A Looming Disaster Brexit Threatens to Become the Messiest of Messy Divorces

 

A Looming Disaster

Brexit Threatens to Become the Messiest of Messy Divorces

Britain will be leaving the EU common market at the end of the year and there are still important issues to be hammered out. Both sides could be facing a disaster in the form of huge traffic jams, job losses and rising prices.

 

By Tim Bartz, Claus Hecking, Nils Klawitter, Peter Müller, Michael Sauga und Jörg Schindler

13.10.2020, 17.50 Uhr

 

 

Truck traffic at the Port of Dover: From an economic perspective, there will only be losers.

 Foto: 

Aaron Chown / EMPICS / picture alliance / dpa

Suddenly, everything screeches to a halt in the Port of Dover. It's a Wednesday in September and dozens of semi-trucks are backed up on the four-lane road that leads out of the port to the highway. Diesel exhaust wafts over the compound as some drivers nervously pump the gas pedal.

A red truck has collided with a gray truck in a curve. Nothing major, just a couple of small dents and scratches on the trailers. Yet the column of trucks quickly backed all the way up to the ferries, which were supposed to have immediately begun loading up other trucks for the return trip across the English Channel.

Everyone is going to be late today: the ferry captains and the truckers. Yet the mini-accident is just a precursor to the gigantic traffic jam that everyone expects to occur on January 1, the day on which the United Kingdom, after a year-long transition period, finally leaves the European single market.

Hectic talks in both London and Brussels are ongoing regarding the final details of the deal - things like customs and certificates, professional qualifications and environmental regulations, startup subsidies and fishing rights off the British coast.

Recently, it looked as though the two sides would be able to at least agree on a rudimentary deal that would prevent customs and tariff quotas. Such an agreement could significantly limit the economic harm produced by the UK exit from the EU, particularly for the UK itself. In truth, though, that is rather cold comfort: Essentially, the only choice now remaining is between an ugly divorce and an extremely ugly divorce.

DER SPIEGEL 42/2020

The article you are reading originally appeared in German in issue 42/2020 (October 10, 2020) of DER SPIEGEL.he Autoindustrie pocht auf "Brexit"-Deal: Noch

SPIEGEL International

Significant damage has already been done. Since the British voted by a razor-thin margin to leave the European Union four years ago, trade between the UK and the EU has plunged. Prior to the Brexit vote, Britain was Germany's third-largest export market, but it has since dropped to fifth place. At the same time, British exports to the Continent have sunk by 17 percent in just the first seven months of this year relative to the same time period one year ago, a steeper drop than that seen by exports from Japan or the United States. Economists refer to the phenomenon as "decoupling."

If there are any winners in this development, it is those people in Britain who see Brexit as a symbolic expression of national sovereignty. Because from an economic perspective, there will only be losers. Particularly in the UK, consumers will be faced with higher prices and less selection. Companies will be forced to deal with a radically altered trade regime, more bureaucracy and higher costs. The labor market will experience job losses. And politicians on both sides of the channel will be faced with difficult questions as to why their Brexit strategies didn't produce the desired results in the end.

When the EU member states had recovered from the shock of the 2016 Brexit referendum, they still hoped to be able to form as close a partnership as possible with Britain. Four years later, though, it has become clear that that goal will not be realized. On trade policy, the country will be further away from the EU than either Norway or Turkey. Indeed, not only will Brexit result in the EU losing almost a sixth of its economic power, Britain will become a new competitor whose primary goal will be that of taking away market share from the EU.

 

British Prime Minister Boris Johnson

 Foto: Martyn Wheatley / i-Images / POLARIS / laif

Meanwhile, Prime Minister Boris Johnson's plan of forming lucrative trade agreements for Britain following Brexit has also proven unsuccessful. And his much-hyped idea of transforming Britain into "Singapore-on-Thames," with low taxes and even less bureaucracy, is nowhere in sight.

Britain's "glorious" post-Brexit future, as Johnson has promised, could thus begin with traffic chaos, administrative disarray and supply shortages. Even the reserved language of government bureaucrats in London sounds like the script for a horror movie, with concerns being voiced about things like blocked ports, medication shortages and mass lay-offs. And the fact that British citizens have been left largely in the dark about their government's concrete plans hasn't exactly helped calm nerves.

The fear and distrust are on full display in the southern England town of Sevington, located in Kent County. From the village cemetery, the view looks out over a busy traffic circle located just behind the church. The M20 motorway, one of the country's most important traffic arterials connecting London with the Port of Dover, isn't far away.

In July, earthmovers showed up essentially overnight to an 11-hectare plot of land just south of the church, where they bulldozed a field of poppies, ragwort and blackberry bushes. Because of Brexit, it is being transformed into "a gigantic field of asphalt for thousands of lorries," says Mandy Rossi, a Green Party politician. "It's appalling."

Officially, the site had been set up for trucks to clear customs - fully 34 kilometers from the border. Referring to the extensive detour it would require, Rossi says: "It would essentially be an invitation for smuggling."

