Smooth Brexit In Interests Of Germany As Much As UK

There is a general perception in the UK that the remaining EU states, and Germany especially, would like to punish Britain for withdrawing from the European Union. This would mean Britain out in the cold, no trade deal, and potentially a fine to make up for lost payments.

The problem here is that it is generally assumed that countries have unified positions, shared by the governments and populations, with no internal differences of significance. In this vein we find allusion to the “German” or “French” position, as if these were fixed and unlikely to change.

I recently discovered first hand that this presumption is wrong and seriously misguides British public perception of post-EU relations with Europe. Even more serious, it serves as a barrier to establishing a rational negotiating strategy by Theresa May’s government. In the same way that there remains disagreement in the UK over whether or not Brexit should still go ahead, or whether or not it should leave the single market, analogous divisions manifest themselves on the continent. Many – even in Germany – are much more sympathetic to the UK position than we might think.

On April 24, along with a number of others, I gave “expert testimony” to the Committee on the Affairs of the European Union of the Deutsche Bundestag. My presence was prompted by a report on EU reform written with a lawyer colleague. I arrived expecting a series of statements in support of a “hard Brexit” position, aided at punishing the British for voting to leave the EU, the best of all unions.

To my surprise, this was not the case. During the hearing, with only a few exceptions, the tone of both the other experts and the parliamentarians was in varying degrees conciliatory and flexible.

Under Bundestag rules the parliamentary parties each select the expert witnesses (I was invited by Die Linke, a left-wing party). The absence of a vociferous “hard Brexiter” among my fellow experts suggests the malleability of the positions of the parties.

Based on my own work and statistical modelling by three economists at the Judge Business School of Cambridge University, I argued that the economic impact of Brexit (“hard” or “soft”) on the British economy is likely to be serious in the short run, but manageable if its government applies appropriate fiscal policies.

The big loss from leaving, however, will be political and social. Namely, losing EU treaty protection of important environmental, consumer, employment, civil and human rights. To these losses the possibility of Scottish independence should be added. The other expert invited by Die Linke, a lawyer from the German trade union central, Susanne Wixforth, reinforced my emphasis on political social dangers of Brexit.

German concerns

To my surprise, most of the experts nominated by the other parties did not stress macroeconomic effects for Britain such as employment, economic output and exports. Rather, their concerns focused on Brexit’s impact on the EU budget, and the potential harm to the German economy (Germany is Britain’s largest source of imports and enjoys a substantial trade surplus on UK trade). The UK gross contribution to the EU budget in 2015 was €18.2 billion or about 12% of the total, though the net contribution (once you remove payments Britain receives from the EU) was about 8%.

How to cover this revenue shortfall presents a major political problem to member states and especially the German government (the largest net contributor).

Three categories cover the vast majority of EU expenditures: transfers to less developed members, agricultural subsidies and aid to non-members. Cutting either of the first two would provoke serious political tensions among member governments, while reducing the last would bring severe criticism from other aid donors.

Raising more revenue from remaining member states is, if anything, more problematic. The other net contributors would resist increases, and Germany Chancellor Angela Merkel’s Bavarian rivals, the Christian Social Union, is on record opposing any increase in EU payments. In an attempt to avoid the potentially divisive issue of national contributions, the German government insists that the British government continue its EU payments at least to the end of the current budget cycle.

The case for cherry picking

On a narrow bilateral basis Brexit is likely to have a more negative impact on the German economy than the British. Stefan Mair from the German confederation of industry made this point to the Bundestag and recommended a “transition agreement” for Britain’s exit. The idea with this would be to, in effect, allow both sides to “cherry pick” from the menu of single market rules and benefits.

In the same spirit other experts, including myself, argued that during the transition, which might last quite long, the UK could withdraw from the “free movement of labour” condition, but retain the other three of the “four freedoms” of movement: capital, goods and services.

There is no doubt a political element to Brexit negotiations. Here, we must distinguish between posturing and reality. During my session, there was a “hard Brexit” comment at the end from the the chairperson of the EU committee, Gunther Krichbaum of the Christian Democratic Union, who warned that the Brexit agreement should not provide “incentives” for other EU members to leave in the future.

This is a warning that is frequently made by European leaders. But it seems inconsistent with the professed nature of the European Union, whose purpose is peace, cooperation and shared prosperity. If the EU successfully pursues these goals, its leaders need not fear more leavers. If it does not, failure to do so provides incentives to leave far stronger than any provision in the eventual Brexit agreement.

First published by The Conversation