PIG TODAY- A ‘3M’ solution for Europe would mean stability

The battle over Britain’s place in Europe and the continent’s future shape is underway. The U.S. is playing a role in all this. Britain’s decision to leave the European Union, by itself, might have been expected to spur the forces of European disintegration. Coupled with the election of Donald Trump, Brexit, as President Trump put it in his interview on Sunday with the Financial Times, may have encouraged the EU “in getting their act together.”

With the contours starting to become a little clearer, the following predictions now look reasonable:

• Britain’s divorce negotiations, which can start following last week’s delivery of the Article 50 letter, will be relatively civilized. Sporadic acrimony and tantrums are inevitable. The U.K. has to try to prove that a non-EU future will be brighter. The other 27 EU members must show the British will be poorer and unhappier, so as to promote EU27 solidarity and prevent defections. But based on last week’s initial exchanges of ideas and objectives, it’s possible to see now how compromises can emerge — on trade in goods and services, on the City, on migration (including the rights of EU citizens in the U.K. and British people in the EU) and on money.

• Germany is indicating that London’s willingness to provide some certainty over U.K. funds flowing after Brexit in 2019 until the end of the EU’s 2014-20 budgetary period would help prepare a framework trade deal including a generous phasing-in period. Theresa May, the British prime minister, will be wary of repeating the pre-referendum mistake of David Cameron, her predecessor, of relying too much on Germany. Yet there will be one strong difference. Cocksure Cameron persuaded Berlin that the U.K. was likely to stay in after the June vote. Melancholic May and her backbenchers will be stoking up fears that the British could walk away from a “bad” deal — and that would leave the EU (and Germany) cash-starved.

• Angela Merkel looks likely to remain German chancellor for a fourth term after the September elections. She has vital experience and standing, yet she and the electorate have grown tired of each other. Martin Schulz, the leader of the Social Democrats and who shares power with Merkel in Berlin’s grand coalition, has raised his party’s poll showing by reconfirming SPD attachment to left-wing economics and European integration. Yet his aspirations have looked as improbable as his “outsider” credentials gleaned from a former role as European parliament president. Schulz and his pretensions were badly dented when his party handed Merkel a victory in the Saarland state election on March 27. She will probably remain ahead in the autumn. The prize ... another grand coalition.

• The European Central Bank will stick to “making haste slowly” over monetary normalization, allowing the euro to stay weak and recovery to gain momentum as the Federal Reserve gradually tightens credit. Jens Weidmann, the Bundesbank president who takes a much more political role than his predecessors, has pointedly refrained from criticizing the ECB’s slowness in raising negative interest rates or phasing out quantitative easing. Klaas Knot, president of the Nederlandsche Bank, the most vocal of the ECB’s “hard money” faction, has stated that rate increases should come only after bond purchases have been adjusted, calling this “a logical order.” Although a slight tightening of deposit rates cannot be ruled out, the first cuts in lending rates will almost certainly not come until after Germany’s autumn poll.

Source: marketwatch.com