Assessing the strength of the tremors

Earthquakes are the result of long periods during which two tectonic plates rub against each other but are unable to smoothly slide over each other due to geological irregularities. But the pressure finally builds up sufficiently to force one plate to slide over the irregularity with such force that it releases energy in the form of a quake. They are generally unpredictable in terms of their timing and the impact of their devastation. But the forces triggering them take a long time to build – indeed, one could be forming under your feet right now.

So it is with economic events and today we have seen a couple of minor tremors which could be the prelude to a much bigger event. Let’s start in Germany where talks to try and form a coalition government finally failed yesterday after two months of fruitless negotiations. There are now essentially three options on the table: form a minority government; form a grand coalition with the SPD or call new elections. Chancellor Merkel does not appear keen on a minority government and the SPD apparently are not willing to repeat the experience of the legislative period 2013-17 when they were accused of being the CDU’s lapdog. And the option of new elections is not palatable to anybody, although Merkel sees it as the least worst option. Indeed, the shock triggered by the September result might cause those who voted AfD as a protest to rethink their strategy because it simply leads to more political chaos. There again, they may not.

Having negotiated the Dutch and French elections earlier in the year, the irony would be if Germany were to become the primary source of political instability with Angela Merkel’s credibility dented beyond repair. It is bad news for two reasons. First, for the euro zone. Having helped steer the euro zone through an existential crisis, Merkel is perceived to be critical to attempts to keep the region on track. Indeed, in Emmanuel Macron she has a political partner across the Rhine who has the vision and energy to kick start Franco-German co-operation. But like other European countries which have turned in on themselves in a bid to address domestic dissatisfaction, a large swathe of the German electorate voted for the AfD in protest at Merkel’s policy of opening the gates to thousands of immigrants. Even assuming she remains as Chancellor, Merkel cannot blithely dismiss this constituency, suggesting she may be a bit too preoccupied in future with domestic issues to fully focus on the euro zone.

It may also be bad news for the UK as it seeks to push forward with Brexit negotiations, for precisely the same reasons. A German Chancellor who is understandably more worried about domestic developments will be less focused on a problem which is perceived across the EU27 as a self-inflicted wound. Moreover, there still appear to be those on the UK side who believe that getting Germany onside will be sufficient to help them get what they want. This was always a naïve view – after all there are 26 other governments with a vote. But if Merkel is less willing, or able, to push through a Brexit deal it removes a crucial weapon from the British armoury.

A second tremor today was the announcement that the European Medicines Agency and European Banking Authority are set to leave London for Amsterdam and Paris respectively. This is the Realpolitik of Brexit in action. For a quick overview of why the loss of the EMA is a big deal, this Twitter thread is worth a read. Recall that in April, Brexit Secretary David Davis would not accept that the two agencies had to leave London even though it was clear that the EU had already begun the process of finding a new home. And lest we forget, banks have not yet moved people out in great numbers – but move people they will over the next 15 months, despite the smug proclamations of those who think the world will remain the same as before. Indeed, for anyone who believes that Brexit is broadly leaving the UK unscathed, it should be noted that the economy is growing only at a rate of 1.5% per annum compared to a rate around 2% prior to the referendum – and that is despite an economic pickup in continental Europe.

Neither of the tremors we have experienced today bode well for the future of Europe in general and the UK in particular. Sometimes, of course, preliminary tremors never result in the big earthquake – as residents of San Francisco over the last 100 years can testify. But they should be treated as a warning sign that there could be worse to come. In the UK case, you can bet on it.