Compromise, dammit!

Reach a Brexit deal or face disaster, German business warns

brexit
Now, this is a disaster. Source: Reuters

With each passing week, German business leaders are becoming more strident in their warnings about the consequences of a no-deal Brexit.

The managing director of the BDI German industry association, Joachim Lang, this week called the prospect a disaster that would cause massive problems for tens of thousands of companies and hundreds of thousands of workers in Britain and the EU.

The worry is that both sides might resign themselves to a hard Brexit after the EU outright rejected Prime Minister Theresa May’s proposals at the summit in Salzburg last month. German industrialists see next week’s EU summit as the last chance to reach a deal.

If it fails to break the impasse, German firms will have little option but to scale down their UK operations as best they can, the BDI warned. To be sure, the Brits would come out worse.

 

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As it stands, 51 percent of British imports come from the remaining 27 EU states and 48 percent of British exports go to continental Europe. Nineteen percent of EU exports go to Britain and 20 percent of their imports come via the UK.

German exports to the UK last year totaled €84 billion ($96 billion). Some 2,500 German companies have operations in the UK and employ about 400,000 people there. The BDI estimates that around 50,000 jobs in Germany are directly dependent on business with the UK.

The interdependence is so great that a hard Brexit could slow growth in the 27 EU member states. “Foreign trade would be hugely affected from the beginning of next year and definitely from April,” Mr. Lang said.

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So far, there’s only been one German economic study into the possible consequences of a no-deal Brexit. It was commissioned by the German economics ministry and conducted by Gabriel Felbermayr, a director of the Munich-based Ifo institute. It predicts the UK would slide into recession with a 1.73 percent contraction in GDP. German GDP would take a 0.23 percent hit.

If the UK reached a trade deal akin to the EU’s arrangements with South Korea, the negative GDP impact would be 0.6 percent for Britain and 0.1 percent for Germany. “It’s in the EU’s own interest that Britain remains in the customs union,” Mr. Felbermayr told Handelsblatt. “If the supply chains tear apart no one will benefit, including the EU.”

Unlike the BDI and the majority of his German colleagues, Mr. Felbermayr said the EU should be ready to break a taboo to achieve a deal. In contrast, the BDI sides with the EU’s stance that the single market’s four freedoms of trade, services, people and capital are sacrosanct.

Come together, right now

For German companies, keeping the EU together remains the top priority in the negotiations – 52 percent of all German exports go to continental EU states. “That’s our home market,” Mr. Lang of the BDI said, pointing out that only 7 percent of German exports went to the UK in 2016 and that the share has since fallen.

Mr. Lang said he understands why the EU’s chief negotiator, Michel Barnier, rejected Mrs. May’s Chequers plan which essentially called for the continued free movement of goods but not services. But he called on both sides to compromise, saying they need to break from the “the negotiating gridlock.”

For BDI, the worst-case scenario is a Brexit that disrupts supplies. Many German factories in the UK depend on deliveries from the continent and would have to shut down. Cumbersome customs processing would thwart the just-in-time business model, which many factories use. Even with a zero-customs deal, the situation will be worse than today because of time-consuming border checks, he added.

A study released this week by the IW German Economic Institute concluded that companies would face billions of euros in additional costs if trade between the UK and EU were suddenly conducted based on World Trade Organization rules. EU companies would face €10 billion in new costs, of which €3 billion would be shouldered by German businesses, and UK-EU trade could be reduced by up to 50 percent, the IW said.

Locked up in (supply) chains

German multinationals are already revamping their supply chains to minimize the volume of components passing through Britain. The logistics, auto aviation, drugs and chemicals industries are due to be worst hit by Brexit. Some 15,000 Airbus employees are in Britain.

The BDI appealed to the EU to agree on a Brexit transition period until 2020 at next week’s summit to give companies the time they need for the changeover. And Mr. Lang warned Mrs. May not to succumb to the illusion that Britain’s economy will be better off after Brexit because it will be free to negotiate trade deals with other countries.

“The EU will remain the most important trading partner for the foreseeable future, and Britain will be the most important third-party country for the EU,” he said. Mrs. May, he added, would be well advised to focus on boosting British growth, which at 1.1 percent in the first half of 2018 was the second-weakest in the EU.

Donata Riedel has worked for Handelsblatt for 20 years and writes about economic policy; she has also covered the telecommunications sector. To contact the author: riedel@handelsblatt.com

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