Economy & Politics

ColumnTen theses on the Brexit deal

Britain and the EU will go their separate ways from 2021
Britain and the EU will go their separate ways from 2021dpa

Thesis # 1

Despite the agreement, Brexit remains a losing business for everyone involved. Great Britain is losing free access to its top sales market. The European Union is losing an important member. As a result of the UK’s departure, the EU’s internal market will shrink by 16%. This weakens the position of Brussels in international negotiations. For other states, the incentive is somewhat lower in future to meet the EU in order to gain better access to the EU market.

Thesis # 2

The deal made on Christmas Eve is far better than a no-deal divorce. It would have been a political embarrassment for both sides if, four and a half years after the Brexit referendum, they had not managed to agree on a contract on their future relationship. A relapse to the minimum rules of the World Trade Organization would have cost Great Britain dearly. The risk of a renewed recession at the beginning of 2021 would have been accompanied by lower long-term trend growth of only 1.5% per year instead of around 1.7% with the agreement and around 2% before the Brexit resolution.

Thesis # 3

For the EU, the treaty does not play a major role economically. Without the agreement, the EU would have suffered from the fact that its companies would have lost preferential access to the British market. This would have affected some supply chains. In the long run, however, this would have been offset by a more pronounced diversion of trade and investment flows as well as skilled workers from the British Isles to the European continent. What counts for the EU above all is that the treaty now puts relations with a politically important neighbor on a new, orderly basis.

Thesis # 4

The agreement is a compromise that has made great demands on both sides. But as expected, the EU, which is five and a half times larger, has more firmly established itself in the key points of the agreement. This can be seen when comparing goods and services. The trade in goods is not burdened by tariffs and quantitative limits. That benefits both sides. But it suits the EU even more than the UK, as EU companies often have a competitive advantage when it comes to goods. In 2019, for example, this was expressed in the EU’s trade in goods with the UK in a surplus of 110 billion euros. In contrast, the trade in services is hardly regulated. This is particularly detrimental to the UK side, whose companies are strong in the financial sector and other services. In 2019, the UK achieved a surplus of 20 billion euros in exchange of services with the EU. The EU can de facto restrict the market access of British service providers in the future almost at will. In the financial sector, the EU decides whether or not to classify the UK regulations for certain financial services as “equivalent” and thus open the EU market for these products.

Thesis # 5

The agreement largely dispels the EU’s greatest concern, namely that the British example might catch on and other countries might be tempted to also seek exit from the EU. The four-and-a-half chaotic years that the UK has lived through since the referendum on June 23, 2016, and the meager outcome of the negotiations should deter potential imitators for the foreseeable future.

Thesis # 6

The treaty is not the last word on future relations between the two sides of the Channel. Instead, the political development in Great Britain should be decisive for this. There is a greater risk of further delimitation among the Tories currently in power. If Britain uses its “freedom” and deviates significantly from EU standards, the EU can impose punitive tariffs. In the worst case, this could set in motion an escalation spiral. For its part, the EU is likely to use its discretion in financial and other services to practice some protectionism under the guise of “fair” competition at the expense of British providers. In contrast, under a later Labor government in London, a much closer connection to the EU would be possible again. When it comes to regulation, Labor would be more willing to orientate itself towards the EU, which is generally more socially democratic. However, Labor is unlikely to seek a return to the EU either. The EU issue has so divided the country and driven it into political chaos that the British side can no longer expect to discuss it again for at least a generation.

Thesis # 7

The deal seals a remarkable development in Britain. In some important areas the country is moving further and further away from the classic liberal ideals of the free market economy. Instead, London is now also tending towards an interventionist industrial policy. A key sticking point in the negotiations was the British demand to be able to subsidize their own companies more than the EU rules allow. After the eastward expansion of the EU in 2004, Great Britain, unlike almost all other EU members, opened up to immigrants from the new member states without a ten-year transition period. Here, too, the country has changed considerably. One of the reasons why many British people voted in favor of Brexit was to be able to restrict this immigration considerably.

Thesis # 8

As a result of Brexit, the outlook for UK public finances is more precarious than in most EU member states. With the British trend growth, British tax power is also suffering from Brexit. In addition, the country is likely to initially significantly expand its government spending to cover up the Brexit damage. Among the major European countries, only Italy is currently heading for more fiscal problems.

Thesis # 9

The deal reduces the likelihood that Scotland will separate. Without a deal, the outrage of many Scots over being catapulted out of the EU by British Brexiteer nationalists would have likely gotten to the point where Scotland would have withdrawn from the UK and applied to join the EU in just a few years. While this is still possible, it is less likely than with an unregulated Brexit.

Thesis # 10

The experience of the Brexit negotiations strengthens the self-confidence of the EU. More than ever before, the EU has seen that it can shape a negotiation result largely in its favor if it sticks together and makes use of its economic size. This experience also strengthens future Franco-German cooperation, which will remain the engine of the EU for the foreseeable future.

Holger Schmieding is the chief economist at Berenberg Bank. He writes here regularly on macroeconomic topics. More columns by Holger Schmieding can be found here


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