Director's Letter

Dr Ulrich Hoppe, the Director General of the Chamber, shares his views on the current developments influencing German-British business relations.

July 2019

© Shutterstock / FatManPhoto

A new Chapter begins but uncertainty will definitely be with us beyond the 31 October

The UK has a new Prime Minister who has promised to leave the EU on 31 October 2019 come what may. The German-British business community hopes that an orderly Brexit will be achieved so that the originally agreed transition phase until the end of 2020 will come into being and more time will be gained to develop a framework for a new relationship between the EU and the UK. Despite his sometimes unconventional approach to politics, Boris Johnson has a unique ability to get messages across and to create a following amongst people, even if sometimes less based on substance but more on his personality. If he is given the chance to tweak the current deal which his predecessor negotiated with the EU he might even be able to get it through parliament. Of course, this also depends on the EU’s willingness to offer some additional changes to the withdrawal agreement and/or on the future declaration. At the moment it appears as though there is not much room for renegotiation on the EU side but that may well change once the political direction of Boris Johnson’s government becomes clearer. However, we should also bear in mind that developments could equally go in the opposite direction and Britain, if parliament doesn’t stop it - and this is by no means certain - , may just drop out of the EU on 31 October. We would then all move into unchartered political and economic territory which may well result in huge long term cost for the economic well-being and political stability of the UK, Europe and beyond. Despite the current nation-based centric rhetoric, the present global political challenges from Hong Kong to Iran show that we are stronger when united and that the unnecessary dismantling or fragmentation of our shared institutional frameworks will be costly to us all. As Boris Johnson said in his acceptance speech, “the work begins” and let us hope that he can fulfil his leadership campaign goal of Britain leaving the EU with a deal.

Dr Ulrich Hoppe
Director General
German-British Chamber of Industry & Commerce

June 2019 - "Horror loses its power to frighten if it is repeated too often"

© Art Konovalov / Shutterstock.com

This quote from Michael Ende’s “Neverending story” has been applied by many of the Conservative leadership contenders in relation to a no deal Brexit. But make no mistake, repetition does not create truth and the business world does not necessarily agree with this approach. For example the German-British Business Community clearly favours for Britain to orderly depart from the EU. Only less than 10% of respondents in a recent survey of ours wished for a hard Brexit. We are not alone with this view - amongst many others, Carolyn Fairbairn, the CBI’s Director General, voiced similar concerns over the last few weeks. A no deal Brexit will leave Britain stranded in no-man’s land in a number of key areas and it will also be much more difficult and time consuming to build a new relationship following such an acrimonious divorce.

The benefits of the Division of Labour, a concept developed by the British economist Adam Smith, are being negated by the hard-line Brexiteers. The idea that the potential gains from not yet concluded free trade agreements with the rest of the world (40% of British trade) will outweigh the costs of the restrictions for 60% of British trade (trade with EU countries or countries with which the EU has a free trade agreement) should be banned to Michael Ende’s phantasy world – these huge benefits will not materialise. Having your cake and eating it does not work for a medium-sized economy like the UK’s. The US President’s recent (later retracted) comments on opening up the NHS for competition as part of a UK-US free trade agreement make this all too clear.

I am often asked whether I know of any German businesses which plan to leave the UK because of Brexit. There may well be a few, but for the vast majority of German companies the UK is a key market and will remain so even if it has become slightly less important in recent years. This decline in importance is probably linked to the weaker growth in the UK since the referendum, which in turn reduced the relative purchasing power of British buyers.

Unfortunately, the results of the European Parliament elections confirm that the battle lines are hardening in the Brexit debate and that the country is still more or less evenly split on this issue. This is making it ever more difficult to find a compromise across the political spectrum. However, we should bear in mind that across Europe we share a common history and the recent D-Day celebrations act as a reminder of our shared destiny. We may have to develop different approaches in terms of how we work together in order to address common challenges in future, but “splendid isolation” will not work in this day and age. Let us hope that the future Prime Minister of the UK will also recognise this, as otherwise the UK’s economy and population, as well as Europe as whole, may well pay an unnecessarily high price for Brexit.

April 2019 - “History teaches that men and nations behave wisely once they have exhausted all other alternatives.”

© Shutterstock / Raggedstone

This is what the Israeli statesmen Abba Eban said in a speech in London in 1970. Let’s hope that this statement still has validity in the London of today. After Wednesday’s vote in parliament a no-deal Brexit may be off the table for the time being but in the end cannot be ruled out. In any case, the longer term outcome of Brexit is as unclear as ever and this is a key problem for many businesses. In the current political climate we can expect uncertainty to continue for many years to come and the resulting detrimental effects on investment and thus productivity should not be underestimated. Having sizeable segments of the economy operating at a low wage/low productivity equilibrium is not a recipe for future growth and the coherence of society. This is especially important because the huge Brexit-induced split in society needs to be healed as quickly as possible. Therefore, the political establishment has to come to a consensus on Brexit and be willing to compromise so that businesses have certainty to invest again and that the government can focus on addressing the productivity challenge so that real long-term wealth creation can follow. Otherwise, the UK will struggle to find the financial means to build bridges across regions and society in order to solve the underlying causes of Brexit – it is high time to behave wisely!

March 2019 - “She drives me crazy”

© Alexandros Michailidis

These days, this song title from the Fine Young Cannibals is probably used by many in the political establishment, not only in the UK, but across the European Union. But what other options are there for the British Prime Minister? She does not know how many cannibals are waiting in the wings and therefore has to play a tactical game. Of course this tactical game is costly, as it continues to create uncertainty for businesses and individuals. With her recent announcement to also allow MPs to vote for an extension if they cannot agree on an orderly Brexit for the 29 March 2019, a no-deal scenario has become less likely in the short-term. The vote on 27 February 2019 in parliament for this approach confirms this assessment. However, if we are to see an extension, especially a short one, uncertainty would only be prolonged, as it