The withdrawal

Will there be an agreement at the last minute or a hard Brexit? The most important facts on this subject.

Opponents of Brexit protest against EU withdrawal.
Opponents of Brexit protest against EU withdrawal. dpa

When the Union Jack is taken down in front of the European Union buildings in Brussels at the end of March 2019 we will not be witnessing a great moment in the European project. As a result of Brexit, the European Union will lose its second largest economy and a centuries-old democracy. The EU, experienced in countless accession negotiations, stands before a new situation – for the first time it has to master a withdrawal application from a member state. There is no precedent to follow. And the longer the negotiations between the European Commission and the UK government continue, the clearer it becomes to both sides how tightly knotted the economic and political ties are within the Union that are now meant to be disentangled in tough wrangling. In any event, two-and-a-half years after the UK referendum on leaving the EU the terms of the British withdrawal have still not yet been finalised.

In mid-November the UK government accepted the draft of a Withdrawal Agreement, but it still needs to be ratified by the UK parliament in mid-December. The 585-page draft envisages an orderly withdrawal on 29 March and an almost two-year transition phase until the end of 2020 in which trade arrangements and future relations will be defined. During this period the United Kingdom is to remain part of the customs union and EU rules will continue to apply. The problem, however, is that without a ratified Withdrawal Agreement there will be no transition period. In other words, there is a danger of a hard Brexit if agreement is not reached by the official withdrawal date at the end of March 2019. The United Kingdom would then become a third country. The borders between the UK and the EU would close overnight. Trade could collapse and travellers from the EU would again be subject to controls. Customs declarations would be required from that time on and the customs tariffs prescribed by the World Trade Organization (WTO) would apply. As a third country, the UK would also cease to be a member of the EU’s 34 free-trade agreements and three customs unions with third countries and therefore lose preferential access to those markets. Following a hard Brexit, semi-finished products from the UK would no longer qualify as EU goods. If, on the other hand, an orderly withdrawal is achieved, the transition period would ­begin on 30 March 2019. Nothing would change for businesses until its end on 31 December 2020.

From the perspective of German industry, which has very close ties with partners in the UK, Brexit is having tangible consequences. Some 2,500 German firms with 400,000 employees are represented in the UK, including not only large business groups like BMW, Eon, Thyssen-Krupp and Siemens, but also numerous small and medium-sized enterprises. In the other direction, 3,000 UK firms are active in Germany. In particular, a hard Brexit, which according to one study would result in nine billion euros of costs for businesses, could have nega­tive impacts on both sides. After all, goods would have to be declared at borders, certificates of origin presented and products possibly even manufactured in accordance with new UK standards. Above all, the German car industry would have to change its supply chains. Car factories in the UK, for example, only hold enough parts in storage for a few hours of production. They are dependent on supplies from the Continent. Every day, over 1,100 trucks transport parts from other EU countries to UK vehicle plants. Other companies that operate internationally have already begun adjusting their supply chains so that as little as possible needs to go through the UK. “If the British were to leave the EU without a deal, the economic and political damage would be enormous,” warns Professor Clemens Fuest of the Ifo research institute. The International Monetary Fund (IMF) estimates the foreseeable loss of growth for the UK economy in the event of a hard Brexit to be four percentage points in five years.

These developments are also viewed with concern in the German engineering industry. The UK is the fifth largest foreign market for this sector with an export volume of 7.2 billion euros. Holger Kunze, Head of the European Office of the German Mechanical Engineering Industry Associ­ation (VDMA), believes that uncertainty in the UK, in addition to concrete delays in customs clearance, would lead to a considerable decrease in investment in plant and machinery.

The signs also point to big changes in the finance sector. The UK has become Europe’s largest centre for banks and financial services: several hundred thousand people work in the finance industry in London. Many non-European banks from the USA and Asia have located their main European subsidiaries in the City. While the UK remains an EU member state, these banks can conduct financial business in the whole of the EU. Brexit, however, has put these so-called “passporting rights” at risk. In fact, much suggests that London-based financial services com­panies will lose their unhindered access to the EU ­finance market. In that case, they will have to find an additional base in the EU. Frankfurt, as Europe’s second financial centre, Paris and Dublin are offering their services.

The Federal Government emphasises that there are opportunities for a “good agreement”. The important thing, however, is to find a solution ­between “the EU-27 in unison” and the UK. Major issues include what will happen to the British citizens living in Germany and what disadvantages will Germans experience in the UK after Brexit, said Federal Chancellor Angela Merkel in a government statement. “At the end there must always be a difference between membership of the EU and a partnership as a third country.” She hopes that the UK will remain “a close and trusting partner” after its withdrawal.

The current timetable envisages that the UK House of Commons must first ratify the agreement. Afterwards the members of the European Parliament must consent and then finally the member states. At least 20 countries representing 65% of the population must support the agreement. Federal Chancellor Merkel, who has had a great deal of experience with difficult EU issues, hopes for an agreement: “I believe: where there is a will, there is normally a way.”

The Brexit scenario

  1. The European Commission and the UK government spent two-and-a-half years negotiating on a Withdrawal Agreement. They agreed on a draft in mid-November 2018.
  2. The current state of play: either the UK leaves the EU “without a deal”, which also means without transitional arrangements, or it makes an orderly withdrawal. A no-deal Brexit would have negative consequences for all.
  3. Business representatives on both sides regard Brexit as a problem.
     

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