In Space No-One Can Hear You Trump: Brexit, GPS, and the Iran Deal

If you’d skipped the news during 2016 you might wonder what this “Brexit” actually is, when the British, French, and German governments are perfectly aligned on crucial political issues like the future relationship with Iran. No, really.
Here, for example, is the three powers’ joint note issued after Trump announced the US was pulling out.

It is with regret and concern that we, the Leaders of France, Germany and the United Kingdom take note of President Trump’s decision to withdraw the United States of America from the Joint Comprehensive Plan of Action.

Together, we emphasise our continuing commitment to the JCPoA. This agreement remains important for our shared security. We recall that the JCPoA was unanimously endorsed by the UN Security Council in resolution 2231. This resolution remains the binding international legal framework for the resolution of the dispute about the Iranian nuclear programme. We urge all sides to remain committed to its full implementation and to act in a spirit of responsibility…

Here’s the No.10 Downing Street readout of Theresa May’s conversation with President Rouhani:

The Prime Minister reiterated the UK’s position that we and our European partners remain firmly committed to ensuring the Iran nuclear deal is upheld. She said it is in both the UK and Iran’s national security interests to maintain the deal…Both leaders agreed the importance of continued dialogue between the two countries, and looked forward to the meeting of UK, German, French and Iranian foreign ministers in Brussels on Tuesday where they will be joined by the EU’s foreign affairs High Representative Federica Mogherini to discuss the Iran nuclear deal and next steps

It’s as if none of it ever happened. But at the same time, a weird subplot of Brexit has developed where the two parties are accusing each other of being a menace to their security and the UK is plotting to launch £3bn worth of space hardware on its own. The combination of the two is highly revealing.

So the European Union decided back in 2004 to build its own satellite navigation and timing system, Galileo, as a competitor to the US Department of Defense’s GPS and Russia’s GLONASS. In the meantime China has also launched a (pretty bare-bones) system, Beidou. British Eurosceptics didn’t like it for the usual reasons of the time, for fear that it might somehow harm the special relationship. Quietly, though, the Ministry of Defence was more enthusiastic. Since 1991, the enormous boon of reliable precision navigation and timing for all kinds of purposes had become obvious, and so had the horrible possibility of losing it.

As early as 2003, the Russian manufacturer Aviakonvertsiya was marketing GPS jamming devices and Iraq used a few in the war of that year. Since then, the technology has become democratised to the point where lorry drivers carry jammers in order to subvert their bosses’ fleet-management tracking systems, sometimes with hilarious results, as when a London bank discovered that its GPS-backed time server went haywire every day at the same time as a delivery truck parked up across the street, and sometimes with less hilarious ones, as when aircraft using GPS for approach guidance got jammed by someone on a motorway near the airport. As with many of the great technologies of the information revolution, GPS was designed – back in 1978 – to work in an environment either of trust, or at least of electronic scarcity. A major argument for Galileo is that it is designed to be much more robust to jamming and spoofing.

Of course, another way to lose it would be if the US decided to cut it off. The implicit suspicion was what bothered the sceptics, but on the other hand, worrying about scenarios is what you pay a general staff for. And the UK also thought it had a good chance of getting a lot of workshare from Galileo. The project went ahead with the British paying about 15 per cent of the bill and getting rather more than that of the contracts – minor things like designing the radio receivers, developing the cryptography intended to protect it against spoofing, building the satellites themselves, and managing mission control.

Now everything is terrible. The European Commission is saying that the UK is a dangerous security risk as a third power, even though there are third party partners in Galileo and in any case it’s literally being manufactured in Stevenage. Of course, French, German, and Italian aerospace would dearly love the contracts, and all the stops are out on the Brussels lobbying game. Airbus has already promised to move mission control. The British are threatening to ban the export of the cryptographic technology involved and refuse people security clearances. And most astonishingly of all, they are seriously considering going on with the project unilaterally!

