Looking across the North Sea: a German view of Brexit

#CriticalThinking

Picture of Johnny Pring
Johnny Pring

Public Affairs Manager at McKesson Europe

Johnny Pring is Public Affairs Manager at McKesson Europe. He writes here in a personal capacity.

At the start of the United Kingdom’s two-year withdrawal from the European Union in March 2017, many Brexiteers looked to Germany as the EU’s key power, hoping that it would make the concessions to smooth the path to a deal between London and Brussels. Once the new government was in place in Berlin after the federal election in September 2017, it was their assumption that economic self-interest would kick in.

One year later, on 19 March 2018, Michel Barnier and David Davis announced that the EU and UK had reached a post-2019 transition deal, largely set on the EU’s terms. What will happen post-2020 is still up in the air. It is clear, however, that Germany has not yet pressured the European Commission to compromise for the sake of its exports to the UK.

The Brexiteer view was always based on a misreading of Germany’s European priorities: the Federal Republic’s traditional approach to Europe is one in which political considerations trump economic ones. Since the inception of European integration in the 1950s, the EEC/EU has never been a transactional relationship for Germany’s political class; rather, it is as much of an identify question as leaving the EU is for the Brexiteers.

What will happen post-2020 is still up in the air

Being pro-European is simply part of the DNA of mainstream German politicians – and the UK’s decision to leave has not changed that. The German government’s priority remains to preserve the integrity of the EU. In doing so, it is prepared if necessary to pay an economic price in terms of trade barriers to the UK. The British expectation that Germany’s car exports would take precedence was always a false hope.

Illustrative of this is the fact that EU policy is traditionally run by the Chancellor’s office, rather than the Finance or Economic ministries. Angela Merkel is no exception: since 2015 her chief advisor on EU affairs has been Uwe Corsepius, formerly the EU Council’s top functionary.

Other departments are nonetheless still involved. Just two weeks after the UK referendum, the German Foreign Ministry held the first meeting of a cross-ministerial Brexit Task Force, and the Finance Ministry also has its own dedicated team. Overall, Berlin has been content to leave the EU negotiations to Michel Barnier (and Sabine Weyand, his German deputy), whose clear mandate from the European Council is also primarily political ‒ maintain the integrity of the EU, no sectoral deals, no cherry-picking ‒ rather than economic ‒ frictionless trade with the UK.

Brexit has yet to emerge as a party politics issue in Germany, with the exception of the populist Eurosceptic AfD. It barely featured in the election campaign of last September. The CDU/CSU-SPD coalition agreement reached this February only makes a few passing mentions to the UK’s impending departure and calls for a ‘trusting cooperation’ between the two countries without any further details.

Nonetheless, German industry is starting to get nervous about prospect of a no-deal Brexit. Its representative body, the BDI, set up sectoral task forces in September 2017 to prepare its members for various scenarios. On 13 March 2018, the BDI issued a statement to express its concern at the lack of progress. Managing Director Joachim Land called on the British government to use the European Council summit at the end of the month to put an end to the uncertainty.

Nonetheless, German industry is starting to get nervous about prospect of a no-deal Brexit

The EU-UK transitional deal allays these uncertainties for a while, as it keeps the UK in the single market for a little longer. Yet the post-2020 arrangement is undecided. A further BDI statement calls for a deal by October 2018 to give companies commercial certainty.

The question of what the cost will be to Germany if its political interests have to take precedence over economic ones in the event that no deal is reached has therefore only been pushed down the road. While exporting industries remain a key constituency for the German government, they may still have to pay a price to maintain cohesion with the EU. As Donald Trump’s threatened trade wars still hang over them, losing barrier-free access to a key market is not a prospect they would look forward too.

As the UK is one of the largest net financial contributors to the EU, Brexit will also impact the EU’s finances when the next multi-annual budget (2021-2027) comes up for discussion. The Finance Ministry in Berlin has estimated that Germany’s potential additional annual contribution could be €6-7 billion through further contributions and phasing out the rebate system. However, German Finance Minister Olaf Scholz has already acknowledged that while Germany would have to pay more, it will not become Europe’s paymaster.

In this regard, Germany’s relations with France should not be overlooked. German Federal Chancellor Angela Merkel and French President Emmanuel Macron have remained aligned in publicly backing the EU’s red lines on Brexit. Looking to the post-Brexit EU27, a reinvigorated France is pushing for reforms, for example regarding the euro zone, to take the EU in a political direction that Germany would not necessarily support. While France does provide much-needed counter-balance to an overweening German influence on EU politics, Berlin may hesitate if this means protectionism or the spending of more German money.

German Federal Chancellor Angela Merkel and French President Emmanuel Macron have remained aligned in publicly backing the EU’s red lines on Brexit

Given that the EU is determined to distinguish the benefits of membership and its stronger bargaining position, there is understandably little willingness for it to meet the UK government halfway on a post-2020 trade deal. After all, it has largely prevailed in the negotiations up until now.

The UK government should therefore drop its misplaced hopes of German exporters changing the dynamic once a no-deal Brexit looms into sight. This prospect may become a factor, but it is not a game-changer. For the next round of negotiations, arguably the most important any British government has faced since the Second World War, it should make a more realistic assessment of its bargaining position and use this to play to its strengths and weaknesses.

The German government should be cautious however. The transition deal marks a truce rather than the end to the Conservative Party’s perpetual civil war over Europe, and the possibility remains of the Brexiteers forcing a walk out from the negotiating table. Berlin may therefore be well advised to discuss with German exporting businesses how they could prepare for a no-deal scenario.

The story of Brexit so far is that politics comes first – and not necessarily without an economic price.

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