Brexit, Cyprus and the EU Summit

The EU leaders summit on refugees begins tomorrow.   A conclusive agreement will likely be elusive.   There are three main obstacles.  First, the effort to reinforce the external borders to allow free internal movement requires Turkey's cooperation, but it won't be represented.  Second, that is important because Cyprus is demanding more concessions by Turkey.  Third, others such as Spain,  are concerned that the strategy contravenes EU and international law by abridging the right to asylum.

The way the EU is dealing with the refugee crisis may be giving the EU-skeptics in the UK additional fodder for what seems to be largely an emotional appeal.  However, looking deeper into what is happening could be part of the case against Brexit.

We have argued that due to the success of the UK's influence in the EU, a broadening strategy took place.  It has grown to include more countries, and outside of Turkey itself, the broadening effort has nearly run its course.  As a consequence of its success in growing the EU, the governance of the EU had to shift away from unanimity.  It is simply too unwieldy. The EU has moved to more decision-making on a qualified majority basis.

Qualified majority decision-making diminishes the veto power any one country, including the UK, enjoyed.  However, there are still some areas that require unanimity.  The agreement with Turkey is one such area.  Next month, The Netherlands will hold a referendum on the new associational agreement with Ukraine.  If the people reject it, as the polls suggest is likely, and parliament agrees to adhere to the non-binding resolution, which it has, it could scupper the entire EU-Ukraine agreement (or force potentially serious modifications).

Leaving the EU, the UK would be abandoning its remaining veto, which as Cyprus and The Netherlands examples illustrate, may still be important. The expansion of qualified majority voting in the EU does not mean that the UK will always get overruled.  It changes the tactics from unilateralism to build ad hoc coalitions.   While the UK may be the victim of its own success in pushing for a broader union, the larger group has many potential allies for the UK.

Little Cyprus can single handily block the Germany's Merkel's willingness to make concessions to Turkey to ensure stopping the flood of refugees into Greece.  Turkey has its own agenda.  Despite being repeatedly spurned, Turkey wants to be part of Europe.   While many in the UK want to leave EU, many Turks want to join.

Merkel, and apparently much of the EU's leadership are willing to cut a deal.  It would involve giving more funds (6 bln euros in all) to Turkey,  talks that could lead to visa-free travel into the EU for Turkish passport holders, and the resumption of five areas of ascension negotiations with the EU.

That is where Cyprus enters.  Previously, Turkey had agreed to recognize the Greek Cypriot government.  Because  Turkey hasn't, Cyprus has blocked (frozen) negotiations on five "chapters" or areas of EU negotiations.  Cypriot President Anastasiades cannot simply fold.  He needs to secure concessions from Turkey.

However, Turkey is reluctant to compromise.  It is also playing for Cyprus, where some report suggest that efforts to reunify the island (divided since 1974) are at a delicate place.  Apparently, Anastasiades has intimated that allowing Cypriot-flagged vessels dock in Turkish ports and direct flights from Cyprus to Turkey would be helpful.  Turkey offers direct flights only from northern Cyprus, which it occupies.

Moreover, the five "chapters" Turkey wanted to proceed on are the same one that Cyprus "frozen".  It could have picked other areas.  In fact, some have suggested that as a basis of compromise, another five chapters are chosen.

Cyprus is playing its small hand well, given its national interests.  The UK frequently has a stronger hand.  Can't it pursue its national interest with as much vigor as Cyprus?

Spain, which is struggling to forge a government from last December's election results, has expressed some concern about the proposed plan to return to Turkey refugees from Greece.  The agreement seems to eschew EU and international laws about the right to asylum.

This seems to be an unusual issue for the caretaker government in Spain to push, but it could reflect a more general push back against Germany.  Merkel's tactics in reaching the tentative agreement with Turkey nearly unilaterally irks many EU capitals which were already chafing from the forced austerity.

In light of the weekend elections in three German states, many may see Merkel as vulnerable.  The AfD party has morphed.  Its leadership change last year under Petry solidified the transition from anti-euro to anti-immigration.   The AfD did particularly well, and secured parliamentary representation in all three states, bring it to six in all.

However,  the electoral results may say more about party politics than Merkel's refugee policies.  The Green party, which will continue to be the senior coalition member in Baden-Wurttemberg, and the SPD, which will continue to lead a regional coalition in Rhineland-Palatinate, campaigned on Merkel's refugee position.  It was  CDU/CSU candidates that ran against Merkel and into defeat.

The debate over Greece last summer strained the relationship between Merkel's CDU and the sister party CSU of Bavaria.  The head of the CSU, Seehofer, has emerged as one of the most vocal critics of Merkel.    There are two more state elections in September ahead of next year's national election.     Merkel's rivals have often under-estimated her political savvy and will.   Still, we have advised long-term investors to begin thinking about the implications of a post-Merkel Germany.