Crisis Averted?

German business relieved over Brexit breakthrough

U.K. Prime Minister Theresa May Meets With EU Commission President Jean-Claude Juncker as Deal Expected
The smiles belie the long road ahead. Source: Bloomberg

Leading German business organizations expressed relief that Britain and the European Union had struck a last-minute deal over the terms of Britain’s departure from the 28-nation trading bloc, and urged both sides to pursue the more important question of how trade will work once the terms of Brexit are sealed.

Earlier on Friday, the European Commission said enough progress had been made after the two sides worked through the night to end an impasse over the status of the Irish border, easing the pressure on UK Prime Minister Theresa May. The Irish issue was the last major obstacle to opening trade talks with the EU, a step leaders are widely expected to approve at a Brussels summit on December 14-15.

“I assume that we have reached the breakthrough we needed,” said Commission President Jean-Claude Juncker in Brussels, who added that much remained to be done. Comments from Berlin echoed that sentiment. “I think everyone understands that there is still much work for negotiators to do even if the European Council decides to move into phase two of Brexit negotiations,” German government spokesman Steffen Seibert said.

According to the EU’s chief Brexit negotiator, Michel Barnier, the terms of Brexit must be agreed by October 2018 to be binding. Britain is currently set to relinquish its EU membership on March 29, 2019 and enter a two-year Brexit transition phase.

“The most difficult part of the negotiations still lies ahead. London shouldn't delude itself.”

Joachim Lang, director of German industry federation BDI

“Consensus over the exit terms clears the way for the issues that companies are dying to discuss,” said Eric Schweitzer, head of the German chambers of commerce, known here by the acronym DIHK. Next on the agenda are key matters of how to deal with border customs, the movement of skilled personnel, and safeguards for existing contracts for loans and insurance, he said. “A lot is at stake for German business,” Mr. Schweitzer added. “The UK is Germany’s fifth-biggest trading partner with goods turnover of more than €120 billion last year.”

Today’s news assuaged fears that companies on both sides of the English Channel might face a so-called “hard Brexit,” the departure of the UK with virtually no trade deals in place to replace the advantages of EU membership. In recent months, German business associations voiced increasing alarm at the lack of progress, and they weren’t alone. On the eve of Ms. May’s meeting in Brussels, Paul Drechsler, head of the British business lobby CBI, warned that 60 percent of firms with Brexit contingency plans would activate them by Easter 2018 unless the UK got the green light for trade talks with the EU.

Joachim Lang, director of the German industry federation BDI, said he was relieved but that the next round of talks should be pursued with renewed verve. “The most difficult part of the negotiations still lies ahead,” he said. “London shouldn’t delude itself. Our companies need to know quickly which model Downing Street sees for a future treaty and what the transition phase will look like.”

“It was to be expected that the Brits would have to move. But we’re not even half-way there.”

Carsten Brzeski, chief economist at ING-Diba

The second round of Brexit negotiations will deal mainly with molding trade relations between the EU and UK. The first round was concluded with a 15-page document that tackled 95 issues, many of which remain open. As far as finances are concerned, it is now clear that the UK will make a regular contribution to the EU’s budget in 2019 and 2020, as if it were still a full EU member.

Clemens Fuest, head of Germany’s Ifo research institute, urged the EU to strike a comprehensive free-trade deal with Britain in order to limit the costs of Brexit for all parties. In the absence of a free-trade deal, the UK would revert to trade rules of the World Trade Organization. “The rising cost of doing trade after Brexit will wreak substantial damage,” the economist said, pegging the total price tag for the EU at €27 billion, or $31.7 billion. “A free-trade agreement could more than halve the additional costs.”

Britain has a similar interest in getting a deal done. Without a free-trade deal, the UK’s financial costs from Brexit would outweigh its annual EU budget payment by €16 billion per year, estimated Mr. Fuest. With a deal, the EU budget costs would be roughly canceled out. “Everyone loses from Brexit,” the economist added.

A recent European Parliament study found that Germany alone would have to pay about €3.8 billion more each year into the EU budget after the UK’s departure.

Analysts responded with muted enthusiasm to the agreement. “A hard Brexit is obviously no longer an issue,” said Thomas Altmann, portfolio manager at investment firm QC Partners. While negotiations on future economic relations won’t be easy, at least they are starting, he added.

Carsten Brzeski, chief economist of ING-Diba in Frankfurt, was less optimistic. “It was to be expected that the Brits would have to move. But we’re not even half-way there,” he said. “A lot has been said about the past, but little about the future. How will future relations be, from trade to politics? A lot of questions are still unanswered.”

Both the euro and British pound strengthened against a basket of currencies, while financial markets across Europe rallied on the Brexit news. By mid-afternoon on Friday, the DAX index of 30 German blue chips gained 1.1%, while the UK’s FTSE 100 index rose 0.9% and France’s CAC 40 index was up 0.4%.

Jeremy Gray is an editor at Handelsblatt Global. To contact the author: j.gray@vhb.de

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