Leaving the EU

Brexit White Paper gives Germany what it wants

Britain Western Balkan Summit
Who's the boss here? Source: AP

There’s a rumor swirling around, mostly among pro-Brexit politicians and media outlets, that German Chancellor Angela Merkel signed off last week on an outline for Brexit proposed by British Prime Minister Theresa May – before Ms. May even showed it to her cabinet.

Though the two leaders did meet twice in the last week, Downing Street has firmly denied the suggestion. The spat is a sign of just how sensitive many Britons are about Berlin’s role in this whole tortuous process. That feeling isn’t really shared by Germans, who have less patience for the topic of Brexit.

Whether or not she had a real say, Ms. Merkel should be pleased with the outcome. Berlin would surely prefer that Britain simply stay in the European Union. But as alternatives go, London’s latest proposal for the post-Brexit relationship suits Germany just fine.

In contrast, a more dramatic response came from President Donald Trump suggesting he wouldn’t agree to a trade deal under a model that was closer to the EU, in an interview with the Sun newspaper. His remark that Boris Johnson would make a great prime minister was likely to further heat the among the governing conservatives, divided over Ms. May’s proposals.

Free trade for factories, not for banks

Ms. May’s long-awaited “White Paper,” an historic 98-page document detailing how London sees its future relationship with the European Union, has already sparked cabinet resignations and sent Ms. May’s government into chaos. Supporters of Brexit are unhappy, because they believe it doesn’t take back enough power from Brussels.

The paper aims to jump start the process of reaching an “association agreement” with the European Union to govern relations after Brexit. With Britain formally leaving the European Union in March 2019, time for a deal between London and Brussels is quickly running out. Brussels welcomed the progress, though a spokesman for the European Commission said they would comment further only once they had taken a closer look.

Ms. May’s paper outlines a softer Brexit when it comes to manufacturing and a harder Brexit for financial services. By keeping a closer trading relationship in manufacturing, London hopes to prevent European companies like BMW and Airbus from following through on threats to shift jobs out of Britain.

At the center of her proposal is a free-trade deal for goods and agricultural products, which make up about 20 percent of Britain’s economy. That deal would effectively keep Britain’s rules and regulations aligned with those of the European Union, allowing trade in goods to flow freely and the Irish border with Northern Ireland to remain open. It’s almost like still being in the EU’s single market and customs union, which is what has Brexit supporters so outraged.

By contrast, London wants to take back more control over the rules governing trade in services – and financial services in particular – that make up the other 80 percent of Britain’s economy. Maintaining that freedom to maneuver means it has given up on the idea of a wide-ranging deal with the EU. But a less ambitious deal will also mean “more barriers” for services, like banks, that want to do business on the Continent, the paper concedes.

Come on down to Frankfurt

This risk, of course, is that financial firms doing business with Europe will leave London, or at least shift manpower to the Continent. That might play better politically (voters would probably complain more about a factory leaving Britain than a bank) but it plays into Berlin’s hands economically.

“In the EU, many policymakers see risks from a hard Brexit mainly on the manufacturing sector and, by contrast, even upside potential with regard to financial services (from a potential relocation),” analysts from Germany’s Deutsche Bank wrote in a research note last week.

After all, Germany had always placed more hope on convincing bankers to leave London than factories to relocate. Frankfurt and Paris have been lobbying hard for business. While nobody in the financial community wants Britain to careen out of the EU without a deal,  many non-European banks may now step up their existing plans to shift resources to the Continent. London is a global financial center of long standing, but also provided access throughout the EU as long as Britain was a member.

That would be why Ms. May’s White Paper landed with a thud in The City. While Brexit was always going to make things difficult for banks, it was “regrettable and frustrating” that the government had given up its plan to push for “mutual recognition” of financial rules and regulations between Brussels and London, said Miles Celic of the financial lobby group City UK. Contrast that with Andreas Krautscheid of Germany’s top banking lobby, who called the latest proposals a “realistic basis for discussion.”

Ms. May isn’t giving up on financial services entirely. Instead of reaching a deal under Brexit talks, she will push to reform an existing “equivalence regime” that gives foreign banks access to the European Union. The system essentially gives banks a license that can be revoked in 30 days if they violate EU’s rules. Ms. May hopes to extend that period to give Britain’s banks more planning security.

But that, too, could be a hard sell. Elmar Brok, a leading EU lawmaker from Angela Merkel’s CDU party, said a free-trade deal on goods was workable, but he ruled out special treatment for Britain’s financial firms. Mr. Brok left out the fact that he would happily see them move to Frankfurt instead.

Christopher Cermak is an editor with Handelsblatt Global based in Berlin. Carsten Volkery of Handelsblatt in London and Ruth Berschens of Handelsblatt in Brussels contributed to this story. To contact the author: Cermak@handelsblatt.com

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