May 18, 2017
German hard line on Brexit already cracking
We have been arguing for a while that the German hard line on Brexit is pure show. Nobody wants to stab Angela Merkel in the back for now, so German industry has decided to stay quiet for the moment. Some of our British friends have interpreted this stillness as evidence that the Brexit negotiations are going to be really tough.
FAZ has the news this morning that the scientific advisory council of the economics ministry - a group of German economics professors, in short - wants the German government to fight for a free trade agreement with the UK because economic relations are very deep. A sudden Brexit would cause massive economic damage, they argue - and rightly so. The council is also right to conclude that this will not happen within two years, and recommends that the UK joins Efta as an intermediate step. We fully agree, too. The council is pressing for a balanced agreement. Contrary to popular belief, it is not true that only British companies benefit from EU market access. Many German companies have supply chains that reach deep into the UK. The council even notes that the City of London will continue to play an important role post-Brexit because of the structural depth of the derivative markets - which will not be easily replicated by any other EU member state. FAZ notes in its coverage that the German debate is mostly about the jobs that might come over from London to Frankfurt, while this is possible the more important issue.
We don’t often agree with German economics professors, but they are spot on. The EU is currently massively overplaying its hand. This will become more apparent as the negotiations progress. These negotiations will deteriorate. But in the end, we expect deal quite similar what the council proposes for the simple reason that every other outcome would be a disaster for all sides. Expect pressure by German industry in particular to rise as these negotiations continue.