Brexit
martin wolf
In 1933, Joseph Goebbels stated that, “The modern structure of the German State is a higher form of democracy in which, by virtue of the people’s mandate, the government is exercised authoritatively while there is no possibility for parliamentary interference, to obliterate and render ineffective the execution of the nation’s will.” It is a measure of how far the UK has fallen that Boris Johnson, the prime minister, often sounds rather like this. Mr Johnson sought to prevent “parliamentary interference” in Brexit negotiations, by proroguing (or suspending) it for five crucial weeks. He dissented from the Supreme Court’s unanimous decision that this was unlawful. He has suggested he could ignore the Benn Act requiring him to seek an extension to the Article 50 deadline, should he not achieve a deal. He condemned this legislation as the “surrender act”. Worst of all, he plans to frame the next election as a battle of “people versus parliament”. How did the UK reach a position in which its prime minister regards parliament as an obstacle to be ignored? The simple answer is that it decided to insert a particularly ill-considered referendum on an exceptionally contentious subject into a parliamentary system. This created conflicting sources of legitimacy. Worse, the meaning of the option that won a small majority in that referendum was ill-defined. “Brexit means Brexit” is perhaps the silliest sentence ever uttered by a British prime minister. But it was also all that could be said. Contrary to what Brexiters insist, parliamentary involvement is not an unwarranted intrusion. Any referendum requires legislation. This one also required negotiation and agreement. Alas, no majority exists for any option for a deal with the EU. Brexiters are as much to blame for this as Remainers. Consequently, “no deal” has emerged as the fallback position. But the Leave campaign said essentially nothing about a no-deal exit. There is no mandate for what every informed observer, including the civil service, knows would be a disruptive and costly result. It would also be just the beginning of negotiations, not their end. But those talks would occur in worse circumstances. There would be pervasive economic uncertainty. This would be a mad choice. Governments exist to help their countries, not harm them deliberately. Among the most important reasons for this outcome is the refusal, especially on the Brexit side, to try to understand the EU. They needed to comprehend that the EU is an existential project for its members, not just a trade deal. Application of European law, under the European Court of Justice, is a central part of that project. The EU, with 27 remaining members, was also sure to be an inflexible counterparty. What next? The government’s Heath Robinson-esque plan, in which Northern Ireland is to be inside the EU’s regulatory system for goods but not its customs area, will be rejected as leaky, legally unenforceable and incompatible with border-free trade in Ireland. It also represents a rejection of the UK’s 2017 commitments on the Irish border. This is sure to have further weakened trust in Britain’s reliability. Remember, too, that the EU has long land borders. It will not allow the precedent of intentionally porous borders. Some believe this plan ought to fly with the EU. It will not. If Northern Ireland were inside the EU’s customs area, too, it could work. But, if the rest of the UK is to have its own trade and regulatory policies, this would make the Irish Sea the UK’s customs and regulatory border with the EU. That would be unacceptable to the Democratic Unionist party and the Conservatives. It might reignite violence in Northern Ireland. So what happens if no deal can be agreed before October 31? One question is whether the EU agrees to another extension when the British government clearly does not want one. Assume that it does, but only with conditions. What might those be? One possibility would be to try to ratify Theresa May’s withdrawal agreement. That would allow the UK and the EU to move on to negotiating a new relationship. This would also mean a compromise between Brexiters and Remainers, itself highly desirable. But it seems impossible. For Remainers, it is too little; for Brexiters, it is too much. Remainers want to stay in the EU. Brexiters reject the Irish backstop that would keep the UK in the EU’s customs area and restrict its trade policy indefinitely. A second possibility is another referendum, probably on a choice between no deal and Remain. Such a vote should be legitimate since no deal played so little part in the referendum. But it would require creation of a caretaker government. That would be hard enough to do. It might also be impossible to agree a question and then carry out a referendum, without large-scale violence. To me, another referendum is the least bad option. But it creates great risks. Finally, there could be an early general election. A drawback is that this would involve many issues apart from Brexit and might lead to another hung parliament. With Mr Johnson campaigning against parliament, it could have dire consequences in both the short and long runs. But it might resolve the Brexit issue, temporarily. Yet the issue now is not just Brexit. It is far deeper. The Conservative party has become an English nationalist party, busily stoking populist resentment. Meanwhile, the hard left has seized the Labour party. The curse of extremist politics has only just begun. Once people see opponents as “traitors” to an imaginary “people”, demons of hatred are unleashed. Brexit awoke those demons. Mr Johnson, aided by Nigel Farage and his Brexit party, will seek to win by freeing them. They are sure to wreak havoc for a very long time.
Corbyn Shrimsley
It’s Brexit or Corbyn. Strip away all the what-ifs and new paradigms. As the UK and EU snowball towards one last grim Brexit gamble all sides need to recognise this fundamental choice. This is not a roulette wheel with multiple outcomes. It is a final coin toss. Heads you win; tails we lose. The EU’s likely rejection of Boris Johnson’s plan will leave the prime minister forced to delay Brexit and face an election. All sides face risks in throwing Brexit back to the voters, although the EU’s position is easiest to comprehend. Defeat for Mr Johnson means a second referendum on a deal more to Europe’s liking. A win does mean a hardline government able to exit without a deal. But, at that point, the EU can still choose to re-engage with his ideas. But the UK’s Leavers and Remainers face a contest in which one side is to lose utterly. Having finally finagled his way into Number 10, Mr Johnson could become the shortest-serving leader in British history. The polls give him hope and he has worked hard to pin the blame for any delay to his supposedly inviolate October 31 Brexit deadline on his parliamentary adversaries. Yet Mr Johnson has two major problems. The first is that he is energising the Remain vote against him. The second is Nigel Farage’s Brexit party. Fear of them will force Mr Johnson into a more hardline campaign since he dare not let the Leave vote splinter. Mr Farage knows that if he splits the Leave vote he risks a Remain victory. Perhaps the Tories will squeeze his vote or perhaps he can take support from Labour in a way that delivers seats to the Conservatives. But he knows Remainers are praying he will stand. As the person who did more than anyone to secure Brexit, is he ready to risk being the man whose vanity kills it? His party insists it doesn’t mind splitting the vote as it is unafraid of a second referendum. “We’ll win bigger,” says chairman Richard Tice. This may be a miscalculation. The terms of that referendum would be set by a new, non-Conservative government. No deal will not be on the ballot paper; the choice will be between Remain and a new deal that keeps the UK in a customs union and closely aligned to the single market. The vote will be extended to 16-year-olds. Even if Remain loses, this Brexit will be a long way from Mr Johnson’s. Brexiters may wail at the lack of a no-deal option and threaten a boycott. They will vow to fight on but they should be clear that the most likely outcome of a Tory defeat is the end of Brexit. No wonder the EU is ready to roll the dice. For the same reason, Remainers welcome the chance to avert Brexit. But the price is a Corbyn government, which is also why they cannot be too confident. Surely, some argue, defeat for Mr Johnson need not mean a Jeremy Corbyn premiership? The Labour leader is miles behind in the polls. His Brexit policy is incoherent. The Scottish National party will mop up in Scotland and the Liberal Democrats will make inroads in England. Labour is unlikely to win outright. The party’s best case scenario is a Labour led-coalition , in which case the smaller parties can demand a different leader as the price of power. Perhaps. The SNP has already shown its readiness to put Mr Corbyn into power; the Welsh nationalists and Greens will follow suit. There is no reason to doubt Lib Dem leader Jo Swinson’s contempt for Mr Corbyn or her promise not to put him in power. But if the alternative is Mr Johnson, she will be forced to acquiesce, at least, to not voting down a Labour-led coalition. (While Labour could do so badly as to make Mr Corbyn vulnerable, that probably means the Tories have won). Recommended FT Podcast Boris’ big Brexit proposal and are the Tories ready for an election? This is not an argument against voting for the Lib Dems. A large Lib Dem bloc could be a vital brake on any Labour-led administration. But some realism is necessary. Unless the party hits around 25 per cent in the polls, a good election night is 50 to 70 MPs. That is not enough to be anything more than a kingmaker. This is the miserable truth. We can all play all the fantasy politics, constructing scenarios in which a different, moderate Labour leader emerges. But it is most likely to stay a fantasy. Even in the increasingly weird world of Westminster, the chances of a result that both stops Brexit and prevents a Corbyn premiership are achingly slim. This, then, is the squeeze the two big parties will attempt. Without signs of a Lib Dem earthquake, Remain voters will be pulled to Labour, which at least offers a referendum. Stopping Brexit means defeating the Tories and, in most seats, Labour is the alternative. If they don’t want Mr Corbyn, they will have to swallow Brexit and hope a victorious Mr Johnson seeks a deal. It is hard to think of a less enviable electoral choice. But it is the choice. It is the choice for Mr Farage. It is the choice for the Lib Dems and it is the choice for Britain’s benighted voters.