She is particularly concerned that it will soon transform into a parking lot for at least 1,500 trucks. The British government, after all, believes that Brexit will result in traffic jams extending several kilometers from ferry ports.

In early September, Johnson promised his fellow citizens a "good result" from the negotiations. Unfortunately, though, a confidential government document had been leaked ahead of his comments, a paper that outlined the "reasonable worst-case scenario." It reads like the screenplay for an apocalyptic BBC drama, including power outages, tight fuel supplies, food shortages on the Channel Islands and thousands of trucks backed up more than 100 kilometers on the nation's highways.

Should there be no deal, the paper noted, the government could be faced with having to send soldiers into the streets to maintain order, while the Navy would be sent out to prevent French fishing boats from encroaching on British waters. Because medications could get stuck at the border, the paper noted, there would be a danger of animal diseases spreading through the countryside. Across the country, one in 20 town halls could go broke, leaving millions of people without necessary financial support.

The final divorce from the European common market will take place at the end of December - right in the middle of winter and possibly also at the peak of a second coronavirus wave. Yet the first swath of destruction has already eaten its way through the country. Nowhere in Europe have more people died from COVID-19 and no other Western industrialized country saw a larger second quarter GDP plunge. When the government's generous coronavirus aid program expires in November, millions of workers will find themselves facing unemployment. A no-deal scenario in the middle of the pandemic would be, according to economist Jonathan Portes of King's College London, "the perfect storm."

The island country's weakest links are the ferry and shipping ports on the English Channel. Even if the two sides can agree on a trade deal, the goods would have to be registered and checked in Dover. Michel Barnier, the EU's chief Brexit negotiator, explained why early on, saying that the EU could not risk goods from around the world being assembled in Britain, being declared as British goods and then entering the EU single market through the back door.

The controls required to prevent that, say experts, will lengthen delivery times by up to two days. Such a delay would not only adversely affect just-in-time supply chains, it would also disrupt the food industry. Fish, shellfish and vegetables could rot as the trucks wait in line. Some medications are also extremely sensitive to delays.

British haulers are clear about where the blame for the chaos lies. "The government is way too late. How can they ask us to prepare everything if we don't get any information?" wonders Richard Burnett, CEO of the Road Haulage Association.

Only three months remain, and much is still up in the air. Where will the truck checkpoints be located? Which computer programs should haulers install given that the government is still testing its customs software? Who is supposed to process the customs declarations for hundreds of millions of deliveries?

Thus far, 5,000 officials have handled 50 million customs documents a year, Burnett says. After Brexit, there will be an increase of around 220 million declarations, meaning that the customs office would require tens of thousands of additional agents, he says. Many EU haulers, Burnett fears, could completely eliminate Britain from their schedules. "Nobody wants to be part of this chaos."

 

Construction of the truck parking lot in Sevington: "The government is way too late."

 Foto: Toby Melville / REUTERS

Carmaker Honda has calculated what the additional effort would cost and found that even delays of just 15 minutes would result in annual extra expenditures of 850,000 pounds. Numerous British companies in the automobile and chemical industries have developed emergency plans to transfer some of their production to the Continent, should it become necessary. That means that tens of thousands of jobs in the industrial regions of northern and central Britain could be in danger - regions that delivered the Conservatives their election victory in December.

Johnson's Brexiteers, though, continue to propagate the fairy tale that trade deals with other regions of the world will be enough to balance out any losses that might occur via Brexit. One of those is trade lawyer Shanker Singham, the adviser to the Johnson government who rhapsodizes about the business opportunities in Asia, the Indo-Pacific region and the Middle East.

But Johnson's Global Britain strategy has thus far enjoyed rather limited success. The trade deals that have been negotiated with countries like Japan and South Korea in recent months have only secured conditions for Britain that are similar to the ones they currently enjoy as an EU member state. Talks with the U.S., meanwhile, have been stagnant for months, despite U.S. President Donald Trump's March claim that the trade deal would be "fantastic and big." As such, says Clemens Fuest, president of the Ifo Institute for Economic Research in Munich, the concept promulgated by the Brexiteers is "an illusion."

Europeans are looking at the approaching Brexit debacle in Britain with a mixture of disbelief and schadenfreude. Many in Brussels see it as evidence of what happens when countries try to leave Europe's successful trade bloc.

But there is no cause for derision. Not only because the EU shares the blame for the Brexit disaster, as Gabriel Felbermayr, president of the Kiel Institute for the World Economy, told DER SPIEGEL. But also because Brexit will result in lower growth for the EU. Additional border formalities, for example, will cost German companies alone up to 300 million euros extra each year – whether there is a deal or not. On top of that will be significant costs associated with new certificates, shipping documents and other red tape.

The situation will be even worse if the EU and Britain slap tariffs on each other's products. "Many customers have already told us: 'If these tariffs come, we will no longer deliver to the UK.' Then, it will no longer be worth it," says Andy McFarnell, who is in charge of Brexit-related issues for the Belgium hauler Sitra, which regularly transports foodstuffs to Britain in some of its 500 trucks. The price of chicken, for example, could rise by more than a euro per kilogram, says McFarnell.

