Brexit perceptions

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Until fairly recently, the research from City firms has focused far too exclusively on the damage to Britain from a rise in protectionist barriers, so it is good to see that the Europeans are now starting to assess how they too would be crippled if the talks degenerate into chaos. The British side is well aware of the potential downsides of Brexit (though it also quite rightly sees the upside) but the Europeans, until now, had been in denial. Changing this perception is key as it reduces the chances of an arrogant EU overreaching during the negotiations and triggering their collapse.

Georgia Bachti of Open Europe has translated and summarised all of Deloitte’s findings in a note on her think-tank’s website. The consultants assume that a 10pc tariff would be slapped by both sides on vehicles, as well as a 4.5pc tariff on car parts. Sterling would fall by 10pc – but the report assumes no extra customs controls or non-tariff barriers, such as rules of origin, so it doesn’t represent a worst case scenario.

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Deloitte believe that EU carmakers will lose €8.3bn (£7.63bn) a year worth of revenues, of which €6.7bn would be accounted for by German carmakers alone. In the first 12 months after we leave, German car exports to the UK would collapse by 255,000 units, a 32pc decline, with 18,000 jobs in the German car industry put at direct risk. Overall, German car production would fall to 2.28m units, down from 3.07m in 2016 and close to the 2.19m seen in 2009 at the height of the crisis, according to Open Europe’s Bachti. Volkswagen, BMW and Daimler would all suffer.

The workings of politics

It is true, of course, that across all industries the EU is proportionately a bigger market for UK firms than the UK is to EU firms. But that’s not an especially useful observation in practice. It’s certainly not how politics works: the concentration of losses among a small number of powerful lobby groups – German carmakers, French farmers and so on – mean that European politicians will be engulfed in organised fury if they fail to agree a free trade deal with the UK. We see this all the time in the political world: what counts is not overall economic magnitudes but the power of vested interest groups.

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That is why I’m optimistic, for example, about a UK-EU deal being reached on airlines: the overall impact in terms of GDP may be containable, but lots of small French airports would go bust immediately without an agreement, devastating local towns and villages that rely on the tourist income. The French countryside is a powerful player in French politics, as can be shown by the scale of the subsidies and the new motorways and TGV stations.

That is also why I don’t buy the currently fashionable view that the German political establishment will simply ignore the country’s most powerful industry. Angela Merkel’s progress in the polls, and the chances that she could end up in coalition with the small liberal FDP rather than the much larger SDP, paradoxically mean that she will have to listen to her base much more carefully.

In the meantime, the UK’s booming car manufacturing sector is becoming more self-reliant, which means that its resilience to any supply-chain disruption is increasing.

A cliff-edge Brexit is in nobody’s interest and would wreak substantial economic havoc. The UK and EU would both gain hugely from a proper post-Brexit free trade deal, which ought to be every business lobby group’s number one priority (rather than trying to refight the referendum, or attempting to cling to doomed set-ups such as the customs union). It’s certainly time for continental and Irish businesses to speak up and tell their masters in Brussels, Berlin, Paris, Madrid and Rome that they want free trade, not political posturing.

@mindhunter