Issue 153: 2018 05 10: Lens on the Week

10 May 2018

Lens on the Week

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UK

BREXIT TENSIONS: Mrs May should have a print of the Greek hero Ulysses on her wall.  It was he who, on his way back from the siege of Troy, had to sail through the straits between the hazards of Scylla and Charybdis, getting through them with the loss of only six sailors.  Mrs May’s path is similarly beset with difficulties and she, like Ulysses, needs to tread it carefully.  On one side are the Remainers, currently chipping away in the House of Lords at the EU (Withdrawal) Bill.  They seek to make continued membership of the Customs Union a negotiating priority, and amendments to that effect will find some support in the Commons.  How much, though?  Some Tory rebels will back them and Labour’s Chuka Umunna has a substantial Remainer following, but, unless the Labour leadership adopts the cause of Customs Union membership, it is hard to see why the government should be defeated.

On the other side there are the Brexiteers and Mr Johnson, who has publicly trashed the idea of a Customs partnership under which, once the technicalities had been worked out, we would collect tariffs at EU rates and give rebates where the goods are for consumption in the UK.  “Workable”, says Greg Clark, the technically sophisticated Business Secretary.  “Oh no, it’s not,” chorus the Brexiteers, afraid that we will end up in the Customs Union for ever because nobody will be able to implement the new system.  They would prefer to see proper tariff collection at Borders with the burden being kept light through the use of technology.

How does this play on the other side of the Channel?  To come away without a deal at all would hurt the UK more than it would hurt the EU, but it would still be a failure by the EU negotiating team.  Both sides, then, have an interest in some deal being reached, and the EU must look at the threats to Mrs May’s position with this in mind.  Presumably they would like to see the Government committed to membership of the Customs Union.  That would put pressure on the UK to accept all the conditions which the EU would like to attach to that membership.  We would be left as rule receivers and there would be minimal effect on EU trade.  Job done.  The UK punished but without too much economic fallout for EU businesses.

The pressure being exerted by the Brexiteers must be less welcome.  Once tariff barriers with the EU are accepted, the free traders can begin to chase their dream of a low tariff hub.  That might work or it might not, but, either way, it is not an experiment that the EU would welcome.

There is a school of negotiation which holds that when in doubt, you should press for the outcome which the other side wants least on the basis that it will make them more anxious to compromise.  The threats from the Brexiteers may give Brussels pause for thought.

PRESS REGULATION: It’s back on the agenda again.  The proposal that newspapers which do not sign up to the regulator Impress should be liable for all costs in defamation actions, reappears as an amendment to the Data Protection Bill.  Whatever merits there may be in regulation, the route being chosen is a dishonest one.  The reality is that everyone will have to sign up.  If that is the case why not make regulation compulsory?  Could it be that compulsory registration would not play well with the British public so it is best to conceal it from them?

International

ELECTIONS: In Venezuela, the main opposition announced that it will boycott presidential elections on May 20 because the government-dominated electoral council has banned a number of senior leaders from taking part. However, a former soldier and state governor Henri Falcon is defying the boycott and will stand against President Maduro.

In Russia, the lower house of parliament re-elected Dmitry Medvedev as prime minister by a vote of 374 MPs against 56.  Putin was sworn in as president earlier this week.

Armenia has a new prime minister. Nikol Pashinyn, the MP and former newspaper editor who lead the peaceful demonstrations which forced prime minister Serzh Srgsyan to resign last month, was finally approved in parliament as his replacement after some disagreement among MPs.

Italy may face new elections in July, only four months after the last ones.  Following last March’s inconclusive elections, four months of coalition talks between competing parties have proved fruitless. This week President Mattarella told them to support a “neutral” caretaker government (ie a government appointed by the president which would deliver a  budget and then step down at the end of the year), or face another election this summer (July 8). The leaders of the main parties – the Five Star Movement, and the League – said they would choose another election rather than a caretaker government.

Only days after election campaigning began for federal elections in Pakistan this summer, interior minister Ahsan Iqbal (of deposed prime minister Nawaz Sharif’s PMLN party) was shot in the arm in what appears to have been an assassination attempt.  The assailant was overpowered as he was about to take a second shot.

There will be general elections in Iraq this coming Saturday. Prime minister Haider al-Abadi is likely to be re-elected, for a second term.  A candidate was murdered in his home on Sunday; Isis claimed responsibility.