Repo Market
The Federal Reserve will soon resume purchases of short-term US Treasury bonds to expand its balance sheet in hopes of preventing a repeat of the recent disruption in overnight “repo” markets, chairman Jay Powell said on Tuesday. Speaking in Denver, Mr Powell said the action differed from the crisis-era programme known as quantitative easing, or QE, because it was intended to facilitate short-term lending rather than to stimulate the US economy. “I want to emphasise that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programmes that we deployed after the financial crisis,” he told the National Association of Business Economists. Mr Powell also appeared to confirm market expectations of a 25 basis-point cut in US interest rates at the Federal Open Market Committee’s October 29-30 meeting to add further insurance against uncertainty over “trade, Brexit and other issues”. This was the only sustainable and permanent solution Priya Misra, head of global rates strategy at TD Securities “We will act as appropriate to support continued growth, a strong job market and inflation moving back to our symmetric 2 per cent objective,” he said. The Fed’s preferred inflation measure currently sits at 1.8 per cent, and has been at or below the US central bank’s target for most of the recovery. With the word “symmetric”, Mr Powell downplayed the risk of overshooting the Fed’s target. In recent weeks, the Federal Reserve Bank of New York has injected billions of cash reserves into short-term lending markets to ease the pressures that bubbled up in September and sent the cost of borrowing cash overnight via repurchase, or repo, agreements as high as 10 per cent. Those measures have brought the so-called repo rate back within a normal range — about 1.8 per cent — but strategists say such pressures could crop up again without a more permanent fix. “This was the only sustainable and permanent solution,” said Priya Misra, head of global rates strategy at TD Securities. “The risk is that this gets miscommunicated as QE. Operationally it will look a lot like QE, but it is not.” Mr Powell reflected such concerns when he took questions after his speech. “Not QE,” he said. “Did I mention that?” When the Fed buys Treasuries to expand its balance sheet, it credits banks with an equal amount of reserves. For banks those reserves are the most liquid and reliable kind of dollar-denominated assets — like deposits in a cheque account. After the Fed began shrinking its balance sheet in 2018, reserves dropped, too. Policymakers had expected that banks still holding large amounts of reserves would lend them overnight into repo markets, keeping short-term interest rates low. But that did not happen when the repo rate rose in September. “It can be that reserves are just kind of less . . . flexible in the markets than we had anticipated,” Mr Powell said. Without enough reserves in the banking system, even normal, predictable demand for reserves, such as when corporations need cash to pay taxes, can “lead to outsized movements in money market interest rates”, Mr Powell said. “This volatility can impede the effective implementation of monetary policy, and we are addressing it,” he added. “Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.” Mr Powell did not offer details on the level of reserves the Fed would add to avoid market disruptions. “We think that level [of reserves] might be at or maybe a bit above where we were in early September,” he said. “We think that all of this is still uncertain. We’re still learning.” In the first week of September, banks held $1.34tn in reserves at the Fed. That level has since dropped to $1.26tn. “What we don’t have here is the exact size [of the asset purchases], and that is what I’m concerned about going into the FOMC meeting,” said Subadra Rajappa, head of US rate strategy at Société Générale. “The concern here is that when the dust settles people may start to ever so slightly price this in as more accommodative monetary policy.” Ms Rajappa said the bond market “took chair Powell’s comments at face value”. Yields on two-year Treasury bills fell 4bp to 1.42 per cent, indicating a rise in price. Meanwhile, the 10-year Treasury yield climbed 3bp to 1.52 per cent. Recommended Federal Reserve Bank of New York NY Fed rejects Wall St criticism of response to repo turmoil Mr Powell has said the Fed would consider resuming “organic” expansion of its balance sheet — meaning buying enough assets to maintain the level of reserves as other liabilities on its balance sheet, such as physical currency or deposits from the Treasury, grow. Physical currency grows at about $50bn every six months. Deposits from the Treasury expand irregularly. In the first half of 2018, they grew by $140bn. In the first half of 2019, they shrank by $30bn. “As we indicated in our March statement on balance sheet normalisation, at some point we will begin increasing our securities holdings to maintain an appropriate level of reserves,” Mr Powell said. “That time is now upon us.” Strategists have warned that “organic” expansion of the balance sheet may not add reserves fast enough to return short-term funding markets to their normal functioning, making the case instead for the Fed to buy anywhere from $200bn to more than $300bn of shorter-dated Treasury bills over the next six months
Tory no deal party
At least 50 Conservative MPs would revolt against a general election manifesto that pledged to pursue a no-deal Brexit, according to two members of the government. Scores of Tory MPs oppose the idea and some are considering running on a softer individual Brexit platform or even standing aside as a Conservative candidate. One minister predicted that “at least 50 colleagues could not back no-deal, including several in the cabinet”. Another said: “So much depends on the language but for me there has to be at least a nod to getting a deal.” Those MPs who would find a manifesto containing a purely no-deal Brexit policy problematic to support include culture secretary Nicky Morgan, justice secretary Robert Buckland and Northern Ireland secretary Julian Smith. Culture secretary Nicky Morgan is one of those who would find a no-deal Brexit policy problematic © Isabel Infantes/AFP Damian Green, leader of the One Nation caucus of approximately 60 moderate Tory MPs, is due to lead a delegation to meet Boris Johnson on Wednesday. They are expected to tell the prime mister they cannot support a manifesto based on pursuing a no deal Brexit. The disquiet in the Tory ranks comes as talks with the EU appear on the verge of collapse. Without a new Brexit deal, Mr Johnson is expected reluctantly to seek a delay to Brexit, precipitating a general election. I would write in my own election address that I will back a deal to leave the EU. I’m pretty sure that dozens more will do the same Member of Johnson government The notion that the Tories could run on an exclusively no-deal platform was raised by a Downing Street official who told The Spectator magazine that if Mr Johnson’s efforts to strike a new deal failed, they would have to back the hardest of Brexits in order to win over voters who might otherwise back Nigel Farage’s Brexit party. “To marginalise the Brexit party, we will have to fight the election on the basis of ‘no more delays, get Brexit done immediately’,” the official said. “We will focus on winning the election on a manifesto of immediately revoking the entire EU legal order without further talks, and then we will leave.” One member of Mr Johnson’s government told the Financial Times: “I would write in my own election address that I will back a deal to leave the EU. I’m pretty sure that dozens more will do the same.” The MP said it would be “lunacy” to endorse the idea of no-deal as a “desired outcome”, adding: “You would have to be without an understanding of basic British electoral politics to see how that could lose you many votes in a general election once Labour started pointing out all the obvious problems.” One senior Tory MP said: “There’s simply no way I am standing on a manifesto promoting no-deal. It would be madness. Tonnes of colleagues feel the same way. I’d have to run on my own manifesto or not stand at all. The idea we can out-Brexit the Brexit party is ludicrous.” Officials working on election planning believe that if an election was held after another Brexit delay, the party may have no choice but to back no-deal in order to counter the threat of the Brexit party. Strategists believe that Mr Farage’s party would receive a bounce of at least five points if Mr Johnson failed to take the UK out of the EU on October 31. Recommended Martin Wolf Brexit is a journey without end Mr Farage has said he would stand candidates down at an election only if Mr Johnson explicitly backed a no-deal exit. His party has otherwise pledged to run in all 650 parliamentary constituencies, even if it risks splitting the pro-Brexit vote and hands victory to Labour or Liberal Democrat candidates. Some Tories, however, do not believe Mr Johnson would agree to an exclusive no-deal manifesto. “Boris wouldn’t go down that route as it would split the party,” said one MP. Another Johnson ally predicted the manifesto would “ultimately look like our 2017 pledge: we’ll back a deal but would be happy to go for no-deal if the EU don’t give way”. One Tory strategist said Mr Johnson might end up splitting the difference. “They have to include no-deal, but to rule out a deal won’t cut it either with around 50 MPs. Making it a no-deal election versus Corbyn will produce some mad outcomes.”
