German Report

Report: U.K. Creditworthiness Sinking Ahead of Brexit

  • Why it matters

    Why it matters

    If Britain’s competitiveness and deficit spending increases over the next two years, it could undermine the country’s bargaining position as it negotiates its way out of the European Union.

  • Facts

    Facts

    • A new report by the Freiburg, Germany-based Centre for European Politics says that Britain’s creditworthiness has declined for a fourth straight year, on rising consumption and a growing need for foreign debt financing.
    • The think tank says the decline in British creditworthiness and the competitiveness of British industry will hurt the country’s hand as it enters Brexit negotiations with the E.U.
    • Britain and Germany are adversaries on the Brexit issue, with each country committed to ensuring that the other does not get the upper hand in negotiations.
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    Audio

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France EU Britain Brexit
Nigel Farage, the leader of the United Kingdom Independence Party, during talks at the European Parliament in Strasbourg on Tuesday. Mr. Farage, a member of the European Parliament, is one of the architects of Brexit. Source: AP Jean-Francois Badias

Deficit spending has eroded Britain’s creditworthiness for a fourth straight year, undermining the country’s bargaining position ahead of key talks with European Union nations over Brexit, a German think tank reported Tuesday.

The Center for European Policy, a think tank based in Freiburg, Germany, said Britain’s creditworthiness fell for a fourth year in its Default-Index. A main reason for the decline in the 2017 reading was overspending by British consumers: Since 2012, more than 100 percent of available income has been spent, the center concluded in its study.

“The erosion of creditworthiness is weakening Britain’s bargaining position vis-a-vis the European Union, because the country is increasingly dependent on capital from abroad,” said Lüder Gerken, the study’s co-author. “They need foreign credit to finance consumption. That can only work for a limited time.”

Matthias Kullas, the other co-author, said the declining competitiveness of British industry is also a significant problem for the island nation as it plans for its negotiations. Britain is supposed to formally apply to leave the European Union later this month, setting in motion at least two years of negotiations to redefine trade relationships, tariffs and customs.

“The British will not be able to avoid taking steps to boost their own competitiveness,” Mr. Kullas said.

The center’s Default Index shows that the GDP-deflator as well as labor unit costs have risen faster in recent years than the E.U. average. The nation’s relatively high consumption and slackening domestic competitiveness since 2013 have created a net demand for foreign financing of British debt that has exceeded GDP by more than 4 percent, the center reported.

Britain will face Germany and 26 other E.U. nations across the bargaining table starting later this year, and the outcome of the talks is far from certain. While Britons are momentarily committed to pursuing a “hard” Brexit as soon as possible, key issues over trade relationships and punitive tariffs must first be decided, and both sides have interests in being unyielding.

British negotiators will work to deliver a deal that fulfills the election promises made during the Brexit campaign, namely that Britain will receive a deal as good as or better than the one it had while in the European Union. The rest of the E.U. has an interest in ensuring that Britain receives a worse deal than it has now, to discourage other E.U. members from leaving.

The CEP’s Default Index, which was created in 2011, measures a matrix of factors that determine a country’s creditworthiness, including government finances, trade balance, consumer behavior and the activities of domestic banks.

Kevin O’Brien is Editor in Chief of Handelsblatt Global Edition. To reach him: obrien@handelsblatt.com