Brexit: London could be overstrained

Peter Ammon, German Ambassador to the United Kingdom from 2014 to 2018, responded to questions from Peter Niggl

Mr. Ammon, you were German ambassador to London at the time of the British decision for the country to leave the EU. To your knowledge, what economic interests or considerations were the reasons this vote?

The decision to leave the EU came completely unexpectedly for the vast majority of observers in Great Britain; even the advocates of Brexit were surprised by the outcome of the referendum. The reason for this was a coalition of protest voters in the industrial areas in the north which had not previously been recognized, left-wing opponents of globalization in the cities, and nostalgic people in the rural areas who were dreaming of the lost British Empire. When looking at this realistically, all three groups acted against their own economic interests: The jobs of industrial workers in the north depend largely on foreign investment, for example, in the automotive industry, which sells more than half of its production in the EU internal market. These are now at risk.

The left-wing opponents of globalization did not realize that minimum social standards were based on EU law, which is now no longer available. And rural farmers are only now beginning to see how hard an existence without agricultural subsidies from Brussels and with uncertain sales markets on the continent will be for them. The majority of British elites in business and in the City of London opposed the Brexit, foreseeing a substantial loss of growth for the British economy. However, there was also a small minority of members of the British financial industry who raised their voices for the Brexit. They hoped that the abolition of Brussels’ control would provide them with new liberty for speculative transactions.

Boris Johnson took up this vision of a new “Singapore-on-Thames” and associated it with unrealistic promises of new, allegedly lucrative free trade agreements with the former colonies and of financial benefits due to the discontinuation of EU membership dues. It is debatable whether Boris Johnson himself was aware that these futile calculations would massively damage the economic interests of the country as a whole. But as a dyed-in-the-wool politician, he sensed that a hard Brexit policy would open up a pathway for him to the seat of government in No. 10. This calculation was acknowledged by a landslide election victory at the end of 2019.

To what extent did the feeling of being at a disadvantage compared to the rest of the EU or some important players like Germany also play a decisive role?

Despite a rebate negotiated by Maggie Thatcher, the UK had become the second-largest net contributor after Germany over the years, an argument often used by Brexit supporters.

Also, in the group of the empire nostalgic people, some had the irrational fear of an allegedly too powerful Germany, whose endeavor for supremacy had been repelled by the military in two world wars, played a role.

The transfer of more and more powers from the nation-states to the EU in recent decades and the EU’s propagated goal of creating an “ever closer union” (i.e., a deepening of the Union) increased many people’s fears that they would no longer be able to uphold their own British interests during majority voting. In short, people feared the emergence of a European superstate, whereas the British dreamed of a large free trade zone in which the member states, not the EU Commission, would have the say.

Wouldn’t “large free trade area” at the same time mean, that one would like to gain certain advantages over competitors by “adjusting” standards? And wouldn’t this inevitably put the EU on the spot?

In principle, yes. Boris Johnson entered the Brexit negotiations with Brussels with the idea that the existing free trade agreement between the EU and Canada (CETA) could serve as a model. This provides for duty-free trade for the vast majority of goods, but does not subject Canada entirely to regulation of the single market by the EU Commission. Brussels has rejected this model because trade between Europe and the UK is not comparable to that with Canada in terms of volume and geographical proximity.

London had also hoped to reach an understanding on the mutual recognition of each other’s standards (Mutual Recognition Agreement – MRA). Such MRAs have long existed, for example, between the EU and the USA with regard to aircraft safety standards. However, it is hard to imagine duty-free trade across the English Channel if the UK can unilaterally lower its standards after Brexit and then offer its products in the EU single market at a lower cost than its competitors from the continent simply because it no longer has to comply with European social and environmental standards in the future, for example, or because the British government will subsidize important branches of industry in the future.

The issue of equivalent standards also played a major role in the negotiations on the financial industry. Clearing of derivatives, a lucrative business for the City of London, will in the future only be possible there if the EU Commission certifies that British regulation is equivalent to that of the EU. In order to ensure business operations beyond the end of the transitional phase at the end of this year, the EU has confirmed equivalence for the next 18 months; after this period, the EU Commission has the power to suspend trading in European derivatives in London.

“If you like horror scenarios, you only have to ask representatives of major banks about the settlement of derivatives transactions (clearing) after the Brexit,” so the “Handelsblatt” wrote three years ago. Do your words imply that trading in high-risk derivatives after the Brexit significantly increases the risk of a financial crisis?

Not necessarily, as long as it remains sensibly regulated. The volume of this market, which is transacted in the City of London, is gigantic and amounts to many trillions of euros. The UK, which provides the “backstop” for this, also has an overriding interest in its stability. I therefore do not expect any adventures in this sector.

However, if trade in EU-originated derivatives (I’ve heard estimates that these account for about a quarter of the total business) were to have to leave the country after the eighteen-month deadline, the UK would suffer substantial financial losses. Traditionally, the UK’s balance trade in goods has been in the red, which already could not be fully compensated for by surpluses in the services balance. This is aggravated by the orgy of government debt caused by the Corona crisis, which must essentially be financed by further capital imports. The recent downgrading of Great Britain by a rating agency is a first warning sign.

With a view to a hard Brexit, the German Pharmaceutical Industry Association has advised its member companies to take all precautions for the “worst case”. What could this “worst case” mean for companies – and the general public – in the EU?

The negotiations are currently in their final phase, so it is not yet possible to say how likely a “worst case” scenario is. In principle, however, I am optimistic that, despite all the threatening gestures from London, we can at least expect a basic agreement that would prevent the introduction of customs controls and quotas at border clearance points.

The lack of qualified customs personnel would lead to endless truck jams.

However, if this is not achieved, trade would have to take place on the basis of WTO rules, which would pose numerous problems. Some examples: Both sides would have to impose tariffs in the amount of 10 percent on imported motor vehicles in the future, for example, and complicated discussions would be held about the “local content” share of products. The lack of qualified customs personnel alone would lead to endlessly long truck jams at the borders, which would severely disrupt supply chains in the automotive industry, for example. Landing rights for airlines would have to be renegotiated, and the approval of medicines etc. would no longer be automatic. Mutual recognition of professional qualifications, safety certifications of products and the right to apply for government tenders on the other side of the English Channel would no longer apply. It is expected that travelers from the EU without a visa may only be able to stay in the UK for three months; according to reports from the Home Office, EU citizens applying for work visas will then be put on an equal footing with applicants from anywhere else in the world, and will have to meet requirements regarding minimum income, etc. Students from the EU, who currently pay tuition fees of around 9,000 British pounds, could expect a tripling of costs.

This list could be endless. The examples show how complex the negotiations are; it is said that the draft agreements are already over 1,000 pages thick.

From personal observation, however, I have another fear: The British administration under Boris Johnson has recently struggled to respond flexibly and competently to major changes. The reaction to Corona, which caused four times as many deaths as in Germany, is just one example. If this administration is confronted with countless new regulations after a hard EU exit, it may not be able to cope with it.

Image source Image 2: James Claffey / unsplash