Part of the story here is the atmosphere of Brexit, a political fifth season when almost anything might happen as long as it’s weird. The Treasury hates technology projects, space, capital expenditure, and unilateral defence procurement, but astonishingly its righteous sentence has been suspended. It is true that there is a certain kind of Brexiter who loves a big engineering project, but I think there is a stronger explanation available.

That is: the elite has begun to hoist in the reality of Trump. We can see this in the synchronised diplomacy towards Iran. We can see it in, for example, the exchanges in the Commons on the 9th of May. Shadow Foreign Secretary Emily Thornberry says:

what yesterday’s announcement confirmed is that as long as Donald Trump remains president we must get used to a world without American leadership

And Boris Johnson does not exactly disagree. It wasn’t that long ago that saying anything like that – even, like Johnson, omitting to condemn it – would mark you as a non-serious person. Disgraced former defence secretary Michael Fallon did try to push back, leading to this priceless moment of Gammon Drama:

Johnson says Fallon never expressed that view when he was in government.

More seriously, we can also see it – three billion pounds’ worth – in the Galileo contingency planning. It was possible to imagine, a few years ago, that the Bush presidency had been something in the nature of an accident. The Americans had got it wrong, but now they had elected someone normal and life could go on. But then it happened all over again. If someone suggested it to him, who can say that Trump wouldn’t order the USAF 50th Space Wing at Schriever AFB, Colorado to shut down GPS, or try to send all the billion or so users of the service outside the US a bill?

After all, if you believe in the US as a provider of global public goods and leader of economic and political integration, GPS is surely Exhibit A. President Reagan opened it to public use as a response to the Soviet shooting-down of a Korean airliner, an example of American leadership that would both shame and terrify the commies and also keep the airways safe for world trade. This is, physically, the stuff they’re always going on about!

The tragedy of the Brexiters, among other things, is that they finally got their wish of backing out of European integration the year the US backed out of globalisation.

Self-Binding Back To The Deal

I think the logic in this post and this earlier one has stood up rather well. There were only three possible options – hard border, sea border, and no border. Everyone involved rejected the hard border. The DUP, and quite a few other people, rejected the sea border. That left only no border. The Tory Brexit caucus claimed to have a veto on that. But their leverage was just that they could howl for concessions from the prime minister. Once the EU Commission, the Republic, and the Northern Irish parties were signed up, though, the prime minister was constrained to offer them nothing. Anything she offered them would be vetoed by the others.

Negotiating theory has the interesting conclusion that you can become stronger by getting rid of alternatives. You can’t be argued into giving something up that you can’t in fact give up. This is the logic of a so-called self-binding commitment, and we saw its full force this week. Ultra-Brexiter Michael Gove was the first to crack, going the rounds of the TV and radio studios to argue in favour of the deal. European Research Group (never mind what research it might have done) chairman Steve Baker stepped up to argue for it. The promised resignations haven’t happened. It was the biggest cave since Lascaux.

So, what’s the deal? The key machinery is in paragraph 49, as George Peretz QC points out:

So, the UK guarantees to avoid a hard border. It’s worth thinking in terms of sequencing here, again. In the first instance, this guarantee is to be made good as part of the “overall EU-UK relationship”. To put it another way, the agreement between the EU and the UK should avoid a hard border. This has to be tried first. Failing that, some sort of Ireland-specific solution can be proposed by the British side. Paragraph 50 states that a sea border could happen if the Northern Ireland executive agrees to it, which requires cross-community consent. Failing that, as a last resort “in the absence of agreed solutions”, the UK will “maintain full alignment with those rules of the Single Market and Customs Union which, now or in the future, support North-South cooperation, the all-island economy, and the maintenance of the 1998 agreement”.

“Alignment” was probably the most-discussed point here for the press. Was that the same thing as “no divergence”? The second was probably whether or not there might be a sea border. But the plain meaning of Paragraph 49 is that both of these are second- or third-best options. The primary aim, the first option, is a top-level agreement between the EU and the UK that enshrines no border. The other options are there as fallback guarantees in case the talks break down. And the scope of this commitment is sweeping. Peretz again:

The hard border is defined in paragraph 43 as anything with physical infrastructure, checks, or controls. To put it another way, the only acceptable border is no border. This would be closer integration than either Norway or Switzerland has with the EU. Fascinatingly, these paragraphs do not seem to have been controversial between the British and the European Commission delegations. The Irish Times quoted something very similar to Paragraph 49 as early as Monday.

