August 2019

Country Ranking Trends

  • Magni completed a review of the Czech Republic. The country received a small upgrade for tangible progress in implementing previously adopted reforms to strengthen the integrity of the country’s markets.

Sino-American Trade: Skirmish, Cold War, or Prelude to War?

  • News outlets contain daily articles on the discussions and related actions of China and the U.S. regarding the trade disagreement. Underlying all of the news is a complex set of issues. Further, each side has multiple ideological camps advocating very different positions that are sometimes incompatible.
  • Implications: While some of President Trump’s formal and informal advisors are pushing various hardline positions, the President appears to want a deal. That said, the outlines of a deal acceptable to the President depict a combination of specific terms that are difficult, if not impossible, for China to accept (e.g., U.S. unilateral determination of Chinese compliance, requirements for structural change in China) and vague directions on other topics (e.g., trade balance, opening markets). The U.S. believes it has the advantage as China is more dependent on trade with the U.S. than the other way around. China believes it has the advantage as U.S. elections are next year and China believes it will get stronger over time. Both leaders most likely want resolution of the situation, however the conditions for resolution do not appear likely at this point. Neither side wants a shooting war, though history is littered with situations where a spark was the catalyst for an unintended military inferno. Expect lots of fireworks, but hopefully nothing worse than fireworks.

The Chinese Dilemma in Hong Kong

  • Protests have been a regular feature in Hong Kong since February, when members of Hong Kong’s government proposed an extradition bill that would have allowed suspects to face trial in China’s opaque court system. Massive, largely peaceful, protests led Hong Kong leader Carrie Lam to suspend the legislation. However, she has refused to meet the protestors’ demand that the bill be completely withdrawn. The protests have over time grown increasingly violent, even leading to the closure of Hong Kong’s international airport. The demands of the protestors have also grown to include greater democracy in the territory. The Hong Kong economy was already suffering from the US-China trade war, and the protests are further dampening business activity. Hong Kong is poised to enter its first recession in over a decade. So far Lam, and by extension the Chinese government, have taken a hardline approach. China has amassed paramilitary troops on the border and has threatened direct intervention.
  • Implications: The Chinese government faces difficult choices. Allowing the protests to continue will further strain the Chinese economy and risks contagion in the Chinese mainland. Conversely, forcibly intervening risks a significant negative reaction around the world, thus causing long-term damage to Hong Kong’s position, which remains critical to the health of the Chinese economy. The ongoing trade war with the U.S. will be a consideration in the ultimate decisions of the Chinese government.

Will the Brexit Nightmare Get Better or Worse on Halloween?

  • Prime Minister Boris Johnson has invoked a parliamentary procedure to bring about a suspension of Parliament in October, which could make it more likely that Britain leaves the European Union without a deal on October 31st. Under Johnson’s plan Parliament will resume on October 14th with the “Queen’s speech”, in which the monarch lays out the government’s agenda. Parliament is normally suspended for about a week before such a speech, and as expected the queen has agreed to the suspension. Parliament was already scheduled to be suspended for annual political party conferences in late September, and with this additional closure Parliament will be out of session for a total of five weeks. With so little time, it will be difficult to stop the UK leaving the EU without a deal. However, a no-deal exit is an outcome most opposition members of Parliament and many from the governing Conservative Party do not want. One option for opponents would be to try to trigger early elections by calling a no-confidence vote.
  • Implications: As Magni has stated for more than a year, a “no deal” exit is increasingly likely. The process continues to be messy and the resulting uncertainty diminishes the opportunity for preparations to reduce disruption. A British recession is increasingly likely. We will probably also see some realignment of the major political parties as both are deeply divided.

Will the Italian Deal Hold?

  • Prime Minister Giuseppe Conte resigned after his deputy prime minister, Matteo Salvini, brought forward a no-confidence motion against the government. His resignation brought to an end the short-lived and unconventional coalition between the anti-establishment Five Star Movement and the far-right Northern League. Salvini withdrew his League party’s support for the coalition after frequently clashing with his partners over often contradictory policy priorities. Salvini had hoped the government’s collapse would lead to new elections, which opinion polls suggest his party would win. However, in order to forestall new elections, Five Star has signed a deal to form a new government with its one-time nemesis, the center-left Democratic Party (PD). If a PD and Five Star deal collapse, President Sergio Mattarella will name a caretaker government and call early elections.
  • Implications: To address the systemic issues, Italy needs economic reforms to improve the quality of the economic infrastructure, as opposed to more social programs (from the left) or limits on immigration (from the right). None of the likely political outcomes place Italy on a path to reform. The country is likely to continue drifting, though a PD and Five Star coalition will likely be more cooperative with the EU whereas, a coalition based around the Northern League could be a catalyst for faster unwinding of the EU. As Magni has stated for some months, the EU is experiencing a slow unwinding with most EU actions being attempts to slow the process as opposed to addressing the systemic issues that cause resistance to the EU.
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