Irish blame game
Boris Johnson on Tuesday urged Leo Varadkar to keep faith with talks on a possible Brexit deal, despite Downing Street fears that the prospects for an agreement before October 31 are all but dead. Mr Johnson’s allies said the British prime minister would meet the taoiseach later in the week to try to resuscitate the talks, after a day of acrimony in which Number 10 aides accused Mr Varadkar and Angela Merkel of blocking a deal. Donald Tusk, European Council president, retaliated by accusing Mr Johnson of engaging in a “stupid blame game”, but both sides seemed determined on Tuesday night to cool tempers and avoid a complete breakdown. Mr Johnson’s team described a 40-minute telephone call with Mr Varadkar as “constructive” and said they expected the prime minister to meet his Irish counterpart on Thursday or Friday for more talks. “Both sides strongly reiterated their desire to reach a Brexit deal,” a Downing Street spokesman said. But the Irish leader later on TV pointed to the difficulty of securing an agreement by next week’s EU summit. Recommended The FT View The editorial board Johnson’s Brexit blame game is a dangerous step Each camp remains far apart on the key issue of how to handle the Irish border, with tensions fuelled by what Downing Street called a “frank” 30-minute phone call between Mr Johnson and Ms Merkel. Mr Johnson’s aides claimed Ms Merkel argued that Northern Ireland would have to remain in the EU customs union under any Brexit deal in order to avoid a hard border. Mr Johnson has insisted that the region must stay in the UK customs territory. “Merkel said that if Germany wanted to leave the EU, they could do it no problem, but the UK cannot leave without leaving Northern Ireland behind in a customs union and in full alignment forever,” said a Downing Street insider. “The call with Merkel showed the EU has adopted a new position. She made clear a deal is overwhelmingly unlikely and she thinks the EU has a veto on us leaving the customs union.” Sterling slipped to its lowest level against the euro for a month. The Downing Street account caused outrage among Ms Merkel’s supporters. “Johnson is misusing the phone conversation to start a blame game,” said Norbert Röttgen, a senior MP in the chancellor’s CDU/CSU group. © Twitter There is pessimism in Brussels and London about the prospects of a deal by October 31, let alone by the time of the EU summit. Talk in Brussels is turning to an extension of the Brexit process — something Mr Johnson has vowed cannot happen. Mr Johnson’s allies have not confirmed that the prime minister will definitely attend the October 17-18 summit, especially if it turns into a discussion about the terms and length of any extension to the Article 50 exit process. Mr Varadkar told Irish broadcaster RTE on Wednesday night that there were still “big gaps” over customs and the question of Northern Irish consent for the all-Ireland regulatory zone. “It’s going to be very difficult to secure an agreement by next week, quite frankly,” Ireland’s premier said. “Essentially what the UK have done is repudiate the deal that we negotiated in good faith with prime minister May’s government over two years and have sort of put half of that now back on the table and are saying that’s a concession — and of course it isn’t really.” The Irish leader said there were “quite wide differences” over customs, adding that the question was “extremely difficult” to settle. Dublin very much wanted a deal “but not at any cost,” he added. Ireland respected the UK referendum result but the British government had made commitments in relation to the border and the all-island economy “and it’s my job to hold them to those commitments.” With talks on the verge of collapse, an unnamed Number 10 source wrote a remarkable note in which they claimed Britain would punish EU member states if they agreed to extend the Article 50 exit process. Mr Johnson’s aides fear that the EU will decide to push the prime minister into seeking a delay to Brexit, precipitating a general election and possibly a second referendum, with the possible result that Brexit is reversed. A note published by The Spectator — attributed to a “contact in Number 10” and not disowned by Downing Street — said there was a threat that any EU member state that agreed to delay Brexit would be guilty of “hostile” interference in British politics. The note suggested that Britain might withhold co-operation with countries that pushed the UK into a Brexit extension, with security and defence cited as possible examples. “Those who support delay will go to the bottom of the queue,” the note said. Recommended Brexit Brussels plays for time as UK goes on the attack The combative language led many Tory MPs to conclude the note came from Mr Johnson’s senior adviser Dominic Cummings and it led to cabinet ministers urging the prime minister to rein in his consigliere. “I am clear that any threat on withdrawing security co-operation with Ireland is unacceptable,” tweeted Julian Smith, Northern Ireland secretary. “This is not in the interest of NI or the Union.” Nicky Morgan, culture secretary, complained to Mr Johnson that it was wrong that the government’s position was relayed to a weekly magazine before cabinet. The prime minister replied that he spoke for the government, not anonymous advisers. The note published by the Spectator also accused Mr Varadkar of “going back on his commitments” to negotiate seriously if Mr Johnson agreed to keep Northern Ireland in the EU regulatory zone. “Varadkar thinks that either there will be a referendum or we win a majority but we will just put this offer back on the table so he thinks he can’t lose by refusing to compromise now,” the note said.
Monetary policy
Before the end of the year, Britain is set to have an election, a Budget and a new fiscal framework. I have argued that the nation can afford to relax the current rules pledging to lower the burden of public debt in normal times so long as extra investment is subject to expert scrutiny. But we also need to think about rewriting the UK’s rules for times of economic pain. As the Resolution Foundation has recently reasoned, with interest rates close to zero, monetary tools to stimulate the economy no longer have much power and relying on these alone “risks a deeper, more prolonged and more painful recession than is necessary”. Fiscal policy should play a new and explicit role when the next recession comes. The problem is in designing a sensible new framework using fiscal tools that preserves the UK’s coherent separation of economic powers. This gives the Bank of England operational independence to damp booms and busts, leaves tax and expenditure decisions with elected representatives and tasks the Office for Budget Responsibility with reporting on the sustainability of the public finances and ensuring forecasts stay honest. Currently, the government’s Charter for Budget Responsibility says the Treasury can review its fiscal rules “in the event of a significant negative shock to the UK economy”. The Labour party proposed a fiscal credibility rule in 2017 that can be suspended on the say so of the Bank of England’s Monetary Policy Committee. Both fall short. The government’s trigger for action is ill-defined, while Labour’s relies on MPC members voting themselves out of a job. Both say nothing about what happens next. Drawing on the work of Adair Turner, former head of the Financial Services Authority, and academics Jonathan Portes and Simon Wren-Lewis, it is possible to sketch out a blueprint for a new framework that includes an explicit role for discretionary fiscal stimulus. The solution is to devolve to the MPC both the decision to use fiscal policy in a downturn and to let the committee determine the required amount of fiscal stimulus. That way the operationally independent BoE would retain its role as the body that smooths the economic cycle and keeps inflation on track. But the MPC should not implement the fiscal stimulus, leaving that task to the chancellor, who would effectively be given a temporary budget to spend in a timely manner. Since it would be madness to link public sector pay or vital infrastructure spending to the vagaries of the economic cycle, the tools at the chancellor’s disposal should be temporary tax cuts. As far as possible, the tax measures should encourage domestic spending, so the best fiscal levers to pull are value added tax on services and rebates of council tax. The former would be highly concentrated on domestic demand, while the latter would use the inherently regressive nature of council tax to channel additional spending power disproportionately to poorer households. The OBR’s role would be unchanged. It would produce independent forecasts that guarded against over-optimism either from the Treasury or the BoE. It would also continue to report on the sustainability of the public finances in a world where fiscal levers are used for stabilisation. With deficits likely to be larger in downturns, these reports should prompt the government to plan larger surpluses in normal times so it can maintain a balanced current budget over the whole cycle. Implementing a new fiscal and monetary framework along these lines would benefit from cross-party support. There is nothing in these proposals that would prevent political parties having very different attitudes towards prudence in the public finances, and the levels of taxation and public spending. So, with sufficient will, it could be done. Even better, progress along these lines would show that despite Brexit woes, there are areas in which Britain can still lead the world.
Scottish Lawsuit
Boris Johnson cannot be trusted to follow through on assurances that he will abide by a law that could force the UK prime minister to seek a delay to Brexit, Scotland’s highest court was told on Tuesday. Aidan O’Neill, QC, said Edinburgh’s Court of Session should be ready to use its “nobile officium” power to have a court official sign the letter asking for an extension on Mr Johnson’s behalf if the UK prime minister fails to do so. The so-called Benn Act, passed last month, requires the prime minister to seek a delay to Brexit, currently scheduled for October 31, if he has not secured parliamentary approval for a withdrawal agreement or a no-deal departure by October 19. The prime minister and his advisers and officials were intentionally sending “contradictory messages” in what appeared to be an effort to “sabotage” the Benn Act, Mr O’Neill said. “This is serious, this is calculated, this is workshopped, focus-grouped, war-gamed,” he said. The request for the Edinburgh court to act to ensure compliance with the Benn Act has been brought by environmentalist Dale Vince, anti-Brexit legal campaigner Jolyon Maugham QC and Scottish National party MP Joanna Cherry. The Court of Session’s lower Outer House on Monday rejected their request that it force Mr Johnson to comply with the act, saying assurances made to the court on the prime minister’s behalf showed his “clear and unequivocal” intention to do so. Tuesday’s hearing at the higher Inner House included an appeal of the Monday decision and a separate request for the court to use its “nobile officium” power. Mr Johnson has repeatedly said he would refuse to ask for an extension and continued at the weekend to insist the UK would leave the bloc on October 31, without agreement if necessary. Mr O’Neill cited an extraordinary note published by the Spectator magazine on Monday, attributed to a “contact in Number 10” as one of a number of reports suggesting Mr Johnson might seek to frustrate the Benn Act. The Spectator said Downing Street believed “our legal advice is clear that we can do all sorts of things to scupper delay”. The note, which many at Westminster assume came from Mr Johnson’s senior adviser Dominic Cummings, also says any EU member state that agrees to delay Brexit would be guilty of “hostile” interference in British politics. It says Mr Johnson would retaliate, a threat that appears intended to dissuade the EU from agreeing an Article 50 extension even if it is requested by the prime minister or on his behalf. Acting for the UK government, Andrew Webster QC said the assurances given to the court that the prime minister would not seek to frustrate the Benn Act carried “significant weight which the court should rely on”. Mr Webster said “no weight” should be put on unattributed statements about the prime minister’s intentions. While the petitioners cited statements by the prime minister and other ministers suggesting he would not sign a request for Brexit delay, other statements could be found confirming they would comply with the law, he said. Lord Carloway, lord president of the Court of Session, suggested during the hearing that the whole case could be put on hold until after October 19, when it would be clear if the prime minister had complied with the Benn Act. Mr Maugham said he expected the case to be stayed until October 21, adding the court was understandably trying to avoid a “destructive clash” between the government and the rule of law. Lord Carloway said the court would announce its decision at 11am on Wednesday. Meanwhile, The Independent Workers’ Union of Great Britain, which represents gig economy workers, has asked the High Court of England and Wales for an injunction forcing Mr Johnson to comply with the Benn Act. Jason Moyer-Lee, the IWGB’s general secretary, said EU law had been “crucial” in helping low-paid workers to fight exploitative bosses. “In a no-deal Brexit, Tory Brexiteers will have free rein to water down employment rights and workers will lose access to the European Court and the Charter of Fundamental Rights, which the IWGB has relied on to defend its members,” he said. The union was bringing the case because it would do “everything possible” to defend its members’ rights, he added. No date has been set for a hearing on the IWGB’s application.
