There is a bigger Brexit issue than the backstop

The difficulties over the Irish border derive from a broader uncertainty

David Allen Green


If there is no relationship agreement by 2022, then all the horrors associated with a no-deal Brexit will simply re-emerge. The position of the Irish border will be just one of many problems © Reuters


The current political discussion about the merits of the draft Brexit withdrawal agreement is focusing on a provision that may never take effect. The backstop in respect of the Irish border is an insurance provision. It is an agreement between the parties on what the state of affairs should be in the event of something else not happening.

That something is a full relationship agreement between an independent UK and the EU. This needs to be in place by the end of 2022 at the latest, as that is the last possible date the transition period can be extended to under the draft exit agreement. Only if there is no relationship agreement by then does the Irish backstop provision apply.

So the controversy over whether the UK can accept such a provision is predicated on one simple assumption: that the UK and EU will not be ready to enter a relationship agreement by the end of the transition period under the exit agreement.

If that is the case, then a no-deal Brexit is not avoided with the exit agreement but merely postponed. The famous “cliff-edge” would still very much be there, waiting for the UK to topple over in due course, just a little further along.

The EU27, and Ireland in particular, are sensible in making this assumption. Nothing that has happened to date on Brexit provides any evidence, let alone comfort, that the parties will be in a position to sign a relationship agreement in the time available.

If there is no relationship agreement by 2022, then all the horrors associated with a no-deal Brexit will simply re-emerge, from customs blockages to food and medicine shortages. The position of the Irish border, though of the upmost importance, will be one of many problems. And no sensible person believes the UK will be in a position to deal with these by 2022, just as it has signally failed to get ready over the past two years or so.

So every expression of concern about the Irish backstop is an implicit admission that the UK is unlikely to have a relationship agreement to enter into by 2022 — indeed, it may not be ready for some years after that. Therefore, the supposed distinction between no-deal Brexit and the deal is to a large extent artificial: the real choice is between no deal now and no deal in 2022.

If politicians were confident that a relationship deal would be in place by 2022, the backstop issue would lose a great deal of potency. But it appears they are in denial about the improbability of reaching a relationship agreement by 2022 and are instead focusing on the logical consequence of this, the backstop, almost as a form of proxy.

One would hope, if not expect, that the likelihood or otherwise of there being such an agreement in place at the end of the transition period would be the basis on which Britain’s politicians were forming their views on the merits of the Brexits on offer. There not being such a deal likely to be ready by 2022 is a good reason for a responsible and rational politician, acting in the national interest, to seek a revocation of the Article 50 notification.

But they are closing their eyes to this looming problem, just as they did with the consequences of making a premature and ill-prepared Article 50 notification. The EU27 are not so dumb as to make the same mistake; that is why they are protecting their interests and those of Ireland in the event of there being no relationship agreement.

It is unfortunate that UK politicians are preoccupied only with the manifestation of this dreadful eventuality, rather than the eventuality itself.


The writer is a contributing editor of the FT

Cash back in the spotlight as global bond yields fall

T-bill’s climb threatens headwinds for other markets

Robin Wigglesworth







Short-term US Treasury yields have climbed to match global bond markets’ average yield for the first time since the financial crisis, with analysts and fund managers warning that the increasing attraction of cash will be a headwind for financial markets in 2019.

The yield of three-month Treasury bills — the financial system’s closest equivalent to cash — has climbed steadily since the Federal Reserve’s first interest rate increase in late 2015, to a nearly 11-year high of 2.42 per cent last week.

Bond market yields have climbed since their mid-2016 lows, propelled by tighter US monetary policy and expectations that the global economic recovery was broadening and strengthening.

However, the yield of the Bloomberg Barclays Multiverse Index — a broad $52tn benchmark of bonds issued by governments and countries around the world — dipped back to 2.41 per cent last week as investors became glummer on the growth outlook.

The market behaviour highlights how 2018 has become an inflection point in the post-crisis regime, with the era of quantitative easing being replaced by “quantitative tightening” as the Fed shrinks its balance sheet and lifts rates. Add to that the European Central Bank’s effort to trim and, by the end of 2018, end its own QE programme.

