So what means “Brexit means Brexit”?

Ever since Theresa May stated that “Brexit means Brexit” during her first speech as Prime Minister, she has left her cabinet, her European counterparts, decision-makers in the world of business and finance, and, not to forget, her electorate wondering what “Brexit means Brexit” actually means. Up until now, it is – though ingeniously crafted – an empty formula that has left ample room for interpretation for Brexiteers as well as Bremainers. But, with the first major, though officially “informal” EU-meeting without the UK approaching, Theresa May now needs to fill the phrase with life and with meaning. And that’s where it’s getting pretty complicated. With both hard and soft Brexiteers in her cabinet, as well as Bremainers, May needs to find out quickly what the British position towards Brexit is.

A first step towards that will be taken on Wednesday, when May gathers her cabinet at Chequers. There, at the Prime Minister’s country retreat, senior ministers will reportedly have to come up with a so-called action plan to “make Brexit work”. As the Guardian explained on Sunday, each cabinet minister has to identify opportunities in their field of competence that could arise from the UK’s departure from the EU.

For that, May and her ministers first need to define what Brexit means. Does it mean continued access to the European Single Market? If so, for all sectors or just for some (e.g. only Financial Services)? Does Brexit mean continued unlimited freedom of labour movement? Or does it mean restrictions to this very freedom? What kind of model does the UK pursue in its negotiations with Brussels – the Norway model, a Swiss-type agreement or a Canadian free-trade solution? Or, would it prefer the “Continental Partnership” , a model that was first discussed on Tuesday after a group of policymakers and scholars published a paper calling for a new, looser organisation between the UK and the EU?

With advocates for both a soft and a hard Brexit in her cabinet, this will be a tough call for Theresa May. She will no doubt struggle to find an agreeable solution for the likes of Brexit minister David Davis or trade minister Liam Fox as well as for Philip Hammond, the Chancellor of the Exchequer. According to the Sunday Times, there is a split between different members of the cabinet, precisely over whether the UK should strive for continued access to the Single Market or not and, if so, whether it would accept continued unlimited European migration or not.

From a European perspective, there won’t be one without the other. Like many of his European counterparts before, Germany’s vice chancellor Sigmar Gabriel underlined this again during the weekend when he stated that the UK would have to “pay” for Brexit. “If we organise Brexit in the wrong way, then we’ll be in deep trouble, so now we need to make sure that we don’t allow Britain to keep the nice things, so to speak, related to Europe while taking no responsibility,” Gabriel said.

Not only the members of the British cabinet but also the members of the civil service seem to be split about what Brexit really means. The Brexit-side in particular gives the impression of fearing opposition from within the civil service. According to the Guardian, Steve Baker MP, who campaigned for Brexit, has suggested that officials should be “summarily fired” if they tried to block the Brexit process.

Unfortunately, the problem goes beyond cabinet and the civil service. MP’s are still shocked by May’s announcement to not consult the House of Commons before triggering Article 50. Should MP’s, most of whom were against Brexit before the referendum on June 23rd, not be questioned, given that the decision to trigger Article 50 will most likely be the gravest decision that the UK government is going to take for decades?

To many MPs as well as outside observers like me, that sounds odd, given that the vote for Brexit was presumably all about democracy and “taking back control”. In my home country Germany, it would be unheard of for our chancellor to go ahead without parliamentary consent (although, I admit, parliament was not questioned before Merkel allowed more than a million refugees in last year).

Then there is the Labour party, with its ongoing leadership contest. Corbyn’s challenger Will Owen has promised a second referendum, should he be elected Labour leader and should his party gain a majority in parliament. Both events are highly unlikely. In addition, the first endeavour is, as the FT’s Wolfgang Muenchau put it – also a waste of time and energy. According to him, the Remain-side should focus on securing a Brexit that is as soft as possible, not accidentally end up with one that is as hard as possible.

“Those who campaigned for the UK to stay in the EU are shaping up to be two-time losers. They lost the referendum vote on June 23; now they are losing the battle to keep the UK inside the single market. Both defeats are based on repeated misjudgements”, Muenchau stated. “After the referendum, they should have conceded defeat, and moved on to argue the case for the closest possible relationship between the UK and the EU. That would at least have kept open the possibility of a return to the EU in the future. Instead, they are calling for a second referendum.”

This, Muenchau argues, leaves the definition of what “Brexit means Brexit” really means mostly to the hard Brexit camp, to the disadvantage of Remainers and soft Brexiteers. There is some truth to this and I will be watching the Chequers meeting quite closely. However, “Bremain vs. Brexit” as a blog will end today, as I will move to a new post with the Wall Street Journal. I hope you enjoyed reading.

Britain’s quest for the right point in time

It’s all about timing. This is true for all walks of life: For work, for relationships, for international politics. As you might have discovered yourself, it matters a lot whether you find the right point in time to hand in your resignation. The right point in time to ask your partner if he or she wants to marry you. The right point in time to have kids.

The same goes for the world of business and politics. Timing can be crucial here, as the British have found out since the vote for Brexit. As there is no automatic start to the two year-long divorce proceedings, choosing the right point in time for the beginning of the negotiations might strongly influence the outcome.

This decision – when to trigger Article 50, the critical passage of the Lisbon Treaty – lies solely with the British government. Although they might want to, neither Jean-Claude Juncker, the President of the European Commission, nor the Members of the European Parliament or the 27 other Member States, can force Britain to trigger Article 50.

