Brexit: the German perspective

Key points

 

  • Angela Merkel has recently announced that she will run for a fourth term in Germany’s federal elections in September 2017. On the basis of what we know today, it is not unlikely that she will be re-elected (in what coalition remains to be seen). With regards to foreign policy in general and Brexit, in particular, this suggests that comments that have been made by the current administration should be taken very seriously.
  • Germany is the de facto leader of the EU, no matter how ambivalent (and uncomfortable) the population and Germany’s political elite may feel about it. Germany’s key strategic interest is to stabilize the EU in a time of multiple crises. The federal government regards “Brexit” as a major challenge for the cohesion of the EU. Hence, Germany’s key political objective is to prevent further exits and to preserve the European political order.
  • Although Germany maintains close trade and investment relations with the UK, the federal government has stated on multiple occasions that it will place key European principles (four freedoms of movement) above pure German economic interests. Merkel has ruled out that Germany might let the UK “pick and choose” free trade of goods and services while limiting (or cancelling) the freedom of movement for EU citizens at the same time.
  • Key German industry associations like BDA, BDI or VDA appear to support this course.
  • Chancellor Merkel and her ministers signalled several times that Germany wishes to see a clear cut between the EU and the UK in a reasonable time frame. In their view, protracted exit negotiations might paralyse politics in Europe for years.
  • Together with the European Commission the German government is trying to organise a unified position of the remaining EU member states prior to the start of any exit negotiations. Merkel wants to prevent the UK from splitting up the EU with beneficial deals between the UK and single EU states. Therefore she refuses to start non-official talks about exit terms, before the UK has triggered article 50.

 

The future relationship between the UK, Germany and the European Union

The German government was hit between the eyes by the result of the Brexit referendum in June. With the UK, Germany will lose a close ally in European politics, especially with regard to issues like financial stability, economic policies or institutional reform. In addition the UK is a large trade partner generating a multi-billion export surplus for Germany.

 

On the one hand Germany is interested in maintaining this beneficial relationship. On the other hand Germany wants to prevent a domino effect: other EU states might seek better terms with the EU by playing the exit threat – the result might be dissolution of the EU.

 

In a government declaration five days after the referendum Chancellor Merkel explained how German government will handle this dilemma. She said that the UK will remain an important partner of Germany, but that the exit negotiations won’t result in cherry picking for the UK.

 

 “There must be a noticeable difference between countries who want to be member state of the EU and those who don’t. Everybody who wants to get access to the European market must accept all four freedoms of movement.”

 

This position hasn’t changed.

 

Bargaining position

In the following months Merkel and her ministers reiterated the indivisibility of the four freedoms of movement. On several occasions German ministers drew red lines whenever the British government discussed compromise proposals or solutions for the exit talks.

 

  • When Theresa May said that she would trigger Article 50 of the Lisbon Treaty by the end of March 2017, Chancellor Merkel warned Britain cannot be given any special treatment. “If we don’t say that full access to the single market is linked to full acceptance of freedom of movement, then everyone in Europe will start doing what they want.
  • When the UK suggested decreasing corporate taxes to attract foreign business after Brexit, Germany’s finance minister Schäuble set out a tough line on EU divorce talks with Britain on issues from tax breaks to exit costs. He told the Financial Times that, even after Brexit, the UK would be bound by tax rules that would restrict it from granting incentives to keep investors in the country. In addition Mr. Schäuble insisted Britain must stick to international rules on investment incentives.
  • Chancellor Merkel rebuffed efforts by Theresa May to secure an early deal on the reciprocal residency rights of UK and Polish citizens in the wake of Brexit. The gesture was also aimed at EU states who might consider similar deals with the UK.
  • The German government appealed to the UK several times to trigger article 50 as soon as possible.
  • Vice chancellor Sigmar Gabriel – a possible challenger of Angela Merkel in the 2017 elections – summoned the EU states to take a hard line within the exit talks with the UK. He argued that a soft course would mean an invitation for national egotism in Europe.

 

Industry position

German industry sectors, especially car makers, manufacturers and the pharmaceuticals industry, would be negatively affected if the UK were to exit the common market. Nevertheless, the key industry associations have gathered behind Chancellor Merkel’s position:

Ingo Kramer, president of German employer organization BDA: “Brexit is a deep cut, but Europe should not make deals with London at all costs in this situation.”

Markus Kerber, president of German industry association BDI: “I read many articles in the British press which claimed that Germany is a relatively soft negotiating partner since 7.5% of Germany’s exports go to the UK. Well, 7.5% is a large figure, but 92.5% go somewhere else.”

Martin Wansleben, chief executive of German chamber of industry and commerce DIHK: “The German economy needs the European common market and we need Great Britain. But, we only can keep together the common market if we avoid cherry picking. It won’t be easy to bridge this issue.”

Matthias Wissmann, head of the German automobile industry association VDA: “Europe must stand together now to prevent a domino effect. If the UK wants free access to the market, they necessarily have to accept the free movement of citizens. It is the bitter pill the Brexit adherents have to swallow.”

 

Public debate

According to a representative survey in November, 58% of the German public think Berlin should not be open to compromise with Britain over its EU departure. A vast majority supports the government course.

Discourse in journalism about Brexit is differentiated and controversial. However, most commentators in quality media outlets conclude that Germany must stabilise the EU by refusing access to the common market to the UK if the British are not willing to grant freedom of movement to EU citizens.

 

Benefitting from Brexit

An interesting side note to the highbrow policy and media debates surrounding Brexit is the very down-to-earth question of who might benefit from it. It appears to have become generally accepted wisdom that many corporations who currently have their headquarters or significant production and/or administration facilities in the UK are likely to relocate to the continent when Brexit becomes a reality. Several German cities and regions stand to benefit and are looking into this very seriously, most visibly Frankfurt (finance and banking), Berlin (tech and start-ups), and Düsseldorf (traditionally a magnet for Asian companies). Roadshows are already taking place and real estate brokers are feeding the frenzy with wild predictions.

 

Federal elections in 2017

What is the significance of Germany’s federal elections in 2017 (most likely in September) for Brexit?

From today’s perspective, Brexit will most likely be only a side issue in the context of the federal election. The German public was surprised (and shocked, to some extent) by the results of the June referendum. However, people quickly adapt to changes and the truth is there are other issues that are seen as a lot more relevant and significant by most people. These include immigration, social welfare, the allegedly increasing “wealth gap”, to name but a few.

Given the rise of right-wing populism (a rather new development in Germany, as opposed to many other European countries) and, in particular, the rise of the AfD, the election might become a vote on Merkel’s refugee welcoming policy (“Wir schaffen das.”). The Merkel government has already responded by toughening Germany’s asylum laws, the deal with Turkey, and other measures. However, the nature of politics these days appears to be its unpredictability – and in that regard, a lot of uncertainty remains. In any case, a lot can happen in 10 months…

Michael Stott

Hill & Knowlton Strategies Search