European food producers are also concerned about a disagreement regarding geographical indications. There are more than 3,000 products in the EU that are thus certified, protecting items like French champagne, Italian gorgonzola and Nuremberg sausage from cheap imitations.

In the Withdrawal Agreement it signed with Brussels, Britain guaranteed that such products would enjoy "at least the same level of protection" as they do now. But Johnson's negotiators suddenly seem to have backed away from that pledge. An internal German Foreign Ministry paper from early September about the ongoing negotiations notes that London now wants to "refashion" the provision.

It is quite possible that British supermarkets will soon be carrying champagne from California. But what will happen to the Scotch whiskey, the cheddar cheese or the rest of the around 80 British products that currently enjoy protection in the EU? Would Brussels block them from being imported? There is a significant risk that both sides will end up losing in the end.

It's the same story in a number of other sectors of the economy. In the case of a no-deal Brexit, says Oliver Holtemüller, a professor of economics at Martin Luther University Halle-Wittenberg, some 180,000 jobs could be in danger, especially in regions that host Germany's carmakers.

European hopes that several thousand bankers from London would move to the Continent as a result of Brexit have thus far not materialized. Hubertus Väth from the initiative Frankfurt Main Finance and the financial hub's chief lobbyist believed that his city would be able to attract up to 10,000 industry professionals from London. Four years later, though, only 2,500 people have made the move, among them many Germans who took the opportunity to return home after spending several years abroad.

It seems unlikely that many more will follow suit. That is partly due to the EU realization that financial deals aren't really workable without the British. In late September, the European Securities and Markets Authority (ESMA) ruled that British clearing houses could continue offering their services in mainland Europe until at least the middle of 2022. "A clear victory for the City," says Väth.

Without clearing houses, banks and funds are unable to settle and process deals involving securities and derivatives. They jump in when a deal falls apart. To avoid chaos on the financial markets in times of trouble, they have to build up billions in reserves.

But clearing houses, too, can run into trouble in times of financial crisis. They must then be propped up by the country in which they are located - and no European government is interested in having to throw aid their way should a crisis erupt. As such, it is hardly surprising that Europeans are content to continue relying on British clearing houses.

Unfulfilled hopes and murky prospects: Shortly before the deadline, the mood on both sides of the channel is dark. The further the EU and Britain drift apart, the greater will be the economic harm, a truth that is clear to all involved. As such, the question has become: Will they at least be able to come up with a slimmed down agreement to avoid the worst?

 

Fishermen in the French town of Boulogne-sur-Mer: The North Sea fishery has become a focus of the Brexit dispute.

 Foto: Marlene Awaad / Bloomberg / Getty Images

There has been a fair degree of optimism expressed recently in London, Brussels and Berlin. But the diplomats directly involved in the talks have been less sanguine. A telephone call between Boris Johnson and European Commission President Ursula von der Leyen 10 days ago Saturday was likewise unable to produce a breakthrough.

The two sides remain significantly at odds on two decisive issues: future competition rules for things like state aid and environmental regulations; and North Sea fishing rights.

Despite the fact that the fishery is largely meaningless from an economic point of view, the dispute over the British fishing grounds has become one of the tallest hurdles for a trade agreement. The issue has become symbolic, in part because it is one of the few where Johnson has the most leverage. Britain wants to limit the access of EU fishing boats to its waters and renegotiate catch limits annually for every one of the around 100 species of edible fish. The EU is demanding continued access and is only ready to agree to catch limits that are valid for a longer period of time.

The message from Brussels has been that the EU will not sigh a deal that does not contain a satisfactory solution to on the fishing issue. In a video conference with Barnier last Wednesday, Germany Agricultural Minister Julia Klöckner clearly outlined the position of Germany, which currently holds the rotating presidency of the Council of the EU. In comments to DER SPIEGEL, she said: "I will not sacrifice the fishing industry for an agreement in other sectors."

The EU has also shown its stubbornness elsewhere. Because the UK violated crucial elements of the Withdrawal Agreement with its recent Internal Market Bill, the EU is insisting on an obligatory mechanism for solving future disputes.

In addition, Brussels wants British environmental, social and labor market standards to continue to live up to EU standards. Whereas the British are apparently prepared to agree on that point when it comes to regulations currently in place, the two sides continue to disagree regarding how future EU regulations should be dealt with. Paris, in particular, is insisting that Britain adopt them as well, Johnson is strictly opposed. One compromise that has been proposed involves the EU making concessions on competition rules in exchange for British agreement to a mechanism for solving disputes.

Time, though, is growing short - again. EU heads of government are meeting for a two-day summit on Thursday and Friday to address the most pressing questions. Brussels says that the outline of a treaty text must be finished by the end of the month to allow sufficient time for ratification by year's end.

That won't, of course, be enough to prevent all the damage caused by Britain's departure from the EU, but it could at least dull the edges. Or, as economist Felbermayr puts it: "A deal is better than no deal