We help companies affected by political change. To access our political and commercial intelligence service, email GUIDE’s Chief Executive on greig@theguideconsultancy.com

09JUN20: Lies, damn lies, and economic statistics

You would be hard-pressed to find two institutions more important to the EU economy than the Commission and the European Central Bank. However, their views on what COVID-19 will do to Member States’ financial standing could hardly be more different. While the ECB predicts a -15% shrinkage of the eurozone economy as a result of the virus, the Commission makes a much rosier (though still unprecedented) prediction of -7.7%

It’s said that if you lay every economists in the world end-to-end, they still wouldn’t reach a conclusion – but this is not just an example of academics splitting hairs. The Commission’s forecasts consistently boost the economic prospects of EU Member States (and especially the eurozone) more than reality warrants. This could cause some real headaches. For example, in the Brexit talks, politicians increasingly believe the Commission is basing negotiating priorities on what it wished the EU economy looks like, rather than what it actually does. 

If the Commission becomes the linchpin for mutualised EU debt this problem will only get worse – and the markets will be a lot less forgiving than officials and journalists have been to date.



EU27 leaders have three incentives to extend the Brexit talks: first and most obviously, to free up capacity as political efforts focus on the COVID-19 crisis; second, delaying the break-off would allow greater access to UK funds when the EU27 want to pay for rebuilding the bloc's economy in 2021; and third, ongoing regulatory alignment would give the EU27 some control over how HMG positions the UK economy to compete with the bloc in what could be a pretty barren post-corona setting.

While the media consensus is that an extension to talks is inevitable, there are arguments for keeping to the current schedule. For example, a delay is just that - it puts off the reckoning rather than removes the need for it, pushing any Brexit-related disruption closer to the next UK General Election. More immediately, as any mechanic will tell you, it's easier to fix a car when it's standing still - so while the economy is in aspic for corona there could be a unique opportunity to reset the terms of trade.  


HMG is making one enormous bet that public debt can be used to generate a financial return, partly by sparking private investment and partly by turning the UK into the world’s science lab. With the Tories at 50% in the polls, they might well be in office long enough to cash in on that gamble. But there’s an irony, too: at the same time as it goes to the debt markets, HMG is reining in Local Authorities’ ability to fund commercial investments with borrowing, for fear of losses exceeding returns.


The next set of Holyrood elections will be a referendum on a referendum – if the SNP has a very strong showing, it’s going to be tricky for HMG to resist calls to test Scotland’s appetite for independence again. This means that we are firmly in the pre-match build-up now… and without COVID-19, the Salmond trial would likely be front page news across the UK.


HMG has little choice but to take its new approach to EU talks if it wants trade agreements with other partners. To strike new trade deals beyond the EU, HMG must manage its own affairs – if the EU had ongoing legal control over HMG, any prospective UK deals with third countries would be impossible because an external body could alter the UK’s ability to comply at any stage.


HMG is due to make fully independent representations at the WTO from 1st January 2021. Ahead of that, it has asked every country in the WTO to approve its General Agreement on Trade in Services (GATS) schedule – and every country duly has, bar one. A Freedom of Information request confirms that Russia has refused to sign off the UK’s schedule, saying it “looks forward to entering into consultations with the UK in order to reach a satisfactory resolution to this matter”. Given that Russia may be equally content with causing disruption or gaining concessions, there are strong incentives to quickly remove this spanner from the works.


For a while, we've been telling clients about a storm coming for Local Authority funding, as Councillors sign off increasingly ambitious and speculative commercial property deals to boost their spending power. The NAO has just published a report that says some Councils have seen “median gross external borrowing levels grow from 3% to 756% of their spending power from 2015-16 to 2018-19”. This is likely to become a big story soon.


The BBC reports that Varadkar sees achieving a permanent UK-EU deal as an “existential” issue for Ireland. If he’s right, whatever happens he can’t walk away from talks. And if the EU decides to stand by Ireland, it can’t walk away from them, either. And if, whatever happens, the EU couldn’t walk away then the balance of power in Phase Two might not be as most commentators assume.


Media reports that HMG is ‘dismantling’ no-deal measures are wide of the mark. Civil Servants did tell colleagues that preparations explicitly for a 31st January exit could be stood down but HMG is keeping its options open for the end of 2020 – as implied by a new Ministerial Statement today relating to infrastructure vital to Operation Brock. No-deal planning is neither gone nor forgotten.


The Commission President’s visit to London today is striking because her comments, ostensibly aimed at HMG, are actually a challenge to the EU Council. It can’t be repeated often enough that the Council, made up of Member States’ heads of government, has not given the Commission a mandate or goals for Phase Two – so the President’s effort today to set out the EU27’s red lines is really an attempt to grab control over the Brexit process. And it shows she has not managed to do so yet.


Please email us for details about upcoming events

Receive exclusive reports and news

GUIDE on Twitter