Countdown to Brexit: 9 days - Germany will not allow Brexit to compromise EU core principles

Many Brexiteers assumed that German big business would lobby its government in a way that would guarantee continuation of frictionless trade in the event of a ‘Hard-Brexit’ scenario.  This was an over-optimistic view expressed by Brexit campaigners.  Still, it was accepted by the Government led by Theresa May that was formed after the referendum.  As symbolism plays an important role in diplomacy, the Prime Minister took her first trip abroad in July 2016 not to Brussels, but to Berlin - seeking goodwill by the German Chancellor and favourable conditions for the upcoming Brexit negotiations.

This did not materialize.  German interests – set in the context of the EU - led it to put its weight behind the EU’s chief negotiator instead.  Not for the first time in recent history, the UK overestimated its ability to win support from Germany.  There have been a number of occasions where the UK believed it had German backing - but it turned out not to be the case.  For example, the UK thought it had the support of Germany in the negotiations on the Fiscal Pact - and also on the appointment of Jean-Claude Juncker as Commission President.  On both occasions, Germany decided to change its position leaving the UK isolated.

With Brexit – once again - the British government over-estimated how far Berlin could - or would - help them.  Above all, it failed to recognize the extent to which its demands clashed with fundamental German interests in preserving the integrity of the single market and, indirectly, the EU itself.

The UK is a vital trade partner for Germany - and is the country with which Germany has the largest trade surplus.  The German automotive industry is especially important – with 800,000 vehicles sold in the UK – accounting for a fifth of all German car exports in 2016.

The UK is Germany’s third largest export partner with €90 billion in sales in 2016.  Germany’s nominal exports to the UK increased by 50% between 2010 and 2015.  No less than 7.5% of all German export goods were sold to Britain in 2015 - a large number given that the UK does not purchase many machine tools or other heavy products of the sort Germany specializes in - unlike emerging economies.

With subdued domestic demand across Europe, Germany and the EU depend on trade-induced moderate growth including close trading relations with Britain.

Nine EU countries send at least 5% of their total exports to the UK.  In 2015, Germany’s trade surplus with the UK alone was a staggering €51 billion - about 20.5% of Germany’s entire trade surplus.

Against this backdrop, the structure of German industry helps explain why Berlin is not - and has never been - really interested in developing a single market in services.  Germany’s economy is focused on the export of goods rather than services - which is why the single market works particularly well for them.

 Germany‘s key industry is automotive. Within Europe, Britain is by far their biggest market.  Auto manufacturers based in Germany export three times more cars to Britain than they do to China, according to their trade association’s data.  The auditing firm Deloitte believes that the number of German cars sold to Britain could drop from 800,000 to 550,000 annually after Brexit without frictionless trade.

The latest developments regarding the potential ‘no-deal’ Brexit have left German policy makers and the German public unprepared for how it may affect them.  A no-deal exit could become a major problem for the German government.

Germany stands to be the hardest hit member of the EU if the UK crashes out of the bloc without a deal.  A study by economists at the Halle Institute for Economic Research (IWH) and the Martin Luther University of Halle-Wittenberg shows that a hard Brexit could put some 100,000 German jobs on the line.  Workers in Germany’s car industry would be at particular risk in the regions of Wolfsburg and lower Bavaria - where Volkswagen and BMW have factories.

The study captures the jobs that would be lost because of a slump in exports resulting from - among other things - customs duties that would be levied by Britain on German exports in the event of a no-deal Brexit.  The UK no-deal tariff table, published last week, sets duties at 10% for finished cars and up to 16% for parts.  Job losses resulting from other factors such as a fall in British investments in Germany are not reflected in the figures.

Despite this gloomy outlook in a no-deal Brexit scenario, German business has held strongly to its pro-EU-27 stance.  Business associations have expressed concerns and have urged politicians to find solutions in order to maintain frictionless trade and maintain jobs - but not at the expense of compromising the integrity and principles of the single market.

German establishment and public are on the same page when it comes to the future relationship between the EU and the UK: that the EU should try to maintain a good relationship with the UK - but it should not make any compromises on its core principles.  Chancellor Angela Merkel understands that the success of the UK and the EU are interlinked, both politically and economically, but that her political interest first and foremost is in keeping the EU-27 together.  The German corporate sector has grudgingly accepted this argument.

Image by Steffen Voß, (CC BY 2.0).

Professor John Ryan: is a Visiting Fellow at LSE IDEAS.  He has been a researcher at CESifo, Munich, Germany, St Edmund’s College, University of Cambridge and the German Institute for International and Security Affairs, Berlin, Germany.  John is working as a senior partner in Brexit Partners and as a Brexit adviser for EU, Gulf and Asian clients.

Prof. John RyanComment