Brexit from a German perspective

Brexit, a grave loss for Germany and the EU but an even greater loss for the UK

On October 19, Dominik Meier had the honor to take part in a panel discussion on Brexit kindly organized by Herbert Smith Freehills and Global Counsel in London. Together with Jens Geier MEP, Wolfgang Münchau from the Financial Times, Ralf Thaeter from HSF and under the splendid chairmanship of Lord Peter Mandelson, they shed a view from Germany on the Brexit negotiations. It became evident that UK and Germany are mutually dependent and intertwined through a deep integration into each other’s economies and a traditional friendship.

With Brexit, Germany is losing a vital partner in the EU. More than 2.500 German businesses have branches in Great Britain which account for roughly 420.000 employees. Still, the debate also made clear that the dependence of UK on the Single Market is far bigger than vice versa. Seven out of the top ten trading partners of Great Britain are members of the European Single Market. In 2015, 44% of all of UK’s exports were directed to EU Member states, while approximately 53% of UK imports were originated in the EU. Consequently, the slow progress of the negotiations between UK and the EU and the lingering risk of a hard Brexit without any follow-up agreements should scare the UK more than Germany or any other EU member state.

For German businesses, whose complex supply chains criss-cross the entire EU, nothing is more important than the achievements of single market, its common rules and institutions. Thus, the stability of the single market will be regarded more important than the economic relationships with UK. In this, the German government stands firmly behind its economy. Certainly, government and business would like to minimize the economic disturbance that comes with a hard Brexit. But not at the cost of risking to encourage other EU member states to follow UK’s footstep and harm the single market.

The clear position of Germany is grounded in the need to gain legal security. Currently, businesses have no clue what to prepare for and they feel that time is running out. As Peter Altmaier, Chief of Staff at the German Federal Chancellery and close ally to Chancellor Merkel, puts it: “Can you imagine how to make a win-win situation out of that mess? It will be a win-win situation for the lawyers of course, but certainly not for the negotiating partners concerned”.

Brexit Negotiations and Business: The Issue of Preparedness
The vital question for businesses is not only whether to relocate their headquarters, but how legal security in the bilateral relationship can be achieved. From taxes, to labor market regulation, to consumer protection and financial services – every legal framework regulating business making in the EU is currently at stake. Due diligence requires business to prepare for the worst. Don´t be deceived: The EU cannot let UK get away easily. Although cautious negotiations on a trade deal will be started eventually and a transition period after March 2019 might prolong UK’s hope, the cut must and will come.

The administrative burden this entails for businesses is immense. The redefinition of internal and external processes ties up vital resources and legal uncertainty leads to risk aversion and a decline in economic activity. Likewise, the political effects of Brexit can already be seen in Brussels. Numerous legislative processes have been halted by the EU Commission in order to free up resources for the negotiations with UK. This is harmful not only to the government apparatus but for the future of the EU as a whole.

In the end, Brexit will lead to a gradual shift in the balance of power in Europe. Germany’s status as agenda-setter and veto player will continue to grow and the EU sets off into a new phase of intergovernmentalism. Member states will coordinate more policy issues among themselves and build new alliances. Consequently, the EU 27 will close ranks vis-à-vis the Brussel’s administration but even more vis-à-vis the British government. They will fight off efforts to divide them and adhere to one common negotiation line.

With intergovernmentalism on the rise, businesses should turn their view to the member states. To prepare for Brexit, it is not enough to monitor the negotiation process from afar. Since the negotiations are framed most differently on the continent and in UK, one can easily only see one side of the medal and mistake it for the complete picture. To see clearly, businesses must understand the political logic in UK, Brussels, Berlin, Paris or Madrid. Permanent political risk assessments, alignment of business strategies to those assessments as well as a strong network to political contacts in the decisive member states will prove key when preparing for Brexit.  Businesses must reach out to national governments now. They should voice their interests, clearly point out concrete problems that Brexit will bring for their business and translate it into the language of politics. Ideally, they already come up with ideas for solutions, timetables and offer their cooperation to the administrations. Only then can the insecurity be mitigated and preparations for Brexit successful.