It’s important to realise that the decision over when to trigger Article 50 is one of the last cards the British government has left to play. It thus made sense that David Cameron, the former Prime Minister, did not trigger it straight away after the – for him – disastrous result of the referendum on the 23rd of June became known (although he had said before he would trigger it straight away). Quite the opposite, he left the decision to his successor.

Coming into office without any detailed plans on how to implement the result of the vote, Britain’s new Prime Minister, Theresa May, has spent the last two months trying to find out what the British position is for a life after the EU. Thanks to the decision in Whitehall not to engage in any prior, in-depth planning for the case of a vote for Brexit, May and her staff, as well the other members of her Cabinet, have found themselves frantically trying to close the gaps before the end of the summer break.

The same is happening on the other side. On Monday, Angela Merkel, French President Francois Hollande and Italy’s Prime Minister Matteo Renzi will meet in Ventotene in Italy. Then, the German Chancellor will head to Estonia and Poland. The goal for this “European Brexit Tour”, as the FT dubbed it, is clear: Coming up with a unified, European position towards Brexit.

Similar to the British, the Europeans don’t have much time left, as there is a big European summit looming which will be held on the 16th of September, in Bratislava. Despite the fact that some leading figures, among them Jean-Claude Juncker as well as Francois Hollande, have demanded the UK to start the divorce talks quickly, it seems that the Europeans have realised that Britain will take its time.

Initially, the autumn or the end of the year seemed like the most feasible time frame for Britain to begin negotiating its exit. Since then, the date has continuously been pushed back: From the end of 2016 to at least 2017. This scenario would give the British government some more time to find out what it wants: The Norwegian model? A Swiss-style agreement? Or maybe no agreement, resulting in a so-called “hard Brexit“? This option would also make it possible to see how the British economy digests the unexpected outcome of the referendum.

Some observers, among them EU-citizens living in the UK, have cherished the idea that Theresa May might kick the ball long into the grass. She could be waiting many more months, even years, they hope, and by that point have waited until the economy is in such a bad state that the electorate might be willing to let go of the idea to leave the EU. This is, of course, pure speculation, as are some of the other theories that are currently being tested.

Then, the Sunday Times made big headlines last weekend by running a story according to which Prime Minister May could wait until late 2017 or even longer before she triggers Article 50. This makes sense, given that both France and Germany will hold national (or federal) elections next year, with very unforeseeable outcomes. With the possibility of both Francois Hollande and Angela Merkel gone before the end of 2017, some more patience might be justified, as a change in government in important countries such as these will definitely influence the outcome of the Brexit-negotiations between London and Brussels.

However, this idea might not go down too well with the “hard“ Brexit-camp, the likes of Brexit Minister David Davis and Trade Minister Liam Fox. Both have campaigned for a quick Brexit in order to radically transform Britain’s relationship with the outside world. Thus, on Friday, there were widespread reports according to which the British government will not wait for the outcome of the French and the German elections before it triggers Article 50, letting the Pound Sterling tumble. From a market point of view, rumours like these are not welcome: The market does not like surprises, it wants ample time to prepare – in order to prevent the worst (In any case, the deployment of Article 50 will result in a heavy sell-off).

To me, it all comes down to how Theresa May squares the circle. How does she reach a common position between soft and hard Brexiteers? Will she manage to align David Davis and Liam Fox, as well as flip-floppers such as Foreign Secretary Boris Johnson? Depending on which position (The Norway model? A Swiss-type agreement? No agreement?) gains the upper hand, May will trigger Article 50 sooner or later. For observers, this will then provide some first insights into what the British government might be after.

After the vote for Brexit: Chinese investment in the UK, Part 2

It’s been very hot and very busy since I landed in Shanghai. The trip – from August 11 to August 20 – is aimed at doing some research for DIE WELT, as well as catching up with contacts that I haven’t to spoken since my last business trip to China in April. In the months that followed, I was occupied with covering the run-up to June 23rd, the day of the British EU-referendum. Hence I did not have time to travel to China.

Here in Shanghai, the vote for Brexit seems to be less of a concern than it is in London, where, close to two months after the referendum, it’s still the dominant topic for dinner conversations, work meetings and small talk on the elevator. Nevertheless, the vote for Brexit does have some significance for the Chinese. For years, the UK has been the top-receiver of Chinese FDI into Europe, a trend that was helped by the country’s openness to foreign investors, the perceived ease of doing business as well as the fact that the UK was a member of EU and thus functioned as a gateway into Europe.

I therefore asked my contacts in Shanghai: Will this change, now that the country wants to leave the EU? Will the country be less attractive for Chinese investors? And does the fact that Prime Minister Theresa May has put the long-awaited Hinkley Point project on hold (the nuclear reactor that was to be built with French and Chinese capital in Somerset) make any difference at all? The decision by Mrs. May – mainly driven by security- and cost concerns – bears a certain irony, given that it became publicly known only hours after EDF, the main financier for the project, finally decided to go ahead with it. Beijing reacted angrily towards the delay. As the Chinese ambassador to the UK, Liu Xiaoming stated in a commentary piece for the FT, Hinkley Point is a “test of mutual trust between UK and China”.

Since then, Prime Minister May has written to President Xi Jinping, assuring the Chinese government of the British intent to continue having strong and fruitful relations between London and Beijing. During her travels to Hangzhou (where the Chinese will host this year’s G20 summit in early September), May will, according to British media, raise the issue again and hopefully find a face-saving solution for both governments.

