Tuesday 17 September 2019

'Things will adjust, there will be trade... but some businesses are going to be lost and they will never come back' - the Brexit view from Germany

In person: Joachim Lang, Director General Bundesverband der Deutschen Industrie

Impact: Joachim Lang anticipates both medium and long-term damage to the UK economy after Brexit
Impact: Joachim Lang anticipates both medium and long-term damage to the UK economy after Brexit
John Mulligan

John Mulligan

There is a certain irony that the Berlin Wall, which used to loom close to what is now Joachim Lang's office, fell 30 years ago this November.

Just days before this year's anniversary on November 9, it had been expected the UK would have left the European Union.

Assuming the extension bill is passed into law this week, that departure now looks set to be delayed until at least January 31. The prospect of a no-deal Brexit will also diminish if the bill succeeds.

But notwithstanding when Brexit actually happens, once again a wall will go up in Europe. Only this time, it's where no one might have expected it.

An ideological and physical barrier which split west from east, the Berlin Wall's collapse, fuelled by people power, was a rapturous event which those tearing it down believed heralded a new dawn for them and for Europe.

And while that immediate anticipation may not have been matched by the reality, the economic dividend, as well as coveted membership of the European Union, did eventually trickle through.

Mr Lang (52) stands at the window, looking across the road to beyond an empty lot where an old building is being renovated and fitted out. The rumour mill suggests Amazon is about to move in there.

As director general of the powerful BDI (Bundesverband der Deutschen Industrie), or the Federation of German Industries, which represents about 100,000 businesses with about eight million employees, Mr Lang has no illusions that Brexit will hurt German firms.

But it is British business which will bear the brunt of the shock, he points out.

"We all know that it's going to have a negative impact on all of us, but the biggest negative impact will be on the United Kingdom, on Ireland, and on others," says Mr Lang, who trained as a lawyer and has previously held roles with the German government. "There's no one who's going to profit from that situation."

"There will be future business between all of us and the United Kingdom, but we will all get a very big hit."

The scale of the potential for the UK and the EU economies to be on the receiving end of a mutual drubbing after Brexit is laid bare in trade statistics. Barriers which look set to rise with a hard Brexit will have an immediate and long-term impact.

UK exports to the European Union totalled £289bn (€317.7bn) last year, accounting for 46pc of all UK exports (financial services comprised 40pc of those exports). UK imports from the EU were £345bn, which was 54pc of all UK imports.

Germany accounted for 8.7pc of the UK's total exports last year, and 11.6pc of its imports. Germany exported €82bn worth of goods and services to the UK last year, and imported €37bn worth.

With Germany, the UK had a trade deficit of £22bn last year, the biggest deficit by a country mile it had with any EU member and on a par with the largest deficit it has with any country, which was China.

With Ireland, the UK had a trade surplus of £16bn last year, by far the biggest surplus it had with any EU country (the next nearest is Luxembourg, with which its surplus was £600m).

"Things will adjust," muses Mr Lang. "There will be trade, but the structure may be different. Some businesses are going to be lost and they will never come back."

He singles out the car industry in the UK as being one of the sectors most at risk from extinction there.

"It doesn't help in a situation where the car industry is already under pressure," says Mr Lang of Brexit. "We've seen Asian companies making decisions already. We've seen the [Land Rover] Discovery being made in Slovakia now instead of the United Kingdom, and there's more to come."

Last week, figures from the UK's Society of Motor Manufacturers and Traders showed that the UK's car production slumped 10pc in July compared with 12 months earlier and has declined for 14 consecutive months. It has been hit by Brexit uncertainty, as well other global geopolitical tensions.

Honda announced this year that it will close a plant in the UK which makes Civics, while Nissan halted manufacturing of its Infiniti. Peugeot and Citroen owner PSA said it will only build the new Vauxhall Astra in the UK if a good Brexit deal is sealed.

None of this is good for anybody. The impact of Brexit has already been felt, but it's the tip of an iceberg in terms of what is likely to come in the event of, especially, a hard exit.

"There is the immediate damage that we will see in the weeks and months after Brexit, and then there's the medium- and long-term damage," says Mr Lang.

"The medium-term damage is going to be seen when the companies make decisions, when they leave the United Kingdom," he explains. "We've seen some early movers, but there are more to come when the value chain breaks down. This is going to have an impact next year. Then, we'll have long-term damage because we will miss one strong member in the European Union."

The UK Treasury's recently leaked Yellowhammer briefing on the likely impact of a hard Brexit on the country predicted that disruption to Channel crossings could last three months, and that supplies of medicine and food could be hit.

While a hard Brexit might not now happen, even an 'orderly' Brexit is certain to cause headaches.

Added to that is the contentious backstop issue - the insurance policy for ensuring continuing free movement of trade and people between the Republic of Ireland and Northern Ireland in the event of a no-deal Brexit.

The EU has so far remained resolute in its determination to retain that backstop agreement, which UK prime minister Boris Johnson is so eager to scrap or alter.