Treasury bills have already outperformed global stocks, bonds and commodities this year, an unusual occurrence that some analysts fret could happen again in 2019, as the monetary tide that lifted almost all boats since the financial crisis continues to recede.

“A common theme in this cycle has been the hunt for yield, with investors moving into unfamiliar asset classes searching for higher returns to offset the low yields in core bonds,” JPMorgan Asset Management wrote in its annual outlook. “This isn’t necessarily an incorrect strategy in the early or middle stages of an economic expansion; however, in the late cycle this approach becomes riskier.”

The danger is that the rising lustre of cash dims the allure of other asset classes.  While there are currency aspects that mean that the broad, international Multiverse bond index is not directly comparable to short-term Treasuries — let alone equities — investors may be less willing to take on their additional risks when cash returns become more competitive.


While analyst opinions on the coming year differ significantly, most predict it will be even more challenging for financial markets, even as cash continues to do well.

Morgan Stanley’s analysts think government bonds will eke out a 1 per cent gain in the coming year, while equities tread water, and corporate debt loses 5 per cent. However, they predict that cash will return 4 per cent.

The Best Way to Predict the Future of Rates

Investors think an end to rate hikes is in sight, but the data the Federal Reserve cares about most are saying otherwise

By Justin Lahart


Federal Reserve Chairman Jerome Powell speaking at the Economic Club of New York on Nov. 28. Photo: carlo allegri/Reuters


A nasty stock market tumble and some ill-chosen (or poorly interpreted) words from the head of the Federal Reserve suddenly have investors bracing for an economic slowdown and an end to interest-rate increases. The better approach is to watch the data, which have shown no sign of weakening.

A month ago, investors expected the Fed to raise rates later this month and two or three times in 2019. Now, interest-rate futures suggest that one increase next year is the most likely outcome. The bond market, meanwhile, is suggesting the chances of a recession next year have risen. 
The way to get this right is to watch the job market, just like Fed Chairman Jerome Powell will do. Strong job growth raises the risk of inflation, which the Fed needs to prevent. The employment report this Friday, which economists expect will show the economy added about 200,000 jobs last month, could serve as an unwelcome reminder to investors that the Fed is unlikely to stop raising rates.



But a real slowdown in employment won’t likely show up in the monthly jobs data right away.



To more quickly catch a shift, there are other more timely—though also more imperfect—reports to pay attention to. All are going strong right now.

Chief among them is the Labor Department’s report every Thursday on initial claims for unemployment, says High Frequency Economics economist Jim O’Sullivan, since these often hook higher before weakness shows up in the monthly job report. But while claims have lately been higher than the nearly 50-year low they plumbed in September, they are still plenty low, suggesting the economy is generating enough jobs to keep the Fed tightening.

Business surveys are another thing to watch, though these, too, continue to suggest the labor market is strong. The employment index in the Institute for Supply Management’s manufacturing report earlier this week suggested that job growth accelerated last month. Similarly, employment measures in household surveys, such as the University of Michigan’s sentiment index, could provide an early read on a downshift in the job market—and so far look healthy.

Anecdotal reports on the job market, such as those contained in the Fed’s Beige Book, could also give investors a heads-up on whether the job market is cooling. But the latest Beige Book, released Wednesday, was rife with reports of companies struggling to attract and retain qualified workers, including in Chicago, where it reported several firms “said that they had been ‘ghosted,’ a situation in which a worker stops coming to work without notice and then is impossible to contact.”

That’s the sort of story that could come back to haunt investors expecting the Fed to go on hold.

The Big Con - Reassessing The 'Great' Recession And Its 'Fix'

by: Laurence Kotlikoff

The World George H.W. Bush Made

What happens in this world is the result of what people choose to do and choose not to do when presented with challenges and opportunities. The 41st US president didn't always make the right choices, but his administration’s foreign policy record compares favorably with that of any other modern leader.

Richard N. Haass




CAMBRIDGE – I have worked for four US presidents, Democrats and Republicans alike, and perhaps the most important thing I have learned along the way is that little of what we call history is inevitable. What happens in this world is the result of what people choose to do and choose not to do when presented with challenges and opportunities.

George H.W. Bush, the 41st president of the United States, was presented with more than his share of challenges and opportunities, and the record is clear: he left the country and the world considerably better off than he found them.