Interestingly enough, most of my interview partners here in Shanghai do not really share the concern that increased tension between Beijing and London could affect the attractiveness of the UK for Chinese investors. Quite the opposite: A manager from Fosun, the largest privately held Chinese conglomerate, argued on Monday that now, thanks to the depreciation of the pound sterling, the UK could become even more attractive for Chinese investors.

“We love crises“, he said, “they provide us with buying opportunities that did not exist before.“ Glancing over Pudong’s glitzy skyline from Fosun`s headquarter on the Bund, he stated that private conglomerates such as Fosun do not invest because of political guidelines from Beijing but for economic reasons. “The outcome of the British referendum did not change any of this“, he said.

Similar views were shared when I visited Ctrip, the Chinese travel company. Headquartered in Sky Soho Shanghai, a futuristic office complex designed by star architect Zaha Hadid, the company has grown quite substantially over the years, thanks to the ever growing Chinese demand for domestic and international travel. Not only Chinese tourists will flock to the UK, thanks to the lower value of the pound, one of the leading managers at Ctrip said. “I think the relationship between the UK and China will get tighter post-Brexit“, she commented. Even if the Hinkley Point deal was cancelled and the Chinese government reacted furiously, private investors would still buy UK firms, UK property and pour money into other UK assets, she thinks.

As I found out during a panel debate at the European Chamber of Commerce on Tuesday, this has actually happened before. “Remember the deep freeze between Beijing and London when Prime Minister Cameron received the Dalai Lama“, a former British diplomat told me. “Private investment into the UK reached new highs during that time.“

Thus, he argued, even if Hinkley Point was scrapped, this should not lead to a major decrease in Chinese investment into the UK. That’s an interesting assessment, given that the Chinese government influences state-owned enterprises – of which China has many – and thus shapes their foreign investments. The same is true for state-backed venture funds. One would assume that investors influenced by the Chinese government would be less likely to continue investing in the UK after such a high-profile fall-out between London and Beijing.

But, as I was told, this is not true for private investors and their vehicles. “Many Chinese look for brands and products that they can introduce to their Chinese customers“, the former diplomat said, citing examples such as Weetabix, the British cereal firm that was sold to Chinese bidders. “For these transactions, it does not matter whether the relations between governments flourish.“

Still, the type of Chinese investments in the UK might change over time. As a lawyer of Pinsent Masons, the British law firm, pointed out to me on Wednesday, the motivation of Chinese investors abroad could change. “So what is there for Chinese investors to buy, in the UK?“ he, a German that has lived in China for years and years, asked. “There is not too much technology remaining. Chinese investors will put their money elsewhere“, he stated.

A slight hint towards Germany, where Midea, a Chinese appliance maker from Foshan, hast just bought the robotics firm Kuka? Where the automation firm Broetje this week got new, Chinese owners? According to the lawyer, Chinese firms will increasingly shift their European investments towards the acquisition of technology, away from real estate and consumer brands.

It remains to be seen whether British infrastructure will still attract Chinese investment, after a potential cancellation of the Hinkley Point project. “It all depends on the diplomatic skills and the priorities of Prime Minister May“, the co-president of Ctrip said on Monday.

Other large scale projects such as HS2, the planned high-speed rail linking London and the North, face an uncertain future after the vote for Brexit, as the government will have to come up with financing for many more projects, once the UK has left the EU. And, will there be similar security concerns about Chinese investments into rail as there are with nuclear energy?

For other, non-Chinese investors, the current change in sentiment against Chinese involvement in crucial infrastructure projects in the UK might provide a lucky coincidence. As I was told, the Canadian Pension Plan Investment Board (CPPIB) is very interested in buying National Grid, the UK grid operator.

Given that Prime Minister May thinks differently about Chinese capital than her predecessor, the Chinese might not be successful in bidding for this (were they interested). That is especially true after the move by Australian regulators to block the sale of a controlling stake in Australia’s state grid to Chinese buyers. Now, it could be somebody else’s turn.

Sino-British relations: Does Brexit signal a rapid end to the “golden era”?

It must have been a shock. Just hours after the board of the French energy company EDF decided to go ahead with the plan to build a new nuclear reactor in Hinkley Point in Somerset, after a months-long impasse, Britain’s new prime minister Theresa May let it be known that she wanted to reconsider the whole project. The French shook their head in disbelief. After all the back and forth, after all the wrangling, multiple delays and the resignation of a board member? May’s announcement was an unpleasant surprise, to say the least.

Admittedly, there are huge doubts about the economics of the project. The nuclear plant will cost around 18 billion pounds to construct and could, according to new forecasts, gobble up another 19 billion pounds during the length of its lifetime. The so called “strike price” on which the previous government and the energy company agreed is still around twice as much as today’s price of a kilowatt hour of energy. Thanks to the global stock market turmoil earlier this year, EDF is worth much less than it was before, adding further to the doubts that have engulfed the project since its early days.

Still, from a French perspective, Hinkley Point C seems worth taking some risk. The reasoning behind this is clear. France prides itself to be a world leader in nuclear energy. Unluckily, in Europe, this energy source has lost a lot of its allure in the wake of Fukushima. Consequently, the majority of new nuclear plants that are being planned or constructed happens to be located outside of Europe. China is, with a huge margin, the country that is and will be building the largest amount of nuclear power plants on earth, for the foreseeable future.

