German economic stresses and the Brexit negotiations

Even before COVID-19, the Eurozone was on the brink of recession. Now that recession is certain, and Germany will be called on to pick up the bill, Berlin may yet be a force for getting the EU to see sense and forge a free trade deal with Britain. If not, it is the EU, and Germany, that will pay the biggest price

Will Angela see sense?
Joshua Mackenzie-Lawrie
On 27 March 2020 11:24

With the second round of official face-to-face negotiations between the UK and the EU delayed as a result of COVID-19, the UK negotiating team must now take advantage of this break to assess their negotiating position and evaluate the weaknesses of their opponent.

A key weakness which has been exposed in recent days and weeks is the German economy.

While the entire world’s financial stability has been thrown into question in the past week, the German economy has been struggling for months and now with the Eurozone in crisis and the stability of all EU economies at serious risk - especially Italy - the stress upon Germany is only growing.

In no way could the German economy hold up satisfactorily if no trade deal is agreed with the UK in the final Brexit negotiations.

One of the key reasons this gives such an advantage to the UK in negotiations is the current trade deficit we have with the EU - something which, when it is boiled down, means the EU needs the UK more than the UK needs the EU when it comes to trade.

While trade between the UK and the EU would continue under a World Trade Organisation terms exit, the UK consumer - free to get goods from all over the world under new trade deals - is less likely to buy goods from the EU, especially Germany, if they are cheaper from other sources. Then in time we can perhaps even buy and build more inside the UK instead of depending on importing so many goods.

Within the current trade numbers, we see that Germany dominates the number of goods we import from the EU. This is in contrast to France which makes up a much smaller fraction of the goods we buy from the EU.

This is why Germany should be the target of UK negotiators, because it is German businesses who stand to lose the most if no trade deal is agreed. In fact, even this year the amount of EU goods being bought in the UK dropped by 10%. If the EU refuse to be reasonable about a good trade deal, this number will only grow, cutting member states off from a vital market and further damaging their economies.

At this time of great instability, there is a chink in the EU’s armour and it is a spot which we must take advantage of. If we can force Germany to take our side, we could soon see the EU’s position as a whole weaken, because if the purse strings - which Germany currently holds - are under threat, common sense would suggest compromise would be the best course of action. (However, as we all know, common sense seems hard to come by within the EU.)

Unless the EU is reasonable with the UK, the economic cost could be substantial and there is certainly a chance of a major domino effect within the EU if the German economy slips further into crisis as a result of losing one of their biggest export markets.

After all, even before COVID-19, economic growth in the Eurozone was below 0.1%. It is not a booming economy and with the effect of Coronavirus, and a manufacturing industry in permanent decline, the EU will almost certainly face recession.

This is the brutal reality the EU will soon have to come to terms with. We will see if the Brussels’ bureaucrats truly care about the economic health of its most important member state and the businesses within, or if they are willing to sacrifice everything just to try and preserve their precious vision of a federalised European ‘super state’.

If the EU cannot understand - or accept - that the UK wants to be free from Brussels regulations, then frankly there would seem to be no hope for the negotiations. While a World Trade Organisation exit may cause short term hardship for the UK as we adjust to the implementation of new tariffs on goods from Europe, the economic and political costs to the EU would be far greater.

With the costs of exporting to the UK increased in this scenario, the stability of the whole European project could be called into question as economies on the brink fall into recession.

All of which tells us, if we want to truly Get Britain Out of the EU and get a good trade deal with the EU, then our best chance is to get Germany on our side.  

Joshua Mackenzie-Lawrie is a Senior Research Executive at the cross-party grassroots campaign Get Britain Out

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