the British Royal Family when it is discovered that Prince Harry had in fact mistakenly married Meghan’s evil twin sister at their May wedding. The marriage will be annulled and Harry will subsequently marry Princess Mako of Japan at a ceremony sponsored by Hello Kitty.

Tulip mania will return after Bitcoin crashes from its March height of 100,000 dollars down to fifty cents after it is revealed that the blockchain was captured by an eleven-year-old computer nerd living in the Austrian city of Graz. Disappointed investors will pile into the Dutch black tulip market, making LOW’s window box in our Rue de la Science office worth 10 million euros.

 

Editor’s note: it was after this last prediction that Brendan decided that his crystal ball may in fact be somewhat faulty, and has since sent it back to Amazon for a cash refund, with which he bought a second window box complete with ten black tulips. Fingers crossed!