British election

Crossing Fingers for Corbyn

Britain’s PM May reacts as she speaks at an election campaign event at Pride Park Stadium in Derby
I beg your pardon? Picture source: Reuters

In normal times, German business leaders would tend to root for a Conservative victory in a British general election. After all, the Conservatives usually stand for business-friendly policies such as deregulation, privatization and tax cuts.

But these times are anything but normal. In fact, a victory for Jeremy Corbyn, the die-hard leftist leader of Britain’s opposition Labour Party who wants to nationalize mail, rail and energy companies, might send champagne corks popping in at least some German boardrooms.

That’s because Mr. Corbyn advocates a so-called soft Brexit in which Britain would retain access to the single market, which would minimize disruption to German trade with one of its most important markets.

Conservative Prime Minister Theresa May by contrast favors a hard Brexit in which Britain would forfeit access to the single market so that it can reclaim full control of immigration. She said she is even prepared to quit the EU without any trade deal.

Ms. May fought an unimpressive campaign in which her commanding lead over the opposition Labour Party has narrowed, but most opinion polls suggest she will still win Thursday’s general election.

“I don’t share the opinion that Ms. May needs a bigger majority to make herself more independent of the hardliners in her parliamentary party.”

David McAllister, German politician and member of European Parliament

It’s unclear whether an increased majority would make her more willing to compromise with Brussels because she would be less reliant on the staunchly Europhobe wing of her party.

“I don’t share the opinion that Ms. May needs a bigger majority to make herself more independent of the hardliners in her parliamentary party,” David McAllister, a German lawmaker who chairs the foreign affairs committee of the European Parliament, told Handelsblatt. “She herself supports a hard Brexit and keeps on stressing that no deal is supposedly better than a bad one.”

While the focus of the campaign has been squarely on security in the last two weeks due to the terrorist attacks in Manchester and London, Brexit is likely to return to the fore imminently, as exit talks are due to start on June 19. And they are going to be tough.

The biggest immediate sticking point is the sequence of talks, with the EU insisting that the terms of Britain’s exit must be agreed before any negotiation on its future relationship with the EU can start. Ms. May by contrast wants to start talking immediately about a free trade deal.

The other 27 EU member states are insisting that Britain must first agree to honor financial obligations to the EU such as its share of pension commitments for EU civil servants and already planned EU payments for structural funds and farming subsidies — an amount totaling around €100 billion ($112 billion), according to Brussels.

Britain’s Brexit minister, David Davis, has countered that Britain will pay what is legally due, in line with its rights and obligations, but “not just what the EU wants.”

One senior EU diplomat said Ms. May, assuming she remains prime minister, may well walk out of the talks at some stage. But she’s not expected to let them collapse because that would have a disastrous impact on the British economy.

Assuming Britain does crash out of the EU’s single market without negotiating a trade deal to replace it, Britain would end up trading with the EU member states on the basis of World Trade Organization rules.

Jeremy Corbyn, leader of Britain’s opposition Labour Party makes an election campaign visit to Derwentside College in Durham
Maybe it's the contagious smile that convinced German business leaders? Picture source: Reuters

That means its trade would be subject to customs duties, firms would have to satisfy rules of origin to determine the national origin of any product, British companies could not sell pharmaceuticals or chemical products in the EU and Britain’s banks would lose their so-called passporting rights to offer financial services across the bloc. Also, British airlines would not be able to fly between airports in the EU.

According to a recent estimate by the Munich-based Ifo institute, Britain’s per capita gross domestic product would fall by almost €600, or $674, if it traded with the EU on a WTO basis. EU countries with the exception of Ireland would be affected far less heavily. Germany’s GDP would decline by €83 per capita, Ifo calculated in its report for the German Economy Ministry.

 

08 p12 The Consequences of Brexit-01

A disorderly Brexit would trigger a sharp depreciation of the pound, rising inflation and causing a “deep recession” in Britain, warned economists John Springford and Simon Tilford of the London-based Centre for European Reform.

Partly as a result, important German industries would also suffer, especially the auto and engineering sectors. Britain is Germany’s most important auto market alongside the US and companies including premium automaker BMW have plants in Britain.

“Many supply chains would break,” warned Matthias Wissmann, president of the German Association of the Automotive Industry. “The option ‘no deal’ cannot be contemplated by serious people.” He said he was worried that crucial decisions were being taken by a very small circle of staff around Ms. May. Politics, he said, must always be open to expert advice.

German business leaders are hoping that common sense will prevail and that the two sides will at least agree to preliminary trade rules in the less than two years left before Britain formally leaves the EU. A transitional agreement is needed, said the Association of German Chambers of Commerce and Industry.

In the unlikely event that Mr. Corbyn wins, the British pound would likely surge. “Does Labour have a cleverer Brexit plan?” asked Thu Lan Nguyen, a forex analyst at Commerzbank. “I’m not sure but it would at least be a softer Brexit.”

Analysts at investment bank Nomura aren’t ruling out that a Labour-led government might abandon Brexit altogether.

The worst scenario would be a hung parliament in which no party has a majority. “So far investors are ignoring this risk, which is why it would shake up the markets most,” said currency strategist Kathleen Brooks of brokerage Gain Capital.

British shares and the pound would tumble.

Till Hoppe reports on politics for Handelsblatt, with a focus on defense, domestic policy and cyber issues. Kerstin Leitel is a correspondent for Handelsblatt in London. To contact the authors: hoppe@handelsblatt.com, leitel@handelsblatt.com

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