The EU's Arrogance

Billions in Losses for Germany

With nearly double-digit billions in losses annually, the German business community would be the main loser of a "hard Brexit" among the remaining EU members, according to an analysis published yesterday by the global management consulting firm Oliver Wyman and the multinational law firm Clifford Chance. The analysis focuses on possible impacts, if Brussels and London fail to conclude a post-Brexit trade agreement or a tariff union. In that case the two sides would simply revert to a World Trade Organization (WTO) trading relationship with one another. According to the analysis, EU27 firms must expect losses totaling €35 billion annually - more than the estimated €30 billion in losses for UK firms. With losses of nearly nine billion euros annually, Germany would be the EU27's greatest loser. The financial services and the automotive industry will most likely be hardest hit. London (financial services), respectively the German states Bavaria, Baden-Württemberg and Lower Saxony (automotive industry) must expect above-average losses.[1]

No Tariff Union

Threatened with billions in losses, the German business is adamantly seeking to avoid a "hard Brexit." According to Joachim Lang, Director General of the Federation of German Industries (BDI), German business is still calling for a tariff union between the UK and the EU27.[2] However, there is little chance of concluding a tariff union, at this time. In case London would assent, following the Brexit, the UK would be unable to conclude independent trade agreements with third states. With British firms already having by far more business deals with non-EU countries than do German firms, the UK is basing its post-Brexit strategy on free-trade agreements, for example with India and China. In addition, a tariff union would benefit British companies far less than their continental rivals. Because British commodity imports from the EU27 are significantly more than British exports to the continent, the EU27 could reduce their Brexit costs from €35 to €16 billion with a tariff union, while the UK, only from €30 to just about €20 billion, as noted by the Oliver Wyman and Clifford Chance analysis.[3] This does not compensate for the opportunities offered by independent free-trade agreements, in the eyes of the UK's government.

"Set an Example"

At the same time, the EU's negotiation strategy threatens to derail even the compromise, which German industry considers an acceptable minimal solution - the conclusion of a comprehensive free trade agreement between the UK and the EU27. Martin Selmayr - since March 1, Secretary-General of the European Commission, the former Chief of Staff to the President of the European Commission, Jean-Claude Juncker, and in both positions, playing a leading role in the Brexit negotiations - had formulated a while back, Brussels' maxim for the Brexit negotiations, "Brexit will never become a success."[4] This is because Berlin seeks to make a discouraging example of Britain's exit, to intimidate EU critical forces in other member countries. Last week, Brussels reacted accordingly to London's proposal to conclude a comprehensive economic agreement, safeguarding all important interests for both sides, while insuring the supply chains - including those for Germany's automotive industry as well as Britain's financial sector's access to the EU27.[5] The EU's chief negotiator Michel Barnier and Donald Tusk, President of the European Council declared that consideration for the British financial sector is out of the question. This however raises the question of whether a free trade agreement can even be reached. After all, it is unlikely that London would enter an agreement accommodating the EU27 interests, but not its own.

"Oriented Only Toward the Past"

In the meantime, even leading German media have begun warning that making an example of Great Britain could backfire. It was recently reported that since January, the mood in the United Kingdom - even among the Brexit opponents - has noticeably begun to change.[6] For example, UK Finance Minister Philip Hammond, a resolute proponent of close cooperation with the EU, complained in an interview that, whereas "one senses enthusiasm in many countries around the world," over the prospect "of reaching free trade agreements with us," from the EU, one hears "only things oriented on the past," such as "it was a bad decision, to want to leave the EU." Or even: "You must be punished, because you wanted to leave."[7] In February, "the idea that a mechanism of sanctions should be initiated for Britain, that exists for no other country," had provoked "such wide-scale, non-partisan outrage on the isles" that "the idea had to be scrapped," he continued.[8] With its obstructionist policy toward British interests, Brussels is increasingly being perceived as "stubborn, arrogant and hostile." The "EU's arrogance shows that we were right to get out," confirmed the London Times recently. Even the "Financial Times," widely considered the "bulwark of Europhilia," has begun to develop a growing skepticism toward the course the EU is taking.

"An Uncomfortable Neighbor"

In fact, last week, one of the "Financial Times'" most prominent columnists, Gideon Rachman, warned about the "dangerous consequences" Brussels' obstructionist policy could have. Rachman wrote that Great Britain is "not any old third country," "it has been crucial to the European balance of power for centuries" and "is currently a major trading partner and military ally for most EU countries."[9] The EU has the choice, it can seek a compromise with the United Kingdom, or it can seek to have Great Britain "economically suffer under the Brexit" - and jobs and tax revenues could migrate from Britain to the EU. The EU’s final option is to "force a crisis" hoping that the May government collapses and a new administration in the UK might reconsider Brexit. All options other than a compromise are risky. With a rising China and an unpredictable US — it makes sense for the EU to try to pull the UK into a new sort of “special relationship.” Rachman notes that "a Britain that feels humiliated or impoverished by the EU could be an uncomfortable neighbor — with Russia as an extreme example of what can happen when a major European power is at odds with the EU."

[1] Oliver Wyman, Clifford Chance: The "Red Tape" Cost of Brexit. London 2018. See also The Brexit Losers.

[2] Deutsche Wirtschaft fordert Zollunion nach dem Brexit. Frankfurter Allgemeine Zeitung 12.03.2018.

[3] Oliver Wyman, Clifford Chance: The "Red Tape" Cost of Brexit. London 2018.

[4] Florian Eder, David M. Herszenhorn: Brexit will never be a success: Juncker's top aide. www.politico.eu 05.05.2017. See also Brussels' Provocations.

[5] EU trade deal must include financial services, says Hammond. bbc.co.uk 07.03.2018.

[6] Jochen Buchsteiner: Starrsinnig, arrogant und feindselig. Frankfurter Allgemeine Zeitung 09.03.2018.

[7] Olaf Gersemann, Ileana Grabitz: Wir hören aus Europa nur Rückwärtsgerichtetes. welt.de 14.01.2018.

[8] Jochen Buchsteiner: Starrsinnig, arrogant und feindselig. Frankfurter Allgemeine Zeitung 09.03.2018.

[9] Gideon Rachman: Europe's strategic choices on Brexit. ft.com 05.03.2018.