Lang sees its retention as a critical part of Brexit, saying it - and a broader transition agreement that sees the single market continue to work until a new relationship structure between the UK and the EU is ready - are "important" parts of the withdrawal process.

"We all hoped that by now we'd be talking about the future agreement. But if it's already so difficult to talk about the past, how difficult is it going to be to talk about the future relationship?" asks Mr Lang.

"From a business perspective, this is not helpful. If we are going towards a hard Brexit, there will be a lot of emotion. There will be chaos for a certain time. There will be extra cost, extra work because you will have to do customs that you didn't have before," he adds.

"So for several months there will be a negative sentiment between the United Kingdom and the rest of Europe, which is not helpful. It's not helpful for the atmosphere in which we should start the negotiations for the future agreement."

"The majority in Germany would like the United Kingdom to stay in the European Union, but nobody would force them," according to Mr Lang.

"If this is the decision of the people in the United Kingdom, so be it, but we all want it to go in the normal way."

But there is no 'normal' way.

With or without a Brexit deal, the UK's departure is uncharted territory.

And every country will pay a price.

What's more, Brexit comes at a time when investors fear the global economy is slipping towards a recession. That's bad news for the UK, and very much so for Ireland, whose open economy rises and falls with the global tide.

With Ireland already laden with debt, a severe shock to the economy gives little wriggle room for any fiscal largesse to stave off the worst effects of what could be coming down the tracks.

Germany, the EU's biggest economy, is already tipping towards a technical recession.

Its second-quarter gross domestic product slipped 0.1pc and the current quarter is expected to show a contraction too. Exports fell 1.3pc between April and June, the biggest fall in six years. Business confidence has also ebbed.

Still, the government generated a budget surplus of €45.3bn between January and June, while it continues to spend on infrastructure and consumers have kept their purse strings loose.

German unemployment, at 5pc, is still near a record low, but the number of people out of work has been edging higher as the manufacturing sector is increasingly strained.

Bundesbank president Jens Weidmann said recently that there was "no reason to panic", amid calls for stimulus packages for the German economy.

"I think it's his job to say that," jokes Mr Lang, who insists the reluctance to date of the government to inject money into the economy is down to regional elections and the upcoming election to choose a new leader for the Social Democratic Party, the coalition party with Angela Merkel's Christian Democratic Union. Germany's finance minister, Olaf Scholz, is a key contender for the hot seat.

"We may see some reaction from the government after all this is over," says Mr Lang. "But we are talking about the end of a growth phase that lasted for over a decade. The difference between then and today is that we can see it coming."

He argues that the difference with this looming recession and previous slumps - such as that following the 2008 financial crisis - is that this one will be caused by "bad economic policy".

"We know it's coming, so we suggest that if you can see the recession coming, why not do something to reduce the negative impacts?" he asks.

One of the things the BDI wants to see is a reform of taxation for German companies, which currently pay a 32pc corporate tax rate once federal, state and local levies are added up. That compares to Ireland's 12.5pc, the UK's 19pc, France's 28pc on profits below €500,000 and 33pc on those over that threshold, and 21pc in the United States.

Mr Lang says a rate of between 22pc and 25pc would be "fine" for Germany, adding that the 32pc rate is "too high".

He also rounds on the country's red tape, which he claims is stifling entrepreneurship in Germany.

"There is a lot of regulation," he says. "In some fields we feel over-regulated. It's especially difficult for startups with brand new ideas and full of energy, to develop something new and then realise that there's a whole bunch of regulation that makes it difficult to take the next step."

"Very often, they prefer to do this somewhere else where they don't have that regulation," he adds.

But Germany also faces another threat: the rise in popularity of the far right, and particularly the AfD (Alternative for Germany) party.

Last weekend, AfD secured gains in two regional elections in eastern Germany which, while not as great as some had feared, still underscore an undercurrent of discontent felt in the former communist state.

A study earlier this year by the Halle Institute of Economic Research found that wages (and productivity) in the former East Germany remain 20pc below those in the former West Germany, despite reunification almost 30 years ago. The federal government has invested €2trn in the former East Germany since.

"The feeling that many people have in eastern Germany is that they are not rewarded or accepted for what they have achieved in their lives before reunification," says Mr Lang.

"It's a feeling of being neglected and not being accepted in the west. But it's also a feeling of 'what did the west do for us?'" he says. "And then came the migrants in 2015, and they saw how much money was being spent on them, And they said 'did they ever care as much about us as they care about them?'"

Xenophobic sentiment also surfaced in the UK after the 2016 Brexit referendum. The number of reported hate crimes in the five years to 2018 more than doubled there.

Barriers help to create fear and suspicion, and Brexit's invisible wall will likely be as potent as the physical one that once surrounded west Berlin. It took almost three decades for it to crumble.

So will the UK come back into the EU fold one day, breaking down its own wall?

"Maybe one day," says Mr Lang. "The United Kingdom has raised a lot of questions that need to be answered by the European Union. The European Union can always be better, but it is necessary to stay inside the system if you want to make it better, than to leave it and watch it from the outside."

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