It’s only a matter of days before London and Brussels begin talks on ending their relationship, but warnings against failure are already coming in: Germany’s finance ministry, in a 34-page internal report obtained by Handelsbatt, has expressed concern that Britain and the European Union might fail to reach a negotiated exit settlement, which would result in “grave economic and systemic consequences” for the financial system and broader economy.
In such a scenario, the financial industry would be hit the hardest – on both sides – according to the analysis conducted by Wolfgang Schäuble’s finance ministry. An abrupt exit of Britain from the European Union would “trigger dislocations” that could “jeopardize financial market stability.”
If Britain leaves the European Union without an agreement in place to govern future relations, British banks would no longer have unrestricted access to European financial markets, and European banks would face obstacles conducting business in London, according to the report.
“The resulting legal uncertainty would be enormous and would hurt Great Britain more than the European Union.”
German representatives in Brussels have told Mr. Schäuble that the European Commission, the E.U. executive, is skeptical an exit agreement can be reached in the two-year time frame laid out under Article 50 of the Lisbon Treaty. British Prime Minister Theresa May is set to formally invoke Article 50 and trigger negotiations to leave the E.U. on Wednesday.
Ms. May has said she will seek not just a departure from the European Union but from the European single market for goods and services, an aggressive move that has been dubbed a “hard Brexit.” She does however hope to reach a negotiated settelement that may keep elements of the single market in place.
If the two sides fail to reach a deal in the two-year time frame, Britain will automatically cease to be a member of the European Union. In that scenario, the U.K. would trade with the 27-nation bloc under WTO terms. Call it a “harder Brexit,” if you will.