On the same day, the DUP’s threat to Theresa May said that Northern Ireland staying in the customs union might destabilise their agreement. It said nothing about the whole of the UK doing so. Arlene Foster vetoed:

any suggestion that Northern Ireland, unlike the rest of the UK, will have to mirror European regulations

Again, she said nothing about the whole of the UK doing so. In fact the DUP had not committed itself to the harder Brexit Theresa May introduced at the 2016 Conservative Party conference – ever. It’s hard to imagine how it could ever do so. As the leading Unionist voice in Ireland it needs the Good Friday agreement. As people living in Northern Ireland, they need the peace. As a political party whose constituency is largely farmers, they couldn’t live with a hard border. On the other hand, their overriding existential mission is to veto anything like a border between the UK and Northern Ireland.

A lot of people on the Left seem to have assumed the DUP was vetoing a soft-Brexit agreement, on the basis that they are Tories but more so. A lot of ERG Tories seem to have believed the same thing, on the basis that they were a substitute for Tory or UKIP MPs they hoped would get elected, or maybe because they thought the famous £435,000 donation bought something even though the DUP as such didn’t get any of it. But this misunderstands the DUP fundamentally. It is an Irish party, from Ireland, whose concerns are Irish. Its understanding of Irishness is very different from the Republic’s, but then accepting this is the whole point of the peace. If it acts as a Westminster party it usually does so for ruthlessly transactional reasons, and unlike Theresa May the ERG offered them nothing. Rather than a terrible beauty, a sordid clarity is born.

EU Commissioner Michel Barnier seems to have understood this very well. I was plenty critical of his decision to raise Northern Ireland as an issue early on – it’s important and people can get killed and I didn’t want it fiddling with, and it seemed strange to define the detail of a border before deciding what it was meant to separate. But it worked in that it anchored the vague into the specific, and put the veto actors to the test. Someone else who may have got it was Oliver Robbins, the top civil servant whose group was moved back from DEXEU to the Cabinet Office in the summer and who led the British delegation. And, of course, the Republic’s negotiators got it supremely well. It was no coincidence that the best news source throughout was RTE’s Tony Connolley.

When you have eliminated the impossible…

A quick thought on the news that the UK “offer” has been agreed by Cabinet (see Robert Peston).

One thing that has been underdiscussed in all the arguing about the Irish border issue is that the core principle of the Good Friday agreement is cross-community consent. The agreement foresees that there can be no change in the status of Northern Ireland without the consent of both communities, and the agreement itself was subject to an act of public consent in the form of a referendum. This is crucial to the whole project. Cross-community consent offers a guarantee to the Unionists that they cannot be sold out by the British, but it is more than just a Unionist veto. To say that there can be no change without cross-community consent is also to say that there can be change, if such consent were given. In taking imposed change off the table, it puts the possibility of change through consent on it.

This is sauce for the goose and for the gander. Stephen Bush on the New Statesman has repeatedly pointed out that there are precisely three options:

a) a land border
b) a sea border
c) no border

The problem with both a) and b) is that they both represent a change in the status of Northern Ireland. I suppose a real sophist might try to claim it wasn’t substantive change, but I can’t see it washing with anyone. If you are committed to the GFA, like all British and Irish political parties, you can’t really support either unless you think you can convince the Unionists to accept b) or the Nationalists to accept a). Neither is realistic. It is not just that the DUP would hate b) or Sinn Fein a) – neither option is acceptable in terms of the GFA because both involve a change in the status of NI imposed on one community or the other.