And that’s where it gets interesting. In order for France to retain its status as a leading nuclear power, it needs to demonstrate that it can successfully develop and build new nuclear plants, ideally in Europe, its home market. China, on the other side, has started to compete aggressively for business outside of Asia and is trying to sell its Hualong One reactor – it is, according to Chinese officials “their own” design – to governments in Latin America, in Africa and the UK. Therefore, the predominantly state-owned French energy company has decided to go ahead with Hinkley Point C, even if the numbers don`t stack up.

Ironically, EDF still needs Chinese capital in order to lift the financial burden that comes along with building the new reactor. About a third of the investment comes from a Chinese consortium, among them CGN, China General Nuclear Power Group. For the Chinese side, the project functions as a bridgehead into the UK. Already in 2014 did the Chinese and the British government sign a Memorandum of Understanding according to which the Chinese would be given the right to design, build and operate a reactor on British soil. To start, a so called test-reactor was to be build in Bradwell in Essex. This agreement fit quite nicely into the Chinese strategy to export its Hualong One technology to foreign countries. That it was the UK, once the most powerful nation on earth, that accepted this, must have appeared as an extremely lucky pull.

But then came the vote for Brexit and with it, the new Prime Minister. Contrary to her predecessor, Theresa May does not have the reputation of being too China-friendly. She is said to have been sceptical about the advances that David Cameron and his Chancellor George Osborne have made to the Chinese, an abrupt U-turn after Cameron’s meeting with the Dalai Lama that led to a sudden shock-freeze of Sino-British relationships.

Only last October did President Xi Jinping travel to the UK, ending a ten-year period during which the Chinese President did not visit the country. He was given everything the UK had to offer: A stay at Buckingham Palace, a ride in the Royal Carriage, a beer with “Dave” in a local pub. Add to that trade deals worth nearly 40 billion pounds and you had both a happy PM and a happy Mr. Xi (whose country was courted by its former oppressor – the Chinese view on the UK – with the world to watch).

Not only the French, but also the Chinese have recently shaken their head in disbelief. For them, a lot is at stake. Will their Hualong One export-strategy fail, now that the UK is no longer that interested in the deal? It seems that Beijing thinks exactly that. Both the Chinese media as well as the Chinese ambassador to the UK, Liu Xiaoming, have criticised May’s decision heavily. Ambassador Liu even went as far as to indirectly threaten the UK: “Right now, the China-UK relationship is at a crucial historical juncture . . . I hope the UK will keep its door open to China,” Mr Liu wrote in the Financial Times.

This happens at a time when the UK has lost some of its attraction for Chinese investors already. Once outside the EU, the country will no longer function as a gateway into the EU. Still, because of its openness, the weakened Pound Sterling and the relative ease of doing business, investors will retain some interest in the UK. Given that there will likely be less investment from Continental Europe, once the UK has left the EU, the country needs these Chinese investors more than ever. But – what an irony – the new government does the opposite: It works very hard on harming its reputation as an open, China-friendly country in the center of Europe. Very bad timing, I guess.

I am of course aware that some people think that Hinkley Point is just one example out of many where China poors money into the UK. Yes, overall, there is still a case for Chinese investments in the UK, after all, assets are now dirt-cheap, compared to the price levels they were at before the 23rd of June. But, don’t forget: Chinese overseas investments are heavily influenced by the central government and by priorities that have been formulated by Beijing. State investments and private investments are often intertwined. Should the British government go ahead and scrap the project – for budgeting reasons, for security reasons – this will consequently have a lasting, negative impact on the relationship between China and the UK.

That’s not to say that the British concerns should be overlooked. Both costs as well as national security are valid arguments when assessing the feasibility of an endeavour such as Hinkley Point C. Tragically, it’s not as if these issues weren’t obvious before. Already two, three years ago, it was clear that Hinkley Point would be expensive, maybe too expensive.

It was also clear that you would have concerns about national security if you handed control over nuclear power plants to companies from an autocratic country such as China – even if those Chinese nuclear companies were controlled by the same regulators as their British counterparts. The plan to have the Chinese design, build and operate a nuclear plant in Britain did raise a lot of eyebrows at the time, in Germany, but also in other countries. I remember having had strong debates with some of my German readers at the time who thought this was really, really dangerous.

But on the British side, optimism prevailed. Only once you digged a bit deeper, you realised why this was the case: The government desperately needs new power plants. It is already behind schedule in replacing the old fleet and cannot find Western firms except EDF to commit to expensive and large-scale projects anymore. Thus, although there might have been security concerns before, Prime Minister Cameron decided to go for the Franco-Chinese solution, making sure to lobby for additional Chinese investment for big infrastructure projects such as HS2. Theresa May, at that time Home Secretary, did reportedly raise her concerns but did not manage to gain much traction.

Unfortunately, Cameron’s strategy no longer looks as good as it did some years ago. Now, after its U-turn with the Dalai Lama-crisis, the UK risks a second U-turn, away from China. Both issues, the desperate need for new power stations as well as the hot-cold-hot-cold-attitude to China stem from the same problem: The lack of long-term, strategic thinking in this country. That makes the UK government look a bit foolish, in comparison to other European countries, but especially in comparison with countries like China that – thanks to their autocratic, undemocratic form of government – plan in decades, not in months.

The fact that CGN is now under investigation in the US for alleged espionage complicates matters even further. With security becoming an ever bigger issue, will Prime Minister May dare to rebuke the Chinese, risking the relationship that was deemed to be so important by her predecessor? I guess I won’t be the only one watching this space.

