Economy & Politics

This is how economists assess the Brexit agreement

At the turn of the year Great Britain leaves the European single market.imago images / Xinhua

Today, EU Commission President Ursula von der Leyen and Council President Charles Michel signed the Brexit agreement, which the UK and the EU have been fighting for until the last moment. The British House of Commons also approved the Brexit deal today. This means that the dreaded no-deal Brexit is off the table for now. In just two days – just in time for the turn of the year – the newly negotiated agreement should come into effect provisionally. Then Great Britain leaves the customs union and the European single market. This changes a lot for European-British trade relations. Because, unlike when Great Britain officially left the EU at the beginning of 2020, there will then no longer be a transition period, but a readjustment of economic relations on the basis of the new trade pact.

The agreement brings relief among economists: Lisandra Flach, Head of the Center for Foreign Trade at the Ifo Institute calls the agreement “a well-deserved Christmas present for Great Britain and the EU”, IfW President Gabriel Felbermayr is “very relieved about this last minute agreement” . In the trade in goods, in the transport sector and in some other important areas, chaos has been prevented from breaking out and new high barriers such as tariffs and comprehensive flight bans have to be introduced, says Jürgen Matthes, head of the International Economic System and Business Cycle at the employer-related institute of the German economy. “That would have unnecessarily burdened the economy, which was shaken on both sides by the Corona crisis,” he says. The fact that production standards and approvals continue to be mutually recognized for the time being makes trade easier.

In the short term, the trade agreement is important in order to reduce the uncertainty in trade relations and thus minimize the costs for those involved, says Ifo trade expert Flach. “The agreement significantly mitigates the long-term negative economic costs of Brexit for the German economy,” she says.

Inevitable glitches

However, economists also agree that the agreement does not solve all problems. “We shouldn’t forget that even if there is an agreement, some disruptions (and especially short-term disruptions) are inevitable,” says Flach. Brexit leads to major new trade barriers such as regulatory barriers and a huge amount of new documentation that would cause major disruptions in the short term, according to Flach. Companies and customs offices cannot adapt overnight. Felbermayr therefore assumes that, in addition to new bureaucratic burdens, there will be a forced restructuring of supply chains for some German companies. “Only a customs union would have eliminated this problem, which Boris Johnson unfortunately ruled out,” says Felbermayr.

IW economist Matthes also sees this danger. With the agreement there are no tariffs and, first of all, extensive recognition of production standards. However, there will be border controls, which hinders cross-border value chains designed for just-in-time. “The UK will probably be less closely integrated into the European supply chains, which is likely to cost jobs there,” says Matthes.

In the medium term it could be that products will be checked for their approval and so new (so-called non-tariff) trade barriers will arise. “Both sides can introduce controls and their own approval procedures if it is no longer ensured that the other side adequately meets their own product standards,” he says. “That can happen if certain standards change, for example if Brussels decides on more demanding regulations, but London does not – or if the British even decide to relax existing standards.”

IfW President Felbermayr assumes that the discussions and negotiations with the agreement are not over. The Northern Ireland regulation will cause internal political discussions in the United Kingdom, and disputes with Brussels over the interpretation and implementation of the text are inevitable. “Within the EU, the different costs of the deal will cause discussions for the members,” says Felbermayr. “They can become a hurdle because all EU countries have to agree and if mixed competencies are involved, the national parliaments too.”

The worst prevented

Although an agreement has now been reached, the UK’s exit from the European internal market and the customs union should have an economic impact. “Some of the negative effects on German GDP will definitely occur, which means that Brexit will make us a little poorer,” says Ifo trade expert Flach. “But Brexit without an agreement would have dramatic consequences for everyone involved, and especially for Great Britain, especially in view of the Corona crisis.”

For the German economy, the worst was prevented with this contract, so Felbermayr. “The burden on some German key products – such as tariffs of ten percent on cars on both sides – would have been high,” he says. Due to a free trade agreement, Great Britain will have to bear economic losses compared to full membership. The bottom line is, however, that both sides benefit from a hard Brexit, according to Felbermayr.

It is a “defensive agreement that only tries to secure the integrity of the internal market for the EU and to allow the British, at least formally, more sovereignty. Both hopes could be disappointed, ”says DIW President Marcel Fratzscher. In the long run, there will inevitably be difficulties in trade with the UK if rules differ in the two economies. “The uncertainty for companies will therefore remain high and lead to trade between Germany and Great Britain shrinking further, as has already been the case in previous years,” said Fratzscher. This will also cause economic damage in Germany, “although this will only be felt by individual companies, while others are likely to orient themselves away from Great Britain in the long term”.

However, Britain’s exit from the domestic market also has far-reaching consequences: The European domestic market will shrink by 16 percent as a result of the British exit, according to Felbermayr. “In negotiations with China and the USA, the EU can ultimately only score with access to this internal market. So your bargaining power and global design options are shrinking, ”he says. That is why it is “extremely important” that the EU develop partnership agreements with all countries in the periphery that integrate the countries as strongly as possible into the internal market.

“The British have lost out”

The agreement can still be expanded “because it regulates little in the service sector and especially in the financial sector, in which the British are particularly export-oriented, and thus creates new obstacles,” says IW economist Matthes. “That will certainly also lead to more added value and jobs being relocated from London to the continent or to Dublin.” However, it is possible that there will be rapprochements here in the future.

“The British clearly got the short straw with this agreement,” says Matthes. The EU has advantages in trade in goods, where hardly any trade barriers are introduced. That is good for the EU and the German economy. “Great Britain did not manage to get good access for the sector in which it has a particular strength.”

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