In the Interest of German Industry

Chancellor Merkel calls for "compromise" on trade agreement with Great Britain, breaking EU consensus.

BERLIN/LONDON (Own report) - The German government breaks ranks with the EU consensus on the negotiations of a Brexit free trade agreement and demands that concessions be made to Great Britain. On Thursday, the EU heads of states and governments - with Germany's endorsement - had unanimously increased pressure on the British government to unilaterally concede in the dispute over the agreement, however, Chancellor Merkel is now strongly pleading for "a compromise." This change of course was triggered by London's reiteration that it would rather settle for a no-deal Brexit, if the EU insists on its maximalist positions. A hard Brexit would bring serious disadvantages particularly for German industry, because, well ahead of China, the UK is its second largest investment site and its business on the British Isles has already been seriously affected by Brexit uncertainties. Confronted with the impact of the Corona crisis and economic risks due to the power struggle between the USA and China, Germany seeks to avoid further slumps.

Trade Agreement Dispute

The new escalation in the dispute over the Brexit trade agreement was triggered by the last-minute change in the mandate for the EU's chief negotiator Michel Barnier, decided last Thursday by the EU heads of states and governments. Originally, Barnier was mandated to "intensify the negotiations with the aim that an agreement can be implemented by January 1, 2021."[1] On Wednesday, however, the EU ambassadors of the member states chose to water down that formulation. Instead of demanding that the negotiations be "intensified," the Union's chief negotiator is asked "to continue negotiations in the coming weeks." The heads of states and governments adopted this formulation with the aim of playing for time to increase pressure on the UK.[2] They also called on the British government "to make the necessary moves to make an agreement possible" - demanding that London unilaterally make all outstanding concessions.

Punitive Tariffs (I)

This is also remarkable because, the UK has a strong negotiating position in the two most important remaining unresolved issues - even according to the assessments of German observers. On the one hand, this applies to the dispute over fishing rights in British territorial waters. According to Valentin Schatz, fisheries law expert in Hamburg, current EU regulations would mean "that other EU member countries' fleets would be catching eight times as many fish in British waters, than British fishermen would be catching in theirs."[3] British fishermen see this as unacceptable and demand improvement. In principle, Great Britain is not obliged to "grant the EU access to British sea fisheries also in the future." The legal position is "unfavorable" for the EU. Brussels is therefore trying to link "the issue of fishing rights to future trade relations" and insists on being allowed to react to Great Britain's eventual "breach of fisheries laws" with punitive tariffs. "Such regulations are unusual for fisheries treaties," according to Valentin Schatz.

Punitive Tariffs (II)

The situation is similar in the dispute over future government subsidies for private enterprises. The EU continues to insist that Great Britain fully accept current restrictions on such subventions, to prevent British companies from having an advantage over their continental rivals. London refuses to do so, referencing its national sovereignty. In addition, experts remind that in the past, the United Kingdom had subsidized much less than for example France or Germany. Paris was spending 0.76 percent of its GDP on subsidies, and Berlin, even 1.31 percent, while London, not more than 0.38 percent.[4] The British government is prepared to commit to international standards in the agreement, for example, as they are stipulated in the EU's free trade agreement with Japan.[5] For the EU, which seeks to bind Great Britain, as tightly as possible to its regulations, this is insufficient. Most recently, the EU suggested that the United Kingdom should adopt the EU's minimum standards, while simultaneously permitting the UK to exceed them in exceptional cases. However, the EU would then respond with punitive tariffs on commodities from Great Britain. London rejected this proposal as a back door imposition of EU norms.

Too Big a Gamble

EU negotiators recently saw new opportunities for trying to impose their demands, in spite of a significantly weaker negotiating position. As insiders have put it, Great Britain's Prime Minister Boris Johnson has "gotten himself into a difficult position." "Due to his mismanagement of the pandemic" he is currently standing "with his back against the wall and cannot afford another setback." Recently Washington also gave the EU a helping hand, when it announced that the US would reject a free trade agreement with the United Kingdom, if Britain violates the Brexit agreement.[6] In case no agreement is reached, the British government is considering such violations on two separate issues. London had a sharp reaction to the above-mentioned EU summit's decision to revise chief negotiator Barnier's mandate, initially with an immediate protest following the EU summit decision, then with statements issued by Johnson on Friday. Johnson said that he no longer assumes that an agreement can be reached. The EU's demands, that Brussels is evidently unwilling to renounce, are totally "unacceptable to an independent country" like Great Britain.[7] The Prime Minister did not rule out that Barnier could - as planned - be received on Monday for talks in London, but added, that would only be on the condition that the EU abandons its maximalist positions.

Too Many Irons in the Fire

Chancellor Angela Merkel called for such a change of course immediately following London's first protests. If Great Britain is being called upon to make concessions, then "that naturally means that we too must make a compromise," declared Merkel - thereby breaking the much-touted EU consensus, that she herself had explicitly voted for during Thursday's EU summit.[8] The German economy would be hard hit by a Brexit without a regulatory free trade agreement, this is why the Chancellor has a change of heart. The Cologne Institute for Economic Research (IW) points out that German exports to the United Kingdom, which rose on a 5 percent average annually between 1991 and 2015, have fallen to an annual average of 3 percent since 2016 - the year of the Brexit referendum - from €89.0 billion in 2015, to only €78.9 billion last year.[9] Tariffs, as they would be imposed without a free trade agreement, would shrink German sales in Great Britain even further. Adding to this, German direct and indirect investment on the British Isles stands currently at €137.7 billion, making the United Kingdom still the second most important investment site for German enterprises, with an investment volume, that continues to be 50 percent more than German investments in China. The Germany Trade & Invest (gtai) recently noted that German investments in Great Britain are already developing "below their potential."[10] If the free trade agreement between the EU and Great Britain does not materialize, significant losses are expected - at a time, in which the Corona crisis is already taking a dramatic toll on the economy and the power struggle between the United States and China hold significant economic risks for Germany. The danger of over-stretching Germany's own potential in the various global conflicts and causing serious damage to its economy is growing.


[1] Thomas Gutschker, Hendrik Kafsack, Jochen Buchsteiner: Und die Briten bewegen sich doch. Frankfurter Allgemeine Zeitung 15.10.2020.

[2] European Council meeting (15 and 16 October 2020) - Conclusions. Brussels, 16 October 2020.

[3] Valentin Schatz: Wem gehört der Fisch? 22.06.2020.

[4] Bericht der Bundesregierung über die Entwicklung der Finanzhilfen des Bundes und der Steuervergünstigungen für die Jahre 2017 bis 2020 (27. Subventionsbericht). Deutscher Bundestag, Drucksache 19/15340, 13.11.2019.

[5], [6] Thomas Gutschker, Hendrik Kafsack, Jochen Buchsteiner: Und die Briten bewegen sich doch. Frankfurter Allgemeine Zeitung 15.10.2020.

[7] Johnson schwört das Königreich auf harten Brexit ein. Frankfurter Allgemeine Zeitung 17.10.2020.

[8] Jochen Buchsteiner, Thomas Gutschker: Verhandlungen gescheitert? Frankfurter Allgemeine Zeitung 17.10.2020.

[9] Berthold Busch: Brexit und Außenhandel. IW-Report 39/2020. Köln, 17.08.2020. See also Die Brexit-Zwischenbilanz.

[10] Marc Lehnfeld: Deutsche Investoren im britischen Nebel. 31.08.2020.