The Bank of England’s reaction towards the vote for Brexit

The “unreliable boyfriend”: That´s the nickname that the City of London has given Mark Carney, the Canadian who has been running the Bank of England since 2013. How did he earn that honour? Several times last year – with the EU-referendum still months and months away, the British economy presented itself in rude health – Carney hinted towards a potential rate rise, only to disappoint investors and analysts by leaving rates at the level they have been since 2009, 0.5 percent. Since then, the City never really trusted the comments that came out of Threadneedle Street.

About six weeks after the historic vote for Brexit, things have changed quite dramatically. As he proved on Thursday, Mark Carney no longer deserves his nickname. Contrary to the past, the head of the BoE met the expectations of the financial community: On Wednesday, the Monetary Policy Committee (MPC), the core decision-making organ of the Central Bank, decided to cut rates to 0.25 percent and to restart Quantitative Easing (QE). In addition to that, the MPC decided to create a new credit facility for banks and house-building societies.

With these measures in place, Governor Carney and the Chancellor of the Exchequer,  Philip Hammond, hope to moderate the negative impact of the EU-referendum on the British economy. Important indicators such as the most recent Purchasing Managers Index (PMI) point towards a drastic slowdown since the end of June. Because of this situation, the BoE has adjusted its forecast for next year: Instead of 2.3 percent as previously forecasted, the central bank only expects meagre growth of around 0.8 percent, the biggest amendment since 1983. After the expected rate cut, it remains to be seen whether the Central Bank will be able to prevent a hard landing. Ultimately, the core problem of the British economy is caused by the uncertainty about the future relationship between the UK and the EU – a problem that monetary policy cannot solve.

According to the report published on Thursday, the BoE expects an increase in inflation, more unemployment and less consumer demand after the vote for Brexit. At 4.9 percent, unemployment is currently at a historic low. However, it is supposed to rise again, to 5.4 percent in 2017 and 5.6 percent in 2018. Because of the expected slump in consumer demand, the MPC has decided to restart QE, a policy measure that hasn´t been used since 2013. Now, the BoE is allowed to buy British government bonds (gilts) of up to 60 billion pounds and, in addition to this, corporate bonds of up to 10 billion pounds. By including corporate bonds, the BoE follows the example of the European Central Bank (ECB) which started buying corporate bonds in early June as part of its QE-program.

The cut in interest rates will most likely reduce the profitability of British banks. Simon-Kucher & Partners, a strategy consultancy, expects operating profits of the 21 largest banks and house-building societies to decline by up to 1.4 billion pounds, now that rates have been reduced to their lowest level for 322 years. In order to prevent a new banking crisis, the MPC introduced a credit program for banks and house-building societies, the so called “Term Funding Scheme” which provides financial institutions with the opportunity to borrow money at rates close to the bank rate. Previous QE-programs included, the balance sheet of the BoE could swell to levels of up to 545 billion pounds thanks to the measures announced on Thursday.

Initially, analysts and markets reacted positively. However, it remains to be seen whether the measures of the BoE deliver the desired results. The underlying problem of the British economy is not access to capital and a lack of funding, but the heightened levels of uncertainty since the British voted for Brexit on the 23rd of June. As long as there is no clarity over the future relationship between the UK and the EU, monetary policy can only do so much to support confidence and investment.

It depends on the outcome of the negotiations between London and Brussels whether the British economy enters a long and severe crisis or whether it recovers relatively quickly and, maybe even more important, only with minor bruises. According to what Theresa May has said, it will take a while until the official start of the negotiations. The Prime Minister intends to wait until early 2017 before she triggers Article 50 of the Lisbon Treaty which will commence the divorce process between the UK and the EU.

Mark Carney is aware of this, as his letter to Chancellor Hammond indicates. “Many of the adjustments needed to move to that new equilibrium (the new relationship between the UK and the EU) are real in nature, and are not the gift of monetary policy makers. Nonetheless, monetary policy can still play a role in smoothing part of this adjustment by appropriately balancing the forces acting to push inflation above the target with those expected to push activity below the economy’s new path for potential output.” Analysts as well as business associations, such as the British Chambers of Commerce (BCC), remain sceptical as to whether the BoE’s actions will produce the desired results. “Lower interest rates may give a helpful boost to market confidence, but have little-long term effect on businesses when rates are already so low”, comments Adam Marshall, acting Director General of the BCC.

Independent of this, Chancellor Hammond seems to be confident regarding the future prospects for the British economy. “The UK economy is fundamentally strong – employment is at a record high, there are almost a million new businesses since 2010 and the budget deficit has been reduced by almost two-thirds as a share of GDP. This is a new chapter for Britain, but we are well-placed to deal with the volatility caused by the vote to leave the EU”, Hammond writes in a letter to the Governor of the Central Bank.

He continues by stating: “I am prepared to take any necessary steps to support the economy and promote confidence. The UK starts from a position of economic strength as we address the challenges and take advantage of the opportunities that will arise as we forge a new relationship with the EU.” Regardless of the slowdown that indicators such as the most recent version of the PMI point out, the BoE has left its growth forecast for 2016 unchanged. In the year of the EU-referendum, the British economy is supposed to grow by 2 percent, the BoE thinks.

After their decision on Wednesday, the members of the MPC will only reconvene in early November. By then, the impact of the vote for Brexit on the state of the economy should be more obvious than it is today. Should there be a further deterioration of sentiment, the MPC might reduce rates further, but not to zero. According to the statement put out by the BoE, the bank rate is supposed to remain a little above zero, potentially avoiding some of the problems that the European counterpart of the BoE, the ECB, finds itself in after the introduction of negative interest rates.