I worked for and often with Bush for all four years of his presidency. I was the National Security Council member responsible for overseeing the development and execution of policy toward the Middle East, the Persian Gulf, and Afghanistan, India, and Pakistan. I was also brought into a good many other policy deliberations.

Bush was kind, decent, fair, open-minded, considerate, lacking in prejudice, modest, principled, and loyal. He valued public service and saw himself as simply the latest in the long line of US presidents, another temporary occupant of the Oval Office and custodian of American democracy.

His foreign policy achievements were many and significant, starting with the ending of the Cold War. To be sure, that it ended when it did had a great deal to do with four decades of concerted Western effort in every region of the world, the defeat of the Soviets in Afghanistan, the deep-seated flaws within the Soviet system, and the words and deeds of Mikhail Gorbachev. But none of this meant that the Cold War was preordained to end quickly or peacefully.

It did, in part, because Bush was sensitive to Gorbachev’s and later Boris Yeltsin’s predicament and avoided making a difficult situation humiliating. He was careful not to gloat or to indulge in the rhetoric of triumphalism. He was widely criticized for this restraint, but he managed not to trigger just the sort of nationalist reaction that we are now seeing in Russia.

He also got what he wanted. No one should confuse Bush’s caution with timidity. He overcame the reluctance, and at times objections, of many of his European counterparts and fostered Germany’s unification – and brought it about within NATO. This was statecraft at its finest.

Bush’s other great foreign policy achievement was the Gulf War. He viewed Saddam Hussein’s invasion and conquest of Kuwait as a threat not just to the region’s critical oil supplies, but also to the emerging post-Cold War world. Bush feared that if this act of war went unanswered, it would encourage further mayhem.

Days into the crisis, Bush declared that Saddam’s aggression would not stand. He then marshaled an unprecedented international coalition that backed sanctions and the threat of force, sent a half-million US troops halfway around the world to join hundreds of thousands from other countries, and, when diplomacy failed to bring about a complete and unconditional Iraqi withdrawal, liberated Kuwait in a matter of weeks with remarkably few US and coalition casualties. It was a textbook case of how multilateralism could work.

Two other points are worth noting here. First, Congress was reluctant to act on Saddam’s aggression. The vote in the Senate authorizing military action nearly failed. Bush, however, was prepared to order what became Operation Desert Storm even without congressional approval, given that he already had international law and the United Nations Security Council on his side. He was that determined and that principled.

Second, Bush refused to allow himself to get caught up in events. The mission was to liberate Kuwait, not Iraq. Fully aware of what happened some four decades earlier when the US and UN forces expanded their strategic objective in Korea and tried to unify the peninsula by force, Bush resisted pressures to expand the war’s aims. He worried about losing the trust of world leaders he had brought along and the loss of life that would likely result. He also wanted to keep Arab governments on his side to improve prospects for the Middle East peace effort that was to begin in Madrid less than a year later. Again, he was strong enough to stand up to the mood of the moment.

None of this is to say that Bush always got it right. The end of the Gulf War was messy, as Saddam managed to hang onto power in Iraq with a brutal crackdown on Kurds in the north and Shi’a in the south. A year later, the Bush administration was slow to respond to violence in the Balkans. It might have done more to help Russia in its early post-Soviet days. Overall, however, the administration’s foreign policy record compares favorably with that of any other modern US president or, for that matter, any other contemporary world leader.

One last thing. Bush assembled what was arguably the best national security team the US has ever had. Brent Scowcroft was the gold standard in national security advisers. James Baker was arguably the most successful secretary of state since Henry Kissinger. And with them were Colin Powell, Dick Cheney, Robert Gates, Larry Eagleburger, William Webster, and others of standing and experience.

All of which brings us back to George H.W. Bush. He chose the people. He set the tone and the expectations. He listened. He insisted on a formal process. And he led.

If, as the saying goes, a fish rots from the head, it also flourishes because of the head. The US flourished as a result of the many contributions of its 41st president. Many people around the world benefited as well. We owe him our collective thanks. May his well-deserved rest be peaceful.


Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush's special envoy to Northern Ireland and Coordinator for the Future of Afghanistan. He is the author of A World in Disarray: American Foreign Policy and the Crisis of the Old Order.