Merkel Blame game
Boris Johnson, who vowed to deliver Brexit on October 31 “do or die”, was always going to need somebody to blame if Halloween passed and Britain remained a member of the EU. On Tuesday he found a new scapegoat: Angela Merkel. At 8am the UK prime minister held a “clarifying” phone call with the German chancellor at which it supposedly became obvious the EU would not strike a Brexit deal on terms acceptable to Mr Johnson — not at a key European leaders’ summit next week, perhaps never. Ms Merkel apparently objected to Mr Johnson’s new proposal to overhaul the UK’s withdrawal agreement with the EU by no longer including Northern Ireland in a customs union with the bloc. By midday Mr Johnson’s allies had unleashed a blame game, claiming the EU and a Remainer parliament were forcing Britain to stay in the bloc against its will beyond October 31. While the blame was being spread widely, one unnamed ally of Mr Johnson — widely assumed at Westminster to be his chief adviser Dominic Cummings — dispensed dark warnings of retaliation against the EU over its intransigence. Although David Frost, Mr Johnson’s chief Brexit negotiator, was in Brussels for talks about the prime minister’s plan for a revised withdrawal agreement, Downing Street officials were busy framing what will be a brutal “people versus the establishment” Tory general election campaign. Amber Rudd, the former Conservative cabinet minister, said the message coming out of Number 10 was “angry and desperate”, reflecting the fact that Mr Cummings’ “shock and awe” Brexit strategy was falling apart. Mr Cummings argued from the start that unless the EU believed that October 31 was a “real” deadline for Brexit — with the UK leaving on Halloween, with or without an agreement — then Ms Merkel and other European leaders would simply reject Mr Johnson’s departure terms and instead offer a delay that would enable an election. A “rebel alliance” of MPs at Westminster derailed that strategy by last month passing a law that seeks to prevent a no-deal Brexit on October 31. In Brussels there is a clear conviction that the so-called Benn act is watertight and the prime minister will be obliged to seek an extension to the Article 50 divorce process if no withdrawal agreement is in place by October 19. Although Mr Johnson’s allies have suggested increasingly fanciful devices by which the government might “cheat” the Benn act, there is a growing acceptance that the prime minister will ultimately have to obey the law and that an election will follow. Mr Cummings feared that the EU would conclude — incorrectly in his opinion — that the worst that could happen in an election would be that Mr Johnson would win and he would come back with the same Brexit proposal. In the best outcome for the EU, especially from Ireland’s point of view, Mr Johnson would be ousted by a coalition of Labour, the Liberal Democrats and the Scottish National party, who would hold a second referendum, possibly reversing Brexit. Those who pushed the Benn act intended to sabotage a deal and they’ve probably succeeded Downing Street insider The outpouring of threats from Number 10 in recent days are all part of a last-ditch attempt by Mr Cummings and his team to persuade the EU not to make this “historic mistake”. Mr Cummings believes that while Mr Johnson is making a constructive offer to the EU now, if he is forced into election before the UK has left the bloc, he will fight on a no-deal Brexit platform. “Those who pushed the Benn act intended to sabotage a deal and they’ve probably succeeded,” said one unnamed Downing Street insider to the Spectator magazine. “So the main effect of it will probably be to help us win an election by uniting the Leave vote and then a no-deal Brexit. History is full of such ironies and tragedies.” The same Number 10 insider also warned that Britain would be a toxic partner if the EU insists on keeping it in the 28-member bloc against its will and that the principle of good co-operation between the two sides would be “in the toilet”. The aggressive briefing is partly intended to precipitate a crisis in Brussels to persuade the EU at the last minute that if it does not engage with Mr Johnson’s Brexit proposal, the result will be dire for both sides. Mr Johnson genuinely wants a Brexit deal before October 31. If he is forced to fight an election on the back of a fresh Brexit delay, the Conservatives will face a serious threat from Nigel Farage’s Brexit party and the pro-Remain Liberal Democrats. But there is little sign of the EU wanting to help him out to finalise a Brexit deal. The EU, as Mr Cummings foresaw, is expected to insist in any negotiations that Northern Ireland must stay in the bloc’s customs union to avoid the return to a hard Irish border. That is a red line that Mr Johnson will refuse to cross, after he rejected the so-called backstop in his predecessor Theresa May’s withdrawal agreement with the EU that retained a customs union between the UK and the bloc to avert a hard border. He instead proposed creating a customs border between Northern Ireland and the Irish Republic. Placing Northern Ireland in a customs union with the EU would be unacceptable to many hardline Eurosceptic Conservative MPs as well as the region’s Democratic Unionist party, whose support Mr Johnson could need to get a Brexit deal through parliament. Arlene Foster, DUP leader, said on Tuesday: “For the United Kingdom to be asked to leave a part of its sovereign territory in a foreign organisation of which the UK would no longer be a part and over which we would have no say whatsoever is beyond crazy. No UK government could ever concede such a surrender.” Mr Johnson still hopes that the EU will compromise at the last minute. But if it does not, his team is already on an election footing, ready to blame Ms Merkel, Brussels and parliament if Britain is still in the EU on November 1.
Dollar Reserves and political risk
The US dollar has long towered over global markets and finance. But cracks are starting to appear in the edifice.
The greenback’s pre-eminent role in official funds and international trade is formidable and unlikely to fade quickly. But the latest data from the IMF on central banks’ reserves show a subtle shift away from the dollar that analysts say could signal a rethink on the political risk embedded into US assets.
“Central banks [are] chipping away at the dollar’s ‘exorbitant privilege’,” said Alan Ruskin, chief international strategist at Deutsche Bank in New York. “Politics are starting to infringe in ways that have the potential to challenge the dollar’s dominance.”
In last month’s quarterly report on central banks’ reserves, the IMF said that the share of the global total denominated in dollars was just short of 62 per cent in the second quarter of this year, down 0.76 percentage points from the same period a year earlier. Euro-denominated reserves account for 20 per cent.
While the dip is small, the apparent resilience is deceptive. As Mr Ruskin pointed out, the dollar was, during that quarter, the highest-yielding currency in the developed world. In theory, that should have lured in investment at a faster pace than other currencies.
Instead, central bank reserve managers — a powerful force in global markets — accumulated 3.5 per cent more dollars over the year, far behind gains of 17 per cent for the renminbi and even 8 per cent for sterling, despite the pound’s Brexit-related troubles.
The dollar’s falling share of reserves represents an “official sector vote against US ‘exceptionalism’”, said Mr Ruskin. In his view, the data should give pause to US policymakers contemplating laws to tax foreign purchases of US assets, further sanctions based on the international use of the dollar and plans to restrict access to US capital markets. All are actions that could weaken the dollar’s influence.
Mark Carney, governor of the Bank of England, warned policymakers in August that as well as being the dominant currency for invoicing and settling international trade, two-thirds of global securities issuance and official currency reserves are denominated in the dollar. This makes economic developments in the US the key driver for monetary policy elsewhere, particularly in emerging markets.
In the long run, central banks should move to a “multipolar” economic system, Mr Carney said, adding that “the renminbi has a long way to go before it is ready to assume the mantle [but] the initial building blocks are there”.
Goldman Sachs analysts said that dollar reserves slipped nearly four percentage points over 2017 and 2018. At the same time, reserve managers have continued to add to their renminbi and Japanese yen holdings, especially in countries that have had a fractious political relationship with the US.
“So far, these flows have been fairly concentrated. Russia accounted for about 70 per cent of new renminbi reserves in 2018, and Brazil and Chile account for about 40 per cent of renminbi reserve accumulation in 2019,” said Mike Cahill, an economist at Goldman Sachs in London.
The US has increasingly used the dollar’s dominance to further its foreign and trade policies. In response, ideas such as invoicing some of the world’s oil trade in the euro are getting more traction.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, suggested in a speech earlier this year that moving oil trading and settlement into the euro and away from dollars “could limit the reach of US foreign policy insofar as it leverages dollar payments”.
Russia has also been making focused efforts over the past five years to move away from the greenback as the currency for trade and payments, and to reduce the impact of dollar strength on its economy.
But central banks face a tough choice. Neither the euro nor the renminbi have the deep liquidity that dollar markets offer. Yields on eurozone government bonds are deeply negative while the renminbi remains tightly controlled by the Chinese government, in spite of recent liberalisation efforts.
Some reserve managers have turned to gold. A report for the World Gold Council and think-tank OMFIF in September highlighted that central banks have been buying the yellow metal at levels last seen during the Bretton Woods era, when exchange rates were pegged to gold.
China, Russia and India were the largest buyers of gold alongside Turkey and Kazakhstan. China alone has added almost 100 tonnes of gold to its reserves over the past 10 months.
“When you look at it on a one- to two-year outlook, it is highly unlikely that any asset could usurp the dollar’s dominance. But when you’re talking about a decade or two, you have to take other considerations into account,” Mr Ruskin said.