Not only the BoE, but also the Chancellor could be taking further measures soon. He will deliver his first Autumn Statement in November and is expected to announce fiscal stimulus for the ailing economy.

But will Hammond be able to take away some of the uncertainty British firms suffer from? We’ll see.

 

 

 

Some thoughts on Boris Johnson

It was a shock. German politicians, their French counterparts, EU-representatives – they all shook their heads in disbelief when it was announced that the former mayor of London, Boris Johnson, would become the UK’s new foreign secretary. German TV commentators reportedly could not stop laughing about the appointment. Others, such as the French foreign minister, Jean-Marc Ayrault, described the Prime Minister’s choice as a sign of the political crisis in the UK. According to Ayrault, Johnson lied a lot during the referendum campaign and is now, what an irony, being rewarded with the post of foreign secretary.

Others tuned in, commenting on Johnson’s rather undiplomatic comments about for example President Obama’s African ancestry, and the fact that he, Johnson, lent his voice to a campaign that was made up of a lot of half-truths, to put it mildly (most of which have already been deleted from the internet). Frank-Walter Steinmeier, the German foreign minister, stated: “To be honest, I find this outrageous. It’s not just bitter for Great Britain. It’s also bitter for the EU.”

Angela Merkel, the German chancellor, however, did not comment on Prime Minister May’s choice. She instead called 10 Downing Street and invited her to Berlin. “I think it is our duty to work quite closely with governments of allied countries“, Merkel said. “The world has enough problems so we need to make progress in foreign policy collaboration, the way we have done it in the past with Great Britain.“

Again, Merkel behaved differently than her – mostly male – colleagues. Instead of exclaiming what an ill-fated choice the selection of Boris Johnson, a prominent Brexit-supporter, was, Merkel waits and sees, a tactic that she mastered very early on in her political career.

From a German point of view, Boris Johnson’s appointment is an interesting choice. Yes, admittedly, he is a populist. He is someone who seems to lack strong political beliefs and who jumped at the chance to join the Brexit-camp just because it fit his long term ambitions. Seldom has this been so obvious as in the case of Boris Johnson, a man who seemed to have little in common with hardcore Brexit supporters such as David Davis, Theresa May’s new Brexit-minister, or Nigel Farage, the former head of UKIP who decided to withdraw from the public eye quickly after the referendum in order to make sure that he will not be associated with the mess that is likely to follow.

However, with the appointment of a Brexit-minister and the creation of an international trade ministry, May has made sure that Johnson’s remit will be quite limited. The real driver in Britain`s Brexit-negotiations will not be the Foreign Office, but 10 and 11 Downing Street as well as the Brexit ministry and the ministry for international trade. Consequently, foreign secretary Johnson will not be involved too much in negotiating Britain´s future relationship with Europe. At the same time, May has made sure that Johnson is inside the government, not outside where he could have easily attacked her decision-making without having to carry any responsibility himself.

He will be fairly busy in the months to come, travelling the world, trying to get the message across that although the UK has voted to leave the EU, it is not turning its back against the world. In addition to that, he will have to make sure that he does not make too many gaffes, something that he is quite known for.

It remains to be seen whether Johnson will be able to curb his tongue. If he does not, he might be the first minister of this new government to be sacked. At least, that´s what the bookies think.

 

 

 

 

Some thoughts on Boris Johnson

It was a shock. German politicians, their French counterparts, EU-representatives – they all shook their heads in disbelief when it was announced that the former mayor of London, Boris Johnson, would become the UK’s new foreign secretary. German TV commentators reportedly could not stop laughing about the appointment. Others, such as the French foreign minister, Jean-Marc Ayrault, described the Prime Minister’s choice as a sign of the political crisis in the UK. According to Ayrault, Johnson lied a lot during the referendum campaign and is now, what an irony, being rewarded with the post of foreign secretary.

Others tuned in, commenting on Johnson’s rather undiplomatic comments about for example President Obama’s African ancestry, and the fact that he, Johnson, lent his voice to a campaign that was made up of a lot of half-truths, to put it mildly (most of which have already been deleted from the internet). Frank-Walter Steinmeier, the German foreign minister, stated: “To be honest, I find this outrageous. It’s not just bitter for Great Britain. It’s also bitter for the EU.”

Angela Merkel, the German chancellor, however, did not comment on Prime Minister May’s choice. She instead called 10 Downing Street and invited her to Berlin. “I think it is our duty to work quite closely with governments of allied countries“, Merkel said. “The world has enough problems so we need to make progress in foreign policy collaboration, the way we have done it in the past with Great Britain.“

Again, Merkel behaved differently than her – mostly male – colleagues. Instead of exclaiming what an ill-fated choice the selection of Boris Johnson, a prominent Brexit-supporter, was, Merkel waits and sees, a tactic that she mastered very early on in her political career.

From a German point of view, Boris Johnson’s appointment is an interesting choice. Yes, admittedly, he is a populist. He is someone who seems to lack strong political beliefs and who jumped at the chance to join the Brexit-camp just because it fit his long term ambitions. Seldom has this been so obvious as in the case of Boris Johnson, a man who seemed to have little in common with hardcore Brexit supporters such as David Davis, Theresa May’s new Brexit-minister, or Nigel Farage, the former head of UKIP who decided to withdraw from the public eye quickly after the referendum in order to make sure that he will not be associated with the mess that is likely to follow.