With a) and b) ruled out that leaves only c), no border. Even the much mocked DEXEU paper on drones, balloons, and such is a sort of twisted acceptance of this point. The point of a “frictionless” or “invisible” border is that it is very like no border. This leads us to a further trilemma. The DUP, and indeed the British government, has acquired three commitments:

1) the Union
2) the GFA
3) Brexit, defined to exclude the customs union

The first is existential. The second is extremely important. DUP ministers, members, and voters benefit from peace and the open border. The third was entered into verbally when Theresa May chose to up the rhetoric at the 2016 Conservative conference, and is not binding in any way. If the first cannot be given up, the second would be extremely costly to give up, and the third merely embarrassing, what do you think will give? How does your answer change now the government has agreed to pay up?

This is why I have not been particularly worried about the Irish element of Brexit, and why I think we’re staying in something.

Brexit and Airlines

About a week before the UK government triggers Article 50, and the stories are just rolling out about taking control how difficult untangling the UK from the EU is going to be, how much business is going to head across the Narrow Sea (and to a much lesser extent, across the Irish Sea), and how very little influence the UK government is going to have on the process.

EU chiefs have warned airlines including easyJet, Ryanair and British Airways that they will need to relocate their headquarters and sell off shares to European nationals if they want to continue flying routes within continental Europe after Brexit.

The Guardian adds a little British understatement, “The ability of companies such as easyJet to operate on routes across the EU has been a major part of their business models.” Indeed.

Some airlines have started to seek headquarters within the EU and to restructure their ownerships. EU holding requirements could include “the forced disinvesting of British shareholders.” At least some business leaders were hoping the problem would go away. Because reasons, I suppose. “EU officials in the meetings were clear, however, about the rigidity of the rules, amid concerns at a senior EU level that too many in the aviation industry are in denial about the consequences of the UK’s decision to leave the bloc.”

Getting a new agreement won’t be easy, either. At present, the European Court of Justice is the final arbiter of disputes that arise under the agreements that cover air travel within Europe. The current UK government has signaled that it wants to leave the ECJ’s jurisdiction entirely. And of course undoing a multilateral agreement opens the door for some states to assert their individual interests in negotiating a new one: Spanish diplomats have said that they will not sign on to any international accord that recognizes the airport in Gibraltar. Somebody might be taking back control.

This is shaping up to be a very good couple of years for corporate relocation businesses, and possibly for people looking to sign on at the new headquarters locations replacing folks who were unwilling or unable to leave the UK when their jobs picked up and went.

Brexit and Banks

With Prime Minister May due to trigger Article 50 eight days from now, shit’s about to get real the clock is about to start ticking, not least for the huge financial center in London. Nothing in the present UK government suggests that they will be able to negotiate an amicable separation in the twenty-four months before they are unceremoniously bounced from the European Union. (Less actually, as agreements will have to be finished early enough for the relevant bodies to vote on their approval.) Hard Brexit, here we come.

Likewise, I don’t see any reason for the 27 to let London continue to have the same access to EU financial markets that it had when the UK was a member of the Union. Prudent bankers came to similar conclusions long ago, and indeed Bloomberg finds that plans to move people and capabilities into the remaining EU are taking concrete shape. Frankfurt and Dublin are the likeliest winners: Frankfurt is the largest financial hub on the continent, and home to the European Central Bank; Dublin is the only English-speaking alternative. (At least until Scotland joins the Union.) This was always the way to bet, and reporters’ talks at individual banks are adding micro details to the macro framework.

“Bank of America Corp., Standard Chartered Plc and Barclays Plc are considering Ireland’s capital for their EU base to ensure continued access to the single market, said people familiar with the plans, asking not to be named because the plans aren’t public. Goldman Sachs Group Inc. and Citigroup Inc. are among banks eyeing Frankfurt, other people said.”

Two Japanese institutions Bloomberg spoke with are considering Amsterdam; Morgan Stanley, local patriots, insisted that New York would gain as they and other institutions re-allocated resources away from Europe entirely. Brexit is going to put a huge dent into one of the UK’s most important economic sectors. Taking back control!