In 1933, Joseph Goebbels stated that, “The modern structure of the German State is a higher form of democracy in which, by virtue of the people’s mandate, the government is exercised authoritatively while there is no possibility for parliamentary interference, to obliterate and render ineffective the execution of the nation’s will.” It is a measure of how far the UK has fallen that Boris Johnson, the prime minister, often sounds rather like this. Mr Johnson sought to prevent “parliamentary interference” in Brexit negotiations, by proroguing (or suspending) it for five crucial weeks. He dissented from the Supreme Court’s unanimous decision that this was unlawful. He has suggested he could ignore the Benn Act requiring him to seek an extension to the Article 50 deadline, should he not achieve a deal. He condemned this legislation as the “surrender act”. Worst of all, he plans to frame the next election as a battle of “people versus parliament”. How did the UK reach a position in which its prime minister regards parliament as an obstacle to be ignored? The simple answer is that it decided to insert a particularly ill-considered referendum on an exceptionally contentious subject into a parliamentary system. This created conflicting sources of legitimacy. Worse, the meaning of the option that won a small majority in that referendum was ill-defined. “Brexit means Brexit” is perhaps the silliest sentence ever uttered by a British prime minister. But it was also all that could be said. Contrary to what Brexiters insist, parliamentary involvement is not an unwarranted intrusion. Any referendum requires legislation. This one also required negotiation and agreement. Alas, no majority exists for any option for a deal with the EU. Brexiters are as much to blame for this as Remainers. Consequently, “no deal” has emerged as the fallback position. But the Leave campaign said essentially nothing about a no-deal exit. There is no mandate for what every informed observer, including the civil service, knows would be a disruptive and costly result. It would also be just the beginning of negotiations, not their end. But those talks would occur in worse circumstances. There would be pervasive economic uncertainty. This would be a mad choice. Governments exist to help their countries, not harm them deliberately. Among the most important reasons for this outcome is the refusal, especially on the Brexit side, to try to understand the EU. They needed to comprehend that the EU is an existential project for its members, not just a trade deal. Application of European law, under the European Court of Justice, is a central part of that project. The EU, with 27 remaining members, was also sure to be an inflexible counterparty. What next? The government’s Heath Robinson-esque plan, in which Northern Ireland is to be inside the EU’s regulatory system for goods but not its customs area, will be rejected as leaky, legally unenforceable and incompatible with border-free trade in Ireland. It also represents a rejection of the UK’s 2017 commitments on the Irish border. This is sure to have further weakened trust in Britain’s reliability. Remember, too, that the EU has long land borders. It will not allow the precedent of intentionally porous borders. Some believe this plan ought to fly with the EU. It will not. If Northern Ireland were inside the EU’s customs area, too, it could work. But, if the rest of the UK is to have its own trade and regulatory policies, this would make the Irish Sea the UK’s customs and regulatory border with the EU. That would be unacceptable to the Democratic Unionist party and the Conservatives. It might reignite violence in Northern Ireland. So what happens if no deal can be agreed before October 31? One question is whether the EU agrees to another extension when the British government clearly does not want one. Assume that it does, but only with conditions. What might those be? One possibility would be to try to ratify Theresa May’s withdrawal agreement. That would allow the UK and the EU to move on to negotiating a new relationship. This would also mean a compromise between Brexiters and Remainers, itself highly desirable. But it seems impossible. For Remainers, it is too little; for Brexiters, it is too much. Remainers want to stay in the EU. Brexiters reject the Irish backstop that would keep the UK in the EU’s customs area and restrict its trade policy indefinitely. A second possibility is another referendum, probably on a choice between no deal and Remain. Such a vote should be legitimate since no deal played so little part in the referendum. But it would require creation of a caretaker government. That would be hard enough to do. It might also be impossible to agree a question and then carry out a referendum, without large-scale violence. To me, another referendum is the least bad option. But it creates great risks. Finally, there could be an early general election. A drawback is that this would involve many issues apart from Brexit and might lead to another hung parliament. With Mr Johnson campaigning against parliament, it could have dire consequences in both the short and long runs. But it might resolve the Brexit issue, temporarily. Yet the issue now is not just Brexit. It is far deeper. The Conservative party has become an English nationalist party, busily stoking populist resentment. Meanwhile, the hard left has seized the Labour party. The curse of extremist politics has only just begun. Once people see opponents as “traitors” to an imaginary “people”, demons of hatred are unleashed. Brexit awoke those demons. Mr Johnson, aided by Nigel Farage and his Brexit party, will seek to win by freeing them. They are sure to wreak havoc for a very long time.
Corbyn Shrimsley
It’s Brexit or Corbyn. Strip away all the what-ifs and new paradigms. As the UK and EU snowball towards one last grim Brexit gamble all sides need to recognise this fundamental choice. This is not a roulette wheel with multiple outcomes. It is a final coin toss. Heads you win; tails we lose. The EU’s likely rejection of Boris Johnson’s plan will leave the prime minister forced to delay Brexit and face an election. All sides face risks in throwing Brexit back to the voters, although the EU’s position is easiest to comprehend. Defeat for Mr Johnson means a second referendum on a deal more to Europe’s liking. A win does mean a hardline government able to exit without a deal. But, at that point, the EU can still choose to re-engage with his ideas. But the UK’s Leavers and Remainers face a contest in which one side is to lose utterly. Having finally finagled his way into Number 10, Mr Johnson could become the shortest-serving leader in British history. The polls give him hope and he has worked hard to pin the blame for any delay to his supposedly inviolate October 31 Brexit deadline on his parliamentary adversaries. Yet Mr Johnson has two major problems. The first is that he is energising the Remain vote against him. The second is Nigel Farage’s Brexit party. Fear of them will force Mr Johnson into a more hardline campaign since he dare not let the Leave vote splinter. Mr Farage knows that if he splits the Leave vote he risks a Remain victory. Perhaps the Tories will squeeze his vote or perhaps he can take support from Labour in a way that delivers seats to the Conservatives. But he knows Remainers are praying he will stand. As the person who did more than anyone to secure Brexit, is he ready to risk being the man whose vanity kills it? His party insists it doesn’t mind splitting the vote as it is unafraid of a second referendum. “We’ll win bigger,” says chairman Richard Tice. This may be a miscalculation. The terms of that referendum would be set by a new, non-Conservative government. No deal will not be on the ballot paper; the choice will be between Remain and a new deal that keeps the UK in a customs union and closely aligned to the single market. The vote will be extended to 16-year-olds. Even if Remain loses, this Brexit will be a long way from Mr Johnson’s. Brexiters may wail at the lack of a no-deal option and threaten a boycott. They will vow to fight on but they should be clear that the most likely outcome of a Tory defeat is the end of Brexit. No wonder the EU is ready to roll the dice. For the same reason, Remainers welcome the chance to avert Brexit. But the price is a Corbyn government, which is also why they cannot be too confident. Surely, some argue, defeat for Mr Johnson need not mean a Jeremy Corbyn premiership? The Labour leader is miles behind in the polls. His Brexit policy is incoherent. The Scottish National party will mop up in Scotland and the Liberal Democrats will make inroads in England. Labour is unlikely to win outright. The party’s best case scenario is a Labour led-coalition , in which case the smaller parties can demand a different leader as the price of power. Perhaps. The SNP has already shown its readiness to put Mr Corbyn into power; the Welsh nationalists and Greens will follow suit. There is no reason to doubt Lib Dem leader Jo Swinson’s contempt for Mr Corbyn or her promise not to put him in power. But if the alternative is Mr Johnson, she will be forced to acquiesce, at least, to not voting down a Labour-led coalition. (While Labour could do so badly as to make Mr Corbyn vulnerable, that probably means the Tories have won). Recommended FT Podcast Boris’ big Brexit proposal and are the Tories ready for an election? This is not an argument against voting for the Lib Dems. A large Lib Dem bloc could be a vital brake on any Labour-led administration. But some realism is necessary. Unless the party hits around 25 per cent in the polls, a good election night is 50 to 70 MPs. That is not enough to be anything more than a kingmaker. This is the miserable truth. We can all play all the fantasy politics, constructing scenarios in which a different, moderate Labour leader emerges. But it is most likely to stay a fantasy. Even in the increasingly weird world of Westminster, the chances of a result that both stops Brexit and prevents a Corbyn premiership are achingly slim. This, then, is the squeeze the two big parties will attempt. Without signs of a Lib Dem earthquake, Remain voters will be pulled to Labour, which at least offers a referendum. Stopping Brexit means defeating the Tories and, in most seats, Labour is the alternative. If they don’t want Mr Corbyn, they will have to swallow Brexit and hope a victorious Mr Johnson seeks a deal. It is hard to think of a less enviable electoral choice. But it is the choice. It is the choice for Mr Farage. It is the choice for the Lib Dems and it is the choice for Britain’s benighted voters.