However, with the appointment of a Brexit-minister and the creation of an international trade ministry, May has made sure that Johnson’s remit will be quite limited. The real driver in Britain`s Brexit-negotiations will not be the Foreign Office, but 10 and 11 Downing Street as well as the Brexit ministry and the ministry for international trade. Consequently, foreign secretary Johnson will not be involved too much in negotiating Britain´s future relationship with Europe. At the same time, May has made sure that Johnson is inside the government, not outside where he could have easily attacked her decision-making without having to carry any responsibility himself.

He will be fairly busy in the months to come, travelling the world, trying to get the message across that although the UK has voted to leave the EU, it is not turning its back against the world. In addition to that, he will have to make sure that he does not make too many gaffes, something that he is quite known for.

It remains to be seen whether Johnson will be able to curb his tongue. If he does not, he might be the first minister of this new government to be sacked. At least, that´s what the bookies think.

The saviour of the British economy?

A safe pair of hands. Over and over again, British media outlets have used these words to describe Theresa May, the new Prime Minister. She is said to be stable and reliable, and yes, a bit boring. But maybe that’s exactly what the country needs now, after all the excitement that her predecessor David Cameron provided the UK with.

Similar things are being said about Theresa May’s new chancellor, Philip Hammond. The 60-year old has already held several ministerial posts – he was Foreign and Defence Secretary, among others – and has, contrary to many of his colleagues in the House of Commons, had a “real” job before becoming a Member of Parliament 19 years ago. After his studies at Oxford University, Hammond worked for a company that sells medical appliances, spent some time in South America as a consultant for the World Bank and became a partner at a consultancy firm.

Prior to the British EU-referendum on the 23rd of June, Hammond was part of the Remain-camp. It is expected that he will try to negotiate a deal under which the City of London can maintain its passporting rights into Europe, a crucial factor for London to keep its status as Europe’s leading financial center. At the same time, the Conservative will have to stabilise the British economy and regain trust from international investors. Thanks to its high budget and current account deficit, Britain will continue to rely on foreign funding – even more so, should there be a sharp recession looming.

Philip Hammond has had an eye out for the prestigious role for a while. Already in 2010, when the Conservatives formed a government with the Liberal Democrats, the man with the grey mane uttered his interest for the role as a Chief Secretary in Her Majesty’s Treasury, the second most important job after that of the Minister. However, at that point in time, a Liberal got the chance.

Thus, Hammond started in the Department of Transport before becoming Defence Secretary in 2011 and Foreign Secretary in 2014. A Member of Parliament, Hammond has represented Runnymede and Weybridge since 1997 – a constituency that voted Leave although their MEP supported Britain to remain in the EU.

Philip Hammond will now have to make use of his vast experience in order to reassure international investors that the UK is still a good destination for their money. “We don`t turn our back against the world”, he said after his appointment. Hammond pledged to take “whatever measures” needed to help stabilise the economy and retain Britain as an attractive destination for firms to invest.

It remains to be seen what this means for his tax policies. On Thursday, Hammond declined to comment on the announcements made by his predecessor George Osborne to slash corporation tax to 15 percent. Hammond is known for his support for low taxes. Nevertheless, it is still too early to tell whether Hammond will engage in, as some critics such as Pascal Lamy, the former head of the WTO, have claimed, extensive tax dumping in order to keep companies from leaving the UK after the divorce from the EU.

There is more to watch out for. There are two areas where Hammond could clash with his new boss fairly soon. First, there is fiscal politics. Hammond has a reputation of being a “fiscal hawk”. Nevertheless, he cannot just continue what George Osborne started in 2010 when he embarked on a massive austerity program that still is not finished. Prime Minister May has been very clear in the past days that the government’s first goal should not be – as planned before – to generate a budget surplus by 2020 but to make sure that more people benefit from economic growth and prosperity (assuming, of course, there is still something left to share after Brexit).

We might get a first glance of his fiscal plans when he presents the Autumn Statement in November. Different to what then chancellor George Osborne announced before the referendum, there won’t be an emergency budget. Experts like Kallum Pickering, the UK economist at Berenberg Bank, thus expect some more fiscal loosening in the short run whilst more cuts are being postponed towards the end of the Parliament.

Besides fiscal policy, there is a second topic that holds vast potential for conflict, the so called passport for the City of London. This framework allows banks headquartered in London to sell their products on the continent. Should the City of London lose these rights, several thousand jobs could be moved to Frankfurt, Paris or Dublin. London would subsequently lose some of its attractiveness for international banks. Hammond seems to be all too aware of this. On Tuesday, he stated at the British Bankers Association that the financial industry will be possibly hit the hardest by Brexit. “I know and understand the importance of passporting”, Hammond said.

Theresa May though not only needs to satisfy the banks, but also those 17 million Brexit-voters of which many requested the European Freedom of Labour Movement to be scrapped or at least reduced. Leading EU-politicians such as Jean-Claude Juncker, the President of the European Commission, or Angela Merkel, the German chancellor, have already made clear that there is not too much room for negotiation here. Access to the Single Market and passporting can only be sustained if the four freedoms remain in place. So where will that leave the two safe pairs of hands?

 

 

 

 

May and Merkel – will they get along?