The Eurozone bailouts: learning more

The Independent Evaluation Office (IEO) for the IMF released its evaluation of the Eurozone bailouts last week. Unfortunately, the excellent report was released on the Thursday of what was for Bureaucristan the last working week before September, and was released as a package with prebuttal of the recommendations by the Fund itself, which diluted its impact. And even in the financial pages of the newspapers, attention was more focused on the banking stress tests which came the following day [UPDATE: good attention to the IEO report from the New York Times]. Nevertheless, the report deserves a long shelf life; below the fold (direct quotes in italics), a selection from its more striking findings: note, these findings may have been documented elsewhere sporadically before, but one value of the report is collecting them all in one place and integrating them into a broader narrative.

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Headline chasing

IMF note to the G20 meeting in Shanghai in February —

The global recovery has weakened further amid increasing financial turbulence and falling asset prices. Activity softened towards the end of 2015 and the valuation of risky assets has dropped sharply, especially in advanced economies, increasing the likelihood of a further weakening of the outlook. Growth in advanced economies is modest already under the baseline, as low demand in some countries and a broad-based weakening of potential growth continue to hold back the recovery. Adding to these headwinds are concerns about the global impact of China’s transition to more balanced growth, along with signs of distress in other large emerging markets, including from falling commodity prices. Heightened risk aversion has triggered global equity market declines and brought a further tightening of external financial  conditions for emerging economies. Strong policy responses both at national and multilateral levels are needed to contain risks and propel the global economy to a more prosperous path.

IMF note to the G20 meeting in Chengdu in July–

“Brexit” marks the materialization of an important downside risk to global growth. The global outlook, set for a small upward revision prior to the U.K.’s referendum, has been revised downward modestly for 2016 and 2017, reflecting the expected macroeconomic consequences of a sizable increase in economic, political, and institutional uncertainty. But with “Brexit” still very much unfolding, more negative outcomes are a distinct possibility.

The two notes, which are written barely 6 months apart, read together bizarrely. The earlier note sees anxiety in financial markets and searches around for any narrative that could justify that — to the point where even a fall in oil prices could be bad! The new note has the luxury of an actual negative shock — Brexit — to work with, but with one big problem relative to the doom-and-gloom narrative of February:– it says that if it wasn’t for Brexit, the IMF was ready to along with the evaporated panic from February, and anyway financial markets haven’t taken Brexit particularly badly!

Could it be that the financial market-led narrative in February was a panic in search of a problem, except that the markets — and thus anyone using that as their lens — missed the one problem that was actually on the horizon, namely Brexit? As it happens, financial asset prices could well be a bit player in the way Brexit eventually plays out.

A simple solution for #Brexit-related uncertainty

Prominent Brexiter Andrew Lilico, I see, argues that we could avoid the uncertainty created by triggering the Article 50 process by not doing so:

The Treasury says an instant triggering of Article 50 post-referendum would be a driver of uncertainty. In which case, maybe don’t do that?

Indeed. Article 50 of the Lisbon Treaty lays down the process for voluntary withdrawal from the EU. You trigger it if you want to leave the EU. If you haven’t, you haven’t left the EU. Not triggering it – staying in the EU – would indeed avoid quite a lot of uncertainty.

But, Andrew, we could go one better. We could completely eliminate it. All we need do is vote to stay in.

#Brexit, trade, and the J-curve

A couple of thoughts on the economic consequences of #Brexit. HM Treasury, the Institute for Fiscal Studies, and others have published their efforts to forecast the short- to medium-term impacts of leaving the EU, and it’s fair to say none of them are good. The point I would like to highlight is that everyone seems to expect a big – 15% is a consensus number – devaluation in sterling post-Brexit.

I’m usually quite a “cheap pound” guy, so you might think I’d see this as an offset to the risks of Brexit. Actually I don’t, and here’s why. Just as a “strong” currency isn’t good in itself, but instead good for some groups in society and bad for others, a “weak” currency is good for some people – exporters, basically – and bad for others – importers, basically. A fall of 15% in the sterling trade-weighted index will help exporters in that it’s an immediate 15% price cut, and harm importers by the 15% increase in their prices. On balance, you’d expect it to reduce the current account deficit by 15% * some elasticity parameter.