Repo Market
The Federal Reserve will soon resume purchases of short-term US Treasury bonds to expand its balance sheet in hopes of preventing a repeat of the recent disruption in overnight “repo” markets, chairman Jay Powell said on Tuesday. Speaking in Denver, Mr Powell said the action differed from the crisis-era programme known as quantitative easing, or QE, because it was intended to facilitate short-term lending rather than to stimulate the US economy. “I want to emphasise that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programmes that we deployed after the financial crisis,” he told the National Association of Business Economists. Mr Powell also appeared to confirm market expectations of a 25 basis-point cut in US interest rates at the Federal Open Market Committee’s October 29-30 meeting to add further insurance against uncertainty over “trade, Brexit and other issues”. This was the only sustainable and permanent solution Priya Misra, head of global rates strategy at TD Securities “We will act as appropriate to support continued growth, a strong job market and inflation moving back to our symmetric 2 per cent objective,” he said. The Fed’s preferred inflation measure currently sits at 1.8 per cent, and has been at or below the US central bank’s target for most of the recovery. With the word “symmetric”, Mr Powell downplayed the risk of overshooting the Fed’s target. In recent weeks, the Federal Reserve Bank of New York has injected billions of cash reserves into short-term lending markets to ease the pressures that bubbled up in September and sent the cost of borrowing cash overnight via repurchase, or repo, agreements as high as 10 per cent. Those measures have brought the so-called repo rate back within a normal range — about 1.8 per cent — but strategists say such pressures could crop up again without a more permanent fix. “This was the only sustainable and permanent solution,” said Priya Misra, head of global rates strategy at TD Securities. “The risk is that this gets miscommunicated as QE. Operationally it will look a lot like QE, but it is not.” Mr Powell reflected such concerns when he took questions after his speech. “Not QE,” he said. “Did I mention that?” When the Fed buys Treasuries to expand its balance sheet, it credits banks with an equal amount of reserves. For banks those reserves are the most liquid and reliable kind of dollar-denominated assets — like deposits in a cheque account. After the Fed began shrinking its balance sheet in 2018, reserves dropped, too. Policymakers had expected that banks still holding large amounts of reserves would lend them overnight into repo markets, keeping short-term interest rates low. But that did not happen when the repo rate rose in September. “It can be that reserves are just kind of less . . . flexible in the markets than we had anticipated,” Mr Powell said. Without enough reserves in the banking system, even normal, predictable demand for reserves, such as when corporations need cash to pay taxes, can “lead to outsized movements in money market interest rates”, Mr Powell said. “This volatility can impede the effective implementation of monetary policy, and we are addressing it,” he added. “Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.” Mr Powell did not offer details on the level of reserves the Fed would add to avoid market disruptions. “We think that level [of reserves] might be at or maybe a bit above where we were in early September,” he said. “We think that all of this is still uncertain. We’re still learning.” In the first week of September, banks held $1.34tn in reserves at the Fed. That level has since dropped to $1.26tn. “What we don’t have here is the exact size [of the asset purchases], and that is what I’m concerned about going into the FOMC meeting,” said Subadra Rajappa, head of US rate strategy at Société Générale. “The concern here is that when the dust settles people may start to ever so slightly price this in as more accommodative monetary policy.” Ms Rajappa said the bond market “took chair Powell’s comments at face value”. Yields on two-year Treasury bills fell 4bp to 1.42 per cent, indicating a rise in price. Meanwhile, the 10-year Treasury yield climbed 3bp to 1.52 per cent. Recommended Federal Reserve Bank of New York NY Fed rejects Wall St criticism of response to repo turmoil Mr Powell has said the Fed would consider resuming “organic” expansion of its balance sheet — meaning buying enough assets to maintain the level of reserves as other liabilities on its balance sheet, such as physical currency or deposits from the Treasury, grow. Physical currency grows at about $50bn every six months. Deposits from the Treasury expand irregularly. In the first half of 2018, they grew by $140bn. In the first half of 2019, they shrank by $30bn. “As we indicated in our March statement on balance sheet normalisation, at some point we will begin increasing our securities holdings to maintain an appropriate level of reserves,” Mr Powell said. “That time is now upon us.” Strategists have warned that “organic” expansion of the balance sheet may not add reserves fast enough to return short-term funding markets to their normal functioning, making the case instead for the Fed to buy anywhere from $200bn to more than $300bn of shorter-dated Treasury bills over the next six months
Tory no deal party
At least 50 Conservative MPs would revolt against a general election manifesto that pledged to pursue a no-deal Brexit, according to two members of the government. Scores of Tory MPs oppose the idea and some are considering running on a softer individual Brexit platform or even standing aside as a Conservative candidate. One minister predicted that “at least 50 colleagues could not back no-deal, including several in the cabinet”. Another said: “So much depends on the language but for me there has to be at least a nod to getting a deal.” Those MPs who would find a manifesto containing a purely no-deal Brexit policy problematic to support include culture secretary Nicky Morgan, justice secretary Robert Buckland and Northern Ireland secretary Julian Smith. Culture secretary Nicky Morgan is one of those who would find a no-deal Brexit policy problematic © Isabel Infantes/AFP Damian Green, leader of the One Nation caucus of approximately 60 moderate Tory MPs, is due to lead a delegation to meet Boris Johnson on Wednesday. They are expected to tell the prime mister they cannot support a manifesto based on pursuing a no deal Brexit. The disquiet in the Tory ranks comes as talks with the EU appear on the verge of collapse. Without a new Brexit deal, Mr Johnson is expected reluctantly to seek a delay to Brexit, precipitating a general election. I would write in my own election address that I will back a deal to leave the EU. I’m pretty sure that dozens more will do the same Member of Johnson government The notion that the Tories could run on an exclusively no-deal platform was raised by a Downing Street official who told The Spectator magazine that if Mr Johnson’s efforts to strike a new deal failed, they would have to back the hardest of Brexits in order to win over voters who might otherwise back Nigel Farage’s Brexit party. “To marginalise the Brexit party, we will have to fight the election on the basis of ‘no more delays, get Brexit done immediately’,” the official said. “We will focus on winning the election on a manifesto of immediately revoking the entire EU legal order without further talks, and then we will leave.” One member of Mr Johnson’s government told the Financial Times: “I would write in my own election address that I will back a deal to leave the EU. I’m pretty sure that dozens more will do the same.” The MP said it would be “lunacy” to endorse the idea of no-deal as a “desired outcome”, adding: “You would have to be without an understanding of basic British electoral politics to see how that could lose you many votes in a general election once Labour started pointing out all the obvious problems.” One senior Tory MP said: “There’s simply no way I am standing on a manifesto promoting no-deal. It would be madness. Tonnes of colleagues feel the same way. I’d have to run on my own manifesto or not stand at all. The idea we can out-Brexit the Brexit party is ludicrous.” Officials working on election planning believe that if an election was held after another Brexit delay, the party may have no choice but to back no-deal in order to counter the threat of the Brexit party. Strategists believe that Mr Farage’s party would receive a bounce of at least five points if Mr Johnson failed to take the UK out of the EU on October 31. Recommended Martin Wolf Brexit is a journey without end Mr Farage has said he would stand candidates down at an election only if Mr Johnson explicitly backed a no-deal exit. His party has otherwise pledged to run in all 650 parliamentary constituencies, even if it risks splitting the pro-Brexit vote and hands victory to Labour or Liberal Democrat candidates. Some Tories, however, do not believe Mr Johnson would agree to an exclusive no-deal manifesto. “Boris wouldn’t go down that route as it would split the party,” said one MP. Another Johnson ally predicted the manifesto would “ultimately look like our 2017 pledge: we’ll back a deal but would be happy to go for no-deal if the EU don’t give way”. One Tory strategist said Mr Johnson might end up splitting the difference. “They have to include no-deal, but to rule out a deal won’t cut it either with around 50 MPs. Making it a no-deal election versus Corbyn will produce some mad outcomes.”
