The march towards Brexit continues. Finally, the Article 50 Bill has been presented to Parliament. What better time to consider perspectives from the EU on what Brexit might mean?
With the Article 50 Bill timescale, in theory at least, Theresa May should be in a position to invoke Article 50 itself during the EU Council meeting on 9th March in Malta. There will certainly be cause for reflection amongst EU ministers.
It is worth taking a moment to consider what exactly the EU is. The highest priority from the Remain side is that the EU is a Single European Market (SEM), a free trade area for its member states.
A reverse perspective from outside the EU is that it is a customs union. Barriers to trade may or may not exist among EU members but for the rest of the world, the SEM is a market to which access faces barriers. The customs union also includes countries such as Turkey who have yet to become full EU members.
To many Leave voters and campaigners, the EU is a political union between 28, soon to be 27 countries. Among those, 14 are also involved in currency union with fiscal restraint in order to harmonise their economies and provide currency stability. In practical terms, this benefits some more than others, more of which later.
On 31st January 2017 the President of the European Council, Donald Tusk, has written to ministers. His letter can be seen here. Tusk is one of five EU presidents who collectively produce reports on the direction of travel, the 2016 report can be found here.
In short, these views can be seen a representative of the EU establishment. They are committed to ever deeper union and integration. This amounts to further convergence, fiscally, economically and in strengthening institutions.
To that end, Brexit represents a political threat. Tusk has identified what he calls “xenophobic sentiment” and “national egoism” as challenges within Europe. In short, democracy and the will of the people is secondary to maintaining and deepening the power of the institutions.
On top of the political threat, the EU administration faces a cut in its budget to the extent of a net £8billion (and growing) per year. This figure represents around 14% of net contributions. Brexit means that money will have to be found from elsewhere or that expenditure, with the power that brings, being diluted.
The EU administration is faced with the dilemma of doing a deal that respects democracy at the risk of other members being incentivised to leave or punishes Britain. The question remains, who would be punished more?
The EU is however still a collection of 27 nations, for the time being at least. It is remembered that even though its supporters see the EU as a valuable single market, those 27 states will have different views of what Brexit means. To explore those, let us start with relative trade positions.
The above table represents the balance of trade, whether EU members are in surplus or deficit with the UK.
Top of the list is Germany with a surplus in excess of £25 billion annually. Their current strength is in full view of those who use Britain’s roads. Germany is the leading car exporter globally at almost twice the value of second in line, Japan and three times the value of USA in third.
To give more background, the UK accounts for 20% of Germany’s car exports. The car industry accounts for 12% of Germany’s total output.
A new German government would certainly be opposed to any sort of deal that damages her own interests. Failure to strike a deal potentially leads to the fall back position of WTO rules. That means of course that British car exports to Germany may face tariffs, in the order of 10%.
Reciprocally, tariffs might be imposed on one of the German car industry’s key export markets. Whilst the SMMT assert this will increase the price of cars by £1,500, there is also the distinct possibility that British consumers shift their buying patterns to those vehicles produced here. Will company car fleets shift from Mercedes or BMW to Jaguar?
There are further threats to Germany. If bilateral free trade deals are struck between Britain and other partners, Japan and the USA, German competitiveness is further diluted by those exporters into British markets as well as British vehicles into American markets.
There is a solution for the car manufacturing companies. German producers, as well as those owned by external investors such as Ford and General Motors can relocate production elsewhere, even back to the UK.
A summary of Brexit for the German economy is that loss in demand from the UK can mean the difference between modest economic growth and recession. Extra competition in markets where bilateral deals are made and disinvestment can lead to depression.
The same principle can be applied to those other countries with significant trade surpluses with Britain, imported cars coming from 7 of the top 8 EU countries which have a surplus with the UK. The exception is Poland which provides components across Europe. Poland’s main export to the UK is consumer goods, including shoes, a relatively labour intensive industry.
Incidentally, the UK happens to be Poland’s 2nd largest export market accounting for Poland’s largest surplus.
Poland is a prime example of another phenomenon, an estimated 800,000 nationals working in the UK and sending a proportion of that income home. Free movement has a greater proportional impact.
The other major trading partners also rely exporting on labour intensive goods to Britain. Among these are heavily subsidised agriculture products; wine, cheese, fruit and cured or processed meats. Reciprocal tariffs would increase these prices in the UK market by up to 80%. Conversely some of these products will become cheaper from the USA, the Commonwealth and the rest of the world.
Jorge Brotons, President of the Spanish export federation Fepex has already identified a cut of 15% in his members’ revenues from the UK, largely as result of currency movements. This would surely be exaggerated by full Brexit and the imposition of reciprocal tariffs. France and Italy can expect similar.
Although campaigners for prioritising access to the SEM choose to minimise Britain’s importance, it can be seen that a shift in Britain’s trading patterns has the potential to impact significantly at the margins. The SEM is not in fact a single market. Rather it is a collection of 27 markets with one dominant currency and 9 others using 24 different official languages.
Remember all of those countries have to agree to a deal.
Not all of the EU is prosperous as was identified on this site here during the referendum campaign. Intriguingly, those with the highest growth rates are typically those former members of the eastern bloc, still with their own currencies and modernising with western investment.
Those with lower growth rates are typically the more mature EU members, outside the German centred powerhouse and who are struggling to meet austerity conditions. These economies are also susceptible to small changes in investment, either through government policy or a fragile banking system.
This brings us full circle back to the institutions leading the Brexit negotiations on behalf of the EU. For all of the above reasons, it is in their interest to delay Britain’s exit, maintaining free access to British markets, freedom of movement and the net contribution. However, all nations involved must agree, including the UK. It is in our interests to seek bilateral agreements with the rest of the world which provides 90% of our economic growth. The EU can not rely on Britain’s compliance.
Restrictions on budgets, if they are to be overcome, require extra funding to be found from somewhere when EU growth is negligible. With elections this year in Germany,France and Netherlands, how can they strike a deal that maintains Germany’s artificial advantage through a Euro that is too strong for most of the rest of Europe? Will the resolve of members reflect the self interest of bureaucrats or will “national egoism”, what we call democracy, mean that they have to accept a scaling down of the vision?
It would not be surprising to see the bigger players in Europe influence the change of direction in of the EU. What Tusk misinterprets as “xenophobic sentiment” might actually be the embryo of devolution, seeking to bring decision making closer to home. Mr Tusk, the concept is called sovereignty.
The EU itself may well find itself in conflict with its members. Further integration can only work if funds flow from the rich in the EU to those suffering with austerity. Is that acceptable to the rich? Can the EU survive without?
So we can see a different context. The EU institutions and 5 presidents may seek to take a hard line with Britain. Voters across Europe may thwart their political will by replacing members of the Council with more nationalistic representatives. The goal may shift from power maximisation to loss minimisation. The only thing certain in the EU negotiating position is uncertainty.