Why Berlin won't give Theresa May an easy ride over Brexit

Opinion piece (The Observer)
19 March 2017

Those in Britain hoping for a soft European Union stance in forthcoming negotiations sooner or later mention the car manufacturer BMW, one of Germany’s prime exporters. Surely BMW would like to continue exporting its cars freely and will use its considerable political influence, together with that of the entire car industry, to sway Angela Merkel to adopt an accommodating position?

After all, why should Germany be overly emotional or political about Brexit and pursue a strategy of economic self-harm? Germany, whose influence in the world is largely based on its economic power, would let the economics trump the politics of Brexit in the end, wouldn’t it?

Similar arguments can be heard about Germany’s security interests. It may be the most powerful country on the continent in economic terms, but it is not a military or diplomatic heavyweight, as Britain is. After the election of Donald Trump in the US, and faced with authoritarian governments in Europe’s vicinity, Berlin depends on Britain as a partner. Wouldn’t Germany consider the risks of alienating the UK over a hard Brexit too high?

Such views of Germany’s position in the coming Brexit talks are wrong, for three reasons. First, for no other country in Europe is the European project more important than it is to Germany. European integration is, to most Germans, a decades-long political project that has become part of the country’s political DNA. Leading politicians, including Merkel and her next challenger, Martin Schulz, fully recognise the importance of European integration and co-operation for Germany’s national interest and are staunch supporters of the EU.

Second, Germany’s economy is deeply connected to Britain’s, but this is hardly a one-way street. Contrary to popular notion, the country with the trade surplus is not “winning”. Export firms and their workers will be hurt if trade is less free, but the pain depends on what share of domestic economic activity (what economists call “value-added”) is potentially at risk, not on whether one country has a trade surplus. Germany and Britain roughly export 2% of what domestic workers and firms produce to each other, and are thus equally dependent on each other.

Exporters are not the only ones getting hurt. Consumers, the main winners of trade, would be hit by rising prices – the more so the more a country depends on imports. Nor does economics always trump politics in Germany: when its core national interests are at stake, business interests take a back seat – as was apparent during the Ukraine conflict, when Germany pushed for sanctions against Russia that also hurt German businesses.

In the case of Brexit, however, commercial interests are largely aligned with politics: German businesses are deeply enmeshed in the EU through a network of supply chains and rely on Europe and the rest of the world for their exports. They have a stronger interest in preserving the EU’s single market and its clout in international trade negotiations than they have in tariff-free access to the British market.

Third, Brexit undermines and distracts the EU at a time of internal and external crisis. To Germany, Brexit is geopolitical vandalism. Any attempt by the UK to use its security contributions as a bargaining chip will be seen by Berlin as a further threat to Germany’s core national interests – European security – and will lose Theresa May crucial political goodwill in the negotiations. Brexit is also seen in Berlin as an act of geopolitical self-harm, Trump’s election notwithstanding: Britain has become less influential and effective, and thus less attractive as a partner.

However one looks at it, Germany does not depend more on Britain than vice versa. Any such notion is a weak basis for a negotiation. The cohesion, unity and stability of the EU are more important to Germany than anything Britain has to offer. The sooner the Brexiters realise this, the more likely is a compromise in the Brexit negotiations.

Christian Odendahl is chief economist at the Centre for European Reform.