Irish blame game
Boris Johnson on Tuesday urged Leo Varadkar to keep faith with talks on a possible Brexit deal, despite Downing Street fears that the prospects for an agreement before October 31 are all but dead. Mr Johnson’s allies said the British prime minister would meet the taoiseach later in the week to try to resuscitate the talks, after a day of acrimony in which Number 10 aides accused Mr Varadkar and Angela Merkel of blocking a deal. Donald Tusk, European Council president, retaliated by accusing Mr Johnson of engaging in a “stupid blame game”, but both sides seemed determined on Tuesday night to cool tempers and avoid a complete breakdown. Mr Johnson’s team described a 40-minute telephone call with Mr Varadkar as “constructive” and said they expected the prime minister to meet his Irish counterpart on Thursday or Friday for more talks. “Both sides strongly reiterated their desire to reach a Brexit deal,” a Downing Street spokesman said. But the Irish leader later on TV pointed to the difficulty of securing an agreement by next week’s EU summit. Recommended The FT View The editorial board Johnson’s Brexit blame game is a dangerous step Each camp remains far apart on the key issue of how to handle the Irish border, with tensions fuelled by what Downing Street called a “frank” 30-minute phone call between Mr Johnson and Ms Merkel. Mr Johnson’s aides claimed Ms Merkel argued that Northern Ireland would have to remain in the EU customs union under any Brexit deal in order to avoid a hard border. Mr Johnson has insisted that the region must stay in the UK customs territory. “Merkel said that if Germany wanted to leave the EU, they could do it no problem, but the UK cannot leave without leaving Northern Ireland behind in a customs union and in full alignment forever,” said a Downing Street insider. “The call with Merkel showed the EU has adopted a new position. She made clear a deal is overwhelmingly unlikely and she thinks the EU has a veto on us leaving the customs union.” Sterling slipped to its lowest level against the euro for a month. The Downing Street account caused outrage among Ms Merkel’s supporters. “Johnson is misusing the phone conversation to start a blame game,” said Norbert Röttgen, a senior MP in the chancellor’s CDU/CSU group. © Twitter There is pessimism in Brussels and London about the prospects of a deal by October 31, let alone by the time of the EU summit. Talk in Brussels is turning to an extension of the Brexit process — something Mr Johnson has vowed cannot happen. Mr Johnson’s allies have not confirmed that the prime minister will definitely attend the October 17-18 summit, especially if it turns into a discussion about the terms and length of any extension to the Article 50 exit process. Mr Varadkar told Irish broadcaster RTE on Wednesday night that there were still “big gaps” over customs and the question of Northern Irish consent for the all-Ireland regulatory zone. “It’s going to be very difficult to secure an agreement by next week, quite frankly,” Ireland’s premier said. “Essentially what the UK have done is repudiate the deal that we negotiated in good faith with prime minister May’s government over two years and have sort of put half of that now back on the table and are saying that’s a concession — and of course it isn’t really.” The Irish leader said there were “quite wide differences” over customs, adding that the question was “extremely difficult” to settle. Dublin very much wanted a deal “but not at any cost,” he added. Ireland respected the UK referendum result but the British government had made commitments in relation to the border and the all-island economy “and it’s my job to hold them to those commitments.” With talks on the verge of collapse, an unnamed Number 10 source wrote a remarkable note in which they claimed Britain would punish EU member states if they agreed to extend the Article 50 exit process. Mr Johnson’s aides fear that the EU will decide to push the prime minister into seeking a delay to Brexit, precipitating a general election and possibly a second referendum, with the possible result that Brexit is reversed. A note published by The Spectator — attributed to a “contact in Number 10” and not disowned by Downing Street — said there was a threat that any EU member state that agreed to delay Brexit would be guilty of “hostile” interference in British politics. The note suggested that Britain might withhold co-operation with countries that pushed the UK into a Brexit extension, with security and defence cited as possible examples. “Those who support delay will go to the bottom of the queue,” the note said. Recommended Brexit Brussels plays for time as UK goes on the attack The combative language led many Tory MPs to conclude the note came from Mr Johnson’s senior adviser Dominic Cummings and it led to cabinet ministers urging the prime minister to rein in his consigliere. “I am clear that any threat on withdrawing security co-operation with Ireland is unacceptable,” tweeted Julian Smith, Northern Ireland secretary. “This is not in the interest of NI or the Union.” Nicky Morgan, culture secretary, complained to Mr Johnson that it was wrong that the government’s position was relayed to a weekly magazine before cabinet. The prime minister replied that he spoke for the government, not anonymous advisers. The note published by the Spectator also accused Mr Varadkar of “going back on his commitments” to negotiate seriously if Mr Johnson agreed to keep Northern Ireland in the EU regulatory zone. “Varadkar thinks that either there will be a referendum or we win a majority but we will just put this offer back on the table so he thinks he can’t lose by refusing to compromise now,” the note said.
Monetary policy
Before the end of the year, Britain is set to have an election, a Budget and a new fiscal framework. I have argued that the nation can afford to relax the current rules pledging to lower the burden of public debt in normal times so long as extra investment is subject to expert scrutiny. But we also need to think about rewriting the UK’s rules for times of economic pain. As the Resolution Foundation has recently reasoned, with interest rates close to zero, monetary tools to stimulate the economy no longer have much power and relying on these alone “risks a deeper, more prolonged and more painful recession than is necessary”. Fiscal policy should play a new and explicit role when the next recession comes. The problem is in designing a sensible new framework using fiscal tools that preserves the UK’s coherent separation of economic powers. This gives the Bank of England operational independence to damp booms and busts, leaves tax and expenditure decisions with elected representatives and tasks the Office for Budget Responsibility with reporting on the sustainability of the public finances and ensuring forecasts stay honest. Currently, the government’s Charter for Budget Responsibility says the Treasury can review its fiscal rules “in the event of a significant negative shock to the UK economy”. The Labour party proposed a fiscal credibility rule in 2017 that can be suspended on the say so of the Bank of England’s Monetary Policy Committee. Both fall short. The government’s trigger for action is ill-defined, while Labour’s relies on MPC members voting themselves out of a job. Both say nothing about what happens next. Drawing on the work of Adair Turner, former head of the Financial Services Authority, and academics Jonathan Portes and Simon Wren-Lewis, it is possible to sketch out a blueprint for a new framework that includes an explicit role for discretionary fiscal stimulus. The solution is to devolve to the MPC both the decision to use fiscal policy in a downturn and to let the committee determine the required amount of fiscal stimulus. That way the operationally independent BoE would retain its role as the body that smooths the economic cycle and keeps inflation on track. But the MPC should not implement the fiscal stimulus, leaving that task to the chancellor, who would effectively be given a temporary budget to spend in a timely manner. Since it would be madness to link public sector pay or vital infrastructure spending to the vagaries of the economic cycle, the tools at the chancellor’s disposal should be temporary tax cuts. As far as possible, the tax measures should encourage domestic spending, so the best fiscal levers to pull are value added tax on services and rebates of council tax. The former would be highly concentrated on domestic demand, while the latter would use the inherently regressive nature of council tax to channel additional spending power disproportionately to poorer households. The OBR’s role would be unchanged. It would produce independent forecasts that guarded against over-optimism either from the Treasury or the BoE. It would also continue to report on the sustainability of the public finances in a world where fiscal levers are used for stabilisation. With deficits likely to be larger in downturns, these reports should prompt the government to plan larger surpluses in normal times so it can maintain a balanced current budget over the whole cycle. Implementing a new fiscal and monetary framework along these lines would benefit from cross-party support. There is nothing in these proposals that would prevent political parties having very different attitudes towards prudence in the public finances, and the levels of taxation and public spending. So, with sufficient will, it could be done. Even better, progress along these lines would show that despite Brexit woes, there are areas in which Britain can still lead the world.
Scottish Lawsuit
Boris Johnson cannot be trusted to follow through on assurances that he will abide by a law that could force the UK prime minister to seek a delay to Brexit, Scotland’s highest court was told on Tuesday. Aidan O’Neill, QC, said Edinburgh’s Court of Session should be ready to use its “nobile officium” power to have a court official sign the letter asking for an extension on Mr Johnson’s behalf if the UK prime minister fails to do so. The so-called Benn Act, passed last month, requires the prime minister to seek a delay to Brexit, currently scheduled for October 31, if he has not secured parliamentary approval for a withdrawal agreement or a no-deal departure by October 19. The prime minister and his advisers and officials were intentionally sending “contradictory messages” in what appeared to be an effort to “sabotage” the Benn Act, Mr O’Neill said. “This is serious, this is calculated, this is workshopped, focus-grouped, war-gamed,” he said. The request for the Edinburgh court to act to ensure compliance with the Benn Act has been brought by environmentalist Dale Vince, anti-Brexit legal campaigner Jolyon Maugham QC and Scottish National party MP Joanna Cherry. The Court of Session’s lower Outer House on Monday rejected their request that it force Mr Johnson to comply with the act, saying assurances made to the court on the prime minister’s behalf showed his “clear and unequivocal” intention to do so. Tuesday’s hearing at the higher Inner House included an appeal of the Monday decision and a separate request for the court to use its “nobile officium” power. Mr Johnson has repeatedly said he would refuse to ask for an extension and continued at the weekend to insist the UK would leave the bloc on October 31, without agreement if necessary. Mr O’Neill cited an extraordinary note published by the Spectator magazine on Monday, attributed to a “contact in Number 10” as one of a number of reports suggesting Mr Johnson might seek to frustrate the Benn Act. The Spectator said Downing Street believed “our legal advice is clear that we can do all sorts of things to scupper delay”. The note, which many at Westminster assume came from Mr Johnson’s senior adviser Dominic Cummings, also says any EU member state that agrees to delay Brexit would be guilty of “hostile” interference in British politics. It says Mr Johnson would retaliate, a threat that appears intended to dissuade the EU from agreeing an Article 50 extension even if it is requested by the prime minister or on his behalf. Acting for the UK government, Andrew Webster QC said the assurances given to the court that the prime minister would not seek to frustrate the Benn Act carried “significant weight which the court should rely on”. Mr Webster said “no weight” should be put on unattributed statements about the prime minister’s intentions. While the petitioners cited statements by the prime minister and other ministers suggesting he would not sign a request for Brexit delay, other statements could be found confirming they would comply with the law, he said. Lord Carloway, lord president of the Court of Session, suggested during the hearing that the whole case could be put on hold until after October 19, when it would be clear if the prime minister had complied with the Benn Act. Mr Maugham said he expected the case to be stayed until October 21, adding the court was understandably trying to avoid a “destructive clash” between the government and the rule of law. Lord Carloway said the court would announce its decision at 11am on Wednesday. Meanwhile, The Independent Workers’ Union of Great Britain, which represents gig economy workers, has asked the High Court of England and Wales for an injunction forcing Mr Johnson to comply with the Benn Act. Jason Moyer-Lee, the IWGB’s general secretary, said EU law had been “crucial” in helping low-paid workers to fight exploitative bosses. “In a no-deal Brexit, Tory Brexiteers will have free rein to water down employment rights and workers will lose access to the European Court and the Charter of Fundamental Rights, which the IWGB has relied on to defend its members,” he said. The union was bringing the case because it would do “everything possible” to defend its members’ rights, he added. No date has been set for a hearing on the IWGB’s application.
