Brexit blues: Top German economist warns of painful divorce

A week after the UK population voted 52 to 48 per cent for us to leave the EU, the forecasts of doom and gloom continue.

With a rudderless government, no indication when Article 50 will be invoked and the Leave campaigners stabbing each other in the back, it is little wonder that many people are concerned about the future.

Unfortunately, top German economist Dr Holger Schmieding said little to assuage those fears at the annual Frost & Sullivan Growth, Innovation and Leadership (GIL) Europe event in London.

“I come from a country where we have a lot of bureaucracy. It is bad. But what is the result? Germany has the strongest economy in Europe,” he said. “Brexit has been about high-level politics. It has never been about trade.

“The EU 27 will not be vindictive. They want the UK to stay a close partner, but it doesn’t mean it won’t have consequences. The UK has given up its seat at the table. And they will try to take UK interest into account. Populists have promised the impossible to voters, and it is not the only country where this has happened.

“If the UK still wants to have access to the common market, they have to pay a membership fee. Ask the Swiss and Norwegians – they pay their membership fee. You are free to negotiate trade with China. But ask how big this country really looks from Bejing. All of Europe is trying to get China’s attention. I hope it goes well.

“As for China, remember one thing. Germany exports more than three times more to China than the UK does. Germany is a member of EU. To claim that EU regulations hold back trade from China is a cheap excuse.”

He said the claims of deregulation from red tape were overhyped as well. “If we look at international surveys of regulations, we find consistently that the UK is among the least regulated countries in the western world when it comes to the labour and services market, apart from Singapore or Hong Kong,” he said. “There is of course scope for more deregulation, but relative to what the UK is, an excellent flexible economy for the labour market – I don’t think there is that much.”

And as for one bureaucracy being better than two, he said, remember that Brussels is not responsible for the UK housing market and house prices. “This has nothing to do with Brussels. The fiscal situation of this country is much worse than anywhere else in Europe. Including the trade deficit. This has nothing to do with Brussels. Brussels can mess up, but Whitehall can mess up as well,” he said.

Brexit impact

“Long ago, which in markets means a month ago, we identified that the single biggest risk was Brexit,” he said. “The economic impact is difficult to call. After all, it is a psychology – how do we now react. Do we buy more? How do US business people react? Do they invest? There is no formal forecast there. Our best guess was last Friday that the UK would fall into stagnation followed by a reduced rate of trend growth in the future because it would be less practical as a gateway to Europe in the future.

“The eurozone will suffer about a third of the economic damage of the UK,” Schmieding predicted. “There is uncertainly around the UK and the world at large. Long term it has no impact for European economic growth. Europe could win with around 10,000 jobs moving from the City of London to the Continent.”

“One thing I’m amazed about,” he said. “Is that nobody from the Brexit campaign seems to have thought about what happens afterwards. So this has an economic impact. The longer there is uncertainty in this country, the bigger the economic damage will be. In this country there seems to be a sense that when the UK does something, the rest of Europe crumbles. Which is not completely wrong. But the direct impact of Brexit on European politics is comparatively minor. The key impact right now is you want to get out – so get out.”

“I’ve had lots of questions from people in the UK and US as to whether the UK will have a better currency. None of my continental European clients have mentioned this. This is not a game. The Continent on Friday morning woke up with great sadness to what it has taken as the UK’s final decision. There is not going to be a better offer. If Mr Johnson [said before he resigned] wants to make himself the laughing stock of the world [and come back], then welcome. But don’t expect a better offer.

“On the Continent we have populists. We have them in Italy, Austria, the Netherlands, some in Germancy, in France; this doesn’t have much to do with Brexit. This is the real risk. It is not the Brexit impact.

“All over the western world, from Donald Trump to Bernie Sanders, from Nigel Farage to Boris Johnnson, some devious people would include Jeremy Corbyn, we have populists and a revolt against globalisation, and against immigration.

“The revolt against rapid technological change has a number of very visible winners and a number of people whose jobs are either disappearing or are less well paid. This is a serious issue and the risk that the euro may lose a member or two is not zero. The risks to Europe are significant and were significant before the Brexit vote."

But change is already happening he explained. 

"The EU 27 will change; it is changing. The direction is clear. There will be more flexibility – it is already more flexible. A lot of countries are not living fully by fiscal rules, and that is OK. Partly in response to discussions triggered by Brexit, there will be less future integration between the full EU – the 27 rather than the 28. Integration in future will take the form of clubs of the willing – ie the French/German-led initiative on foreign policy, which everyone is invited to ratify but if they don’t then they are simply not part of it.

“The future of the EU is to have the four freedoms of the common market as the basis for all – they have supervision through European courts including human rights as a common requirement of membership. But on top of that we will have more groups within the larger group. A club of clubs. A club that co-operates on passports for free travel, on currency, on foreign policy, rather than the uniform arrangement where everyone is expected to be in.”

D.I.V.O.R.C.E.

Schmieding said the divorce settlement is not going to be a pleasant pill to swallow on both sides.

“The EU 27 account for 83 per cent. This country is 17 per cent. This country earns 13 per cent of its GDP in exporting goods and services to the continent, and vice versa it is three per cent. Who has the most to lose? Then think who has the better bargaining power?

“The settlement will not necessarily be to the UK’s liking. The initial offer may be that we continue with the common market, just as we have with Norway, except for parts of financial services because they relate to the euro.

“If, after that, the UK says (and this will take a lot of continental European goodwill) ‘What about Polish plumbers?’, Brexit was about migration after all. Remember, there are four freedoms of the common market, not three. Think who is in the stronger bargaining position. Every UK wish to deviate from what the EU would see as an extremely generous offer will mean more restriction for the UK where it hurts. And it is very clear where it hurts, in services.

“London will remain a great financial centre of the world. So many great people do a very good job. They will find a lot to do. The more the UK insists on different treatment, the more the continent will have to say 'we can’t offer you the other things'. So the future for the City may be less golden.

“The result will likely be significant restrictions in terms of loss of passporting rights for the financial services and other services sectors. There could be some restrictions on immigration from the EU. In terms of goods, hardly anything will change. Why would Germany, for example, have any interest in not trading goods with the UK? We have a trade surplus. But there are rough times ahead for services. In goods it helps with the exchange rate being low.

“All in all, there will be bad for both sides. Divorces are not nice. They make lawyers rich, but nobody on either side. There are negatives on both sides, but the impact will be felt more strongly in this country than in the EU.”

YOUR VIEW: What do you think of this viewpoint? Is it overly negative? Predictable? Do you agree? please do comment under this article and share your views.

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