It’s not that simple, though – there’s the famous J-curve effect. It might take time for exporters to increase their volumes, while import prices go up straight away. As a result, devaluations often have a contractionary effect immediately, and then a greater, expansionary one later. The problem, in the Brexit scenario, is that we propose to do something that will induce a substantial devaluation at the same moment that we commit ourselves to a whole lot of uncertainty regarding trade with Europe.

The case for it all turning out OK is basically a bet that the lower sterling trade-weighted index will lead to enough growth in export volumes to make it up. However, we’re meant to be taking this bet just at the time we do something that’s likely to constrain volumes on about 44% of our exports, even if only temporarily. Also, a lot of export-heavy companies are manufacturers integrated in international supply chains, who probably use quite a lot of intermediate products sourced from inside the EU. These companies will see their input prices rise sharply, while they may not be able to take advantage of the cheap pound on about half their market. As a result, they will experience quite a dramatic margin squeeze.

I can certainly see this leading to a beast of a J-curve recession, even if it doesn’t manage to push the housing market off the wall. One important trigger for a big drop in sterling, by the way, would be a drop in foreign portfolio investment in the UK. A hell of a lot of that is real estate, and there is already evidence of investors putting purchases on hold.

Before you all write at once, I stick with the 44% number. This has been criticised due to the so-called Rotterdam effect, where goods going to the wider world get trans-shipped through EU load centre ports like Rotterdam, Antwerp, or Hamburg, and therefore counted in the port statistics as exports to the Netherlands, Belgium, or Germany. There’s a good account of it here. I do not accept that this is a problem. Rather, I do not accept that it is a valid argument that European trade is less important than we think.

If shippers in the UK choose to ship to, say, China via Rotterdam rather than direct ex-Felixstowe or Southampton, they presumably do so for a reason, typically that bigger volumes and bigger ships mean lower freight rates and more choice of routes and sailings. There is no reason, I think, to expect Maersk or whoever to call at UK ports more often post-Brexit. Shipping via Rotterdam to somewhere extra-European represents trade with the EU in that the UK imports port services from the Netherlands, paid for out of the revenue from exporting. If we had a port the size of Rotterdam, we certainly wouldn’t discourage European shippers from using it! And of course, we do – just it’s an airport, and it’s called Heathrow, and just listen to the business lobby hollering for more capacity there.

In conclusion, one of the contradictions of Brexit that bothers me is that its strongest advocates seem to believe that relatively petty regulatory burdens are enormous restraints on the economy, whose removal would lead to a surge of growth, while they also seem to believe that incurring even relatively petty trade barriers would mean, well, nothing much. You can’t have it both ways. Either the economy is robust to petty interference, in which case we might as well stay in, or it’s not, in which case we surely have no business putting a new layer of it between us and Europe. After all, it’s unrealistic to imagine the electorate ever agreeing to some sort of Donner Party libertarian utopia – we wouldn’t be swapping open trade, with levels of regulation that don’t seem to do German exporters any harm, for a tariff, but zero regulation. Instead we’d likely get a worse relationship with Europe by quite a lot, offset by a few doubtfully useful regulatory changes at the margins.

I find this baffling. Perhaps, in the end, the belief is that even trivial regulatory changes would be transformative, and the relationship with the EU would, well, somehow turn out OK in an unspecified manner. That strikes me as too many leaps of faith for one lunchtime.

PS – don’t trust me, ask a Felixstowe docker!

It will make a difference. FXT will surely suffer as they will no longer be able to tranship to R’dam and elsewhere without documentation as they can now. Why would shippers go through two lots of clearance procedures when they can cut FXT out and ship straight to the continent?

Burden sharing

Eurogroup statement on Greece —

Once approved, the full re-engagement of the IMF is expected to reduce subsequently the ESM financing envelope accordingly.

Is the Eurozone generally so transparent that the reason to have the IMF on board is to lesson the amount that a group of the world’s richest countries have to put on the table to sustain one of their own?