Merkel Blame game
Boris Johnson, who vowed to deliver Brexit on October 31 “do or die”, was always going to need somebody to blame if Halloween passed and Britain remained a member of the EU. On Tuesday he found a new scapegoat: Angela Merkel. At 8am the UK prime minister held a “clarifying” phone call with the German chancellor at which it supposedly became obvious the EU would not strike a Brexit deal on terms acceptable to Mr Johnson — not at a key European leaders’ summit next week, perhaps never. Ms Merkel apparently objected to Mr Johnson’s new proposal to overhaul the UK’s withdrawal agreement with the EU by no longer including Northern Ireland in a customs union with the bloc. By midday Mr Johnson’s allies had unleashed a blame game, claiming the EU and a Remainer parliament were forcing Britain to stay in the bloc against its will beyond October 31. While the blame was being spread widely, one unnamed ally of Mr Johnson — widely assumed at Westminster to be his chief adviser Dominic Cummings — dispensed dark warnings of retaliation against the EU over its intransigence. Although David Frost, Mr Johnson’s chief Brexit negotiator, was in Brussels for talks about the prime minister’s plan for a revised withdrawal agreement, Downing Street officials were busy framing what will be a brutal “people versus the establishment” Tory general election campaign. Amber Rudd, the former Conservative cabinet minister, said the message coming out of Number 10 was “angry and desperate”, reflecting the fact that Mr Cummings’ “shock and awe” Brexit strategy was falling apart. Mr Cummings argued from the start that unless the EU believed that October 31 was a “real” deadline for Brexit — with the UK leaving on Halloween, with or without an agreement — then Ms Merkel and other European leaders would simply reject Mr Johnson’s departure terms and instead offer a delay that would enable an election. A “rebel alliance” of MPs at Westminster derailed that strategy by last month passing a law that seeks to prevent a no-deal Brexit on October 31. In Brussels there is a clear conviction that the so-called Benn act is watertight and the prime minister will be obliged to seek an extension to the Article 50 divorce process if no withdrawal agreement is in place by October 19. Although Mr Johnson’s allies have suggested increasingly fanciful devices by which the government might “cheat” the Benn act, there is a growing acceptance that the prime minister will ultimately have to obey the law and that an election will follow. Mr Cummings feared that the EU would conclude — incorrectly in his opinion — that the worst that could happen in an election would be that Mr Johnson would win and he would come back with the same Brexit proposal. In the best outcome for the EU, especially from Ireland’s point of view, Mr Johnson would be ousted by a coalition of Labour, the Liberal Democrats and the Scottish National party, who would hold a second referendum, possibly reversing Brexit. Those who pushed the Benn act intended to sabotage a deal and they’ve probably succeeded Downing Street insider The outpouring of threats from Number 10 in recent days are all part of a last-ditch attempt by Mr Cummings and his team to persuade the EU not to make this “historic mistake”. Mr Cummings believes that while Mr Johnson is making a constructive offer to the EU now, if he is forced into election before the UK has left the bloc, he will fight on a no-deal Brexit platform. “Those who pushed the Benn act intended to sabotage a deal and they’ve probably succeeded,” said one unnamed Downing Street insider to the Spectator magazine. “So the main effect of it will probably be to help us win an election by uniting the Leave vote and then a no-deal Brexit. History is full of such ironies and tragedies.” The same Number 10 insider also warned that Britain would be a toxic partner if the EU insists on keeping it in the 28-member bloc against its will and that the principle of good co-operation between the two sides would be “in the toilet”. The aggressive briefing is partly intended to precipitate a crisis in Brussels to persuade the EU at the last minute that if it does not engage with Mr Johnson’s Brexit proposal, the result will be dire for both sides. Mr Johnson genuinely wants a Brexit deal before October 31. If he is forced to fight an election on the back of a fresh Brexit delay, the Conservatives will face a serious threat from Nigel Farage’s Brexit party and the pro-Remain Liberal Democrats. But there is little sign of the EU wanting to help him out to finalise a Brexit deal. The EU, as Mr Cummings foresaw, is expected to insist in any negotiations that Northern Ireland must stay in the bloc’s customs union to avoid the return to a hard Irish border. That is a red line that Mr Johnson will refuse to cross, after he rejected the so-called backstop in his predecessor Theresa May’s withdrawal agreement with the EU that retained a customs union between the UK and the bloc to avert a hard border. He instead proposed creating a customs border between Northern Ireland and the Irish Republic. Placing Northern Ireland in a customs union with the EU would be unacceptable to many hardline Eurosceptic Conservative MPs as well as the region’s Democratic Unionist party, whose support Mr Johnson could need to get a Brexit deal through parliament. Arlene Foster, DUP leader, said on Tuesday: “For the United Kingdom to be asked to leave a part of its sovereign territory in a foreign organisation of which the UK would no longer be a part and over which we would have no say whatsoever is beyond crazy. No UK government could ever concede such a surrender.” Mr Johnson still hopes that the EU will compromise at the last minute. But if it does not, his team is already on an election footing, ready to blame Ms Merkel, Brussels and parliament if Britain is still in the EU on November 1.
Dollar Reserves and political risk
The US dollar has long towered over global markets and finance. But cracks are starting to appear in the edifice.
The greenback’s pre-eminent role in official funds and international trade is formidable and unlikely to fade quickly. But the latest data from the IMF on central banks’ reserves show a subtle shift away from the dollar that analysts say could signal a rethink on the political risk embedded into US assets.
“Central banks [are] chipping away at the dollar’s ‘exorbitant privilege’,” said Alan Ruskin, chief international strategist at Deutsche Bank in New York. “Politics are starting to infringe in ways that have the potential to challenge the dollar’s dominance.”
In last month’s quarterly report on central banks’ reserves, the IMF said that the share of the global total denominated in dollars was just short of 62 per cent in the second quarter of this year, down 0.76 percentage points from the same period a year earlier. Euro-denominated reserves account for 20 per cent.
While the dip is small, the apparent resilience is deceptive. As Mr Ruskin pointed out, the dollar was, during that quarter, the highest-yielding currency in the developed world. In theory, that should have lured in investment at a faster pace than other currencies.
Instead, central bank reserve managers — a powerful force in global markets — accumulated 3.5 per cent more dollars over the year, far behind gains of 17 per cent for the renminbi and even 8 per cent for sterling, despite the pound’s Brexit-related troubles.
The dollar’s falling share of reserves represents an “official sector vote against US ‘exceptionalism’”, said Mr Ruskin. In his view, the data should give pause to US policymakers contemplating laws to tax foreign purchases of US assets, further sanctions based on the international use of the dollar and plans to restrict access to US capital markets. All are actions that could weaken the dollar’s influence.
Mark Carney, governor of the Bank of England, warned policymakers in August that as well as being the dominant currency for invoicing and settling international trade, two-thirds of global securities issuance and official currency reserves are denominated in the dollar. This makes economic developments in the US the key driver for monetary policy elsewhere, particularly in emerging markets.
In the long run, central banks should move to a “multipolar” economic system, Mr Carney said, adding that “the renminbi has a long way to go before it is ready to assume the mantle [but] the initial building blocks are there”.
Goldman Sachs analysts said that dollar reserves slipped nearly four percentage points over 2017 and 2018. At the same time, reserve managers have continued to add to their renminbi and Japanese yen holdings, especially in countries that have had a fractious political relationship with the US.
“So far, these flows have been fairly concentrated. Russia accounted for about 70 per cent of new renminbi reserves in 2018, and Brazil and Chile account for about 40 per cent of renminbi reserve accumulation in 2019,” said Mike Cahill, an economist at Goldman Sachs in London.
The US has increasingly used the dollar’s dominance to further its foreign and trade policies. In response, ideas such as invoicing some of the world’s oil trade in the euro are getting more traction.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, suggested in a speech earlier this year that moving oil trading and settlement into the euro and away from dollars “could limit the reach of US foreign policy insofar as it leverages dollar payments”.
Russia has also been making focused efforts over the past five years to move away from the greenback as the currency for trade and payments, and to reduce the impact of dollar strength on its economy.
But central banks face a tough choice. Neither the euro nor the renminbi have the deep liquidity that dollar markets offer. Yields on eurozone government bonds are deeply negative while the renminbi remains tightly controlled by the Chinese government, in spite of recent liberalisation efforts.
Some reserve managers have turned to gold. A report for the World Gold Council and think-tank OMFIF in September highlighted that central banks have been buying the yellow metal at levels last seen during the Bretton Woods era, when exchange rates were pegged to gold.
China, Russia and India were the largest buyers of gold alongside Turkey and Kazakhstan. China alone has added almost 100 tonnes of gold to its reserves over the past 10 months.
“When you look at it on a one- to two-year outlook, it is highly unlikely that any asset could usurp the dollar’s dominance. But when you’re talking about a decade or two, you have to take other considerations into account,” Mr Ruskin said.
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