Preliminary results of last week’s elections in Lebanon suggest that prime minister Saad Hariri’s party, Future Movement, has lost a third of its MPs, winning only 21 of 128 seats (down from 34). The pro-Iran, militant Shia militia group Hezbollah (designated a terrorist organisation in most Western countries) and its allies may win up to 50 seats. Saad Hariri will remain prime minister, however, as the constitution reserves the office for the most popular Sunni politician (the Speaker must be Shia, and the president must be a Christian), so he will continue to share an increasingly uneasy government of national unity with Hezbollah.

In Turkey, campaigning began for the forthcoming presidential and parliamentary elections on June 24.  Erdogan, who called the election a year early (before the looming economic downturn could hit hard), is expected to win another five years (he has had 15 already); the next term would give him new executive powers following the recent reform of the constitution.

At least 14 people were killed and more than 30 injured when a bomb exploded in a voter registration centre in a tent at a mosque in eastern Afghanistan preparing for elections in October.  Last month, a suicide bomber killed 60 people and injured over 100 at a registration centre in Kabul.

In Malaysia, prime minister Najib Razak is expected to win this week’s elections in spite of being under investigation by the US Department of Justice for allegations concerning a multi-billion pound fraud. Boundary changes are considered to favour his coalition, and the main opposition leader is under pressure from police over allegations relating to new laws about ‘fake news’.

Financial

NEVER A BORROWER BE:  Congratulations to any readers who happen to have deposits denominated in Argentine pesos.  Commiserations though to those who happen to be peso borrowers.  The Central Bank of the Argentine Republic earlier this week increased base rates to 40% (yup, forty per cent).  Not that this is really good news for either depositors or borrowers, or even bankers.  Argentina is suffering from a painful combination of raging inflation, political instability, and attacks by currency speculators.  The government dare not devalue the peso (which is the obvious answer to what is happening) because of pressure by external and internal businesses; inflation is in the interests of the property owning classes, at least short term, as the value of their assets increases almost daily; and the speculating sharks know that there will be just one outcome – devaluation, maybe coupled with a military takeover (again) – a government trying to fight the inevitable gives currency speculators as near a betting cert as exists.  But pity the poor Argentinean in the street, especially with a mortgage or debts; it is a real art form to match income to inflation, and even more so when interest rates are going up at this sort of rate.  UK readers who recall the dark days of 1992 and Mr Lamont’s attempts to outface speculators on Britain’s role in the ERM will know the feeling

The fundamental driver though is simple – the growing strength of the dollar.  Mr Trump has been, so far, good for the American economy, and the dollar, far from weakening, has risen.  That has affected even the Euro, but for a dollar dependent country such as the Argentine it is at least temporarily a disaster.  Capital moves to dollar denominations and much of the essential imports for Argentina will go up in currency translation (and oil may go up anyway).  Not a happy trap for such a beautiful land.

NOT ALWAYS RIGHT:  The speculators may be having a good time in the peso (if that plays out as expected) but those who play the oil game may be less happy.  President Trump’s surprise decision to cancel the nuclear restriction deal with Iran is not only making the world  a more nervous place, always a booster for the oil price, but also makes it more likely that the US will reintroduce sanctions on Iranian exports – which from a world economy point of view are mostly oil.   The oil price rose immediately by US$1.75 to a recent high of $76.5 as the oil market began to assess what the effects of this policy change might mean.  Since sanctions were lifted Iran has become a major oil exporter as it was in the ‘70’s and ‘80’s – the third largest supplier in the OPEC cartel in 2016.  The Trump administration pointed out that the oil price reached record lows when Iran was barred from most markets – and that the oil price has risen as supply has gone up.  Analysts have also pointed that current price levels are significantly above breakeven costs for many other oil sources such as shale and Atlantic wells, and indeed for many sustainable energy sources such as solar panels, and that the US is pretty much self-sufficient in oil supply.  And the long term trend is for the world to become much more efficient in energy use.  So the prognosis is that the boost to the oil price will be short lived – unless of course war should break out in the Middle East

Certainly Shell seems to think that – it announced that it was proceeding with the sale of its remaining investments in Canadian oil sands, to reduce debt and continue its interest in sustainable energy generation.

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