The parallels are all too obvious. They are both females, in their late fifties or early sixties. They are both pastors’ daughters. They both studied untypical subjects (geography and physics). They are both known for being practical, having a strong endurance and, paying attention to details. In addition to all of this, they have fought their way to the top by beating the competition (mostly men) and by making sure that there is actually not too much competition left to challenge them in the future (Merkel has killed off all critics in her party while May was the last Tory-woman standing after a bruising Referendum campaign).

Both are known to be hard workers. Both have the reputation of wanting to get things done and, of just getting on with it, as people say here in Britain. Both Merkel, the German chancellor, as well as May, Britain’s new Prime Minister, have been around for a while (Merkel since 2005, May since 2010). Both are said to be a “safe pair of hands”, a safe bet. Neither of the two has the reputation of being too emotional, chatty, charming, or anything but business.

So, the question goes, will they get along, the German chancellor and her British counterpart? For sure, the relationship between Merkel and May will be crucial when negotiating Britain’s exit from the EU. Both will be studying each others previous negotiating quite closely, and they will be trying to predict the future by investigating the other’s past behaviour in negotiations where a lot was at stake.

From a German point of view, out of the two choices at hand – Theresa May and Andrea Leadsom – May is definitely the preferred option. This is not so much because she was a soft Remainer, but rather because she is expected to behave fairly rationally, pragmatically and reasonably. That’s not to say that Merkel and others should not expect some tough negotiating. Theresa May will, and I am sure that people in Berlin and Brussels will be aware of this, fight as hard as she can to get “the best deal for Britain”.

A lot will depend on the careful calibration of this relationship. Merkel might help May where other European partners don’t want to. But, as the leading representative of one of the most important trading partners of the UK, she can also play a huge role in massaging May into the desired direction.

As to the end result, I am not sure whether it makes a huge difference whether the two get along well, given the gigantic task that lies ahead of them. There is a fundamental issue here that needs to be resolved but that at the same time seems totally unresolveable. How do you keep full access to the Single Market if you plan to reduce the European Freedom of (Labour) Movement? Any negotiator will have to be very witty to achieve anything that comes close to this.

Depending on how the coming months unfold, Merkel could become May’s interconnector into Brussels and other European capitals. However, it could also be the contrary. Merkel might well become a strong adversary to May, should the British Prime Minister try to use the Europeans currently living in the UK as bargaining chips for the negotiations in Brussels.

However, we should not overplay the importance of the relationship between the two. Germany and the UK no longer have closely aligned interests (at least not as aligned as before June 23rd) and so each side will fight with might for what they want to get out of this situation.

Where have they all gone?

On Saturday, I spoke to a good friend on the phone. She is German, like me, and works for a British firm in London. Some weeks ago, she was sent to the Middle East to supervise a local project which unfortunately lead to her missing the full, on the ground Brexit-experience that we enjoyed here. She is still there, in the sweltering heat, and is trying to follow the post-Brexit fall out as closely as possible.

One of the things that my friend is particularly angry about is the fact that Johnson, Gove and Farage, the triumvirate that engineered the victory of the Leave-side, have now all but vanished from the political stage. Well, you might say, that’s an old hat, isn’t it? It might feel as if, given that within the last two and a half weeks, most of what people like me and my friend thought we had known about this country is no longer true. Thus, with headlines chasing each other, people seem to get used to this new reality fairly quickly.

My friend though is still struggling. “This is just not correct”, she, a strong supporter of Britain’s EU-membership, said. “How can it be that these people are not held accountable for what they have done?” Fair point. Of course, the media reported widely on Johnson’s withdrawal, Gove’s betrayal and Farage’s resignation as chair of Ukip. As we found out, he wants to remain a British MEP even though he was one of the core driving forces that made the UK vote for Leave.

Calls for him to step down fell on deaf ears, even though MPs like Tom Brake have critised him heavily. Last week, when I interviewed Brake, he said: “You can’t call for the EU to be dismantled and at the same time benefit from a generous salary and expense allowances. Nigel needs to do the honourable thing – he cannot spend years complaining about the Brussels gravy train and stay on it.” Unfortunately, that’s exactly what Farage intends to do.

Besides Nigel, let’s not forget people like Boris Johnson and Michael Gove. Their failure to accept responsibility is as disappointing as that of Nigel Farage. None of this is of course a surprise. I knew from the beginning onwards that neither of the three were willing to carry the burden of implementing the vote of the British people.

What I am surprised about though is that we don’t hear anything from Leave-voters, those that thought that the NHS would get 350 million pounds more per week if the UK left the EU, those that believed that the UK could just end European migration with a snap of a finger. Why are we not hearing from them?

It’s obvious that they have been misled and lied to by people like Nigel Farage, Boris Johnson and Michael Gove. Most of the claims made during the campaign were taken back quickly, within days, and quickly afterwards, the main protagonists are leaving the stage and nobody stops them from doing so.

If I was a Leave-voter, I would be really angry these days. I would feel fooled and used by people who obviously were not interested in the fate of the British people but only in their own careers. But Leave-voters seem to not bother. I googled around a bit and found an interesting entry on Quora. On the question whether Brexit voters felt betrayed now that Farage and Johnson have resigned, user Alex Higgins had an easy answer: “No. Farage is a national hero who has restored Britain’s freedom. Johnson was stabbed in the back by his ex-friend Gove and left with no option but to withdraw. Very simple really.”

If this is what Leave-voters think (I still haven’t met a single one of them, elitist me), then there is only one conclusion one can draw: A large part of the population in this country does not mind if they are being lied to.

In a democracy, we get the politicians and the government we deserve. This seems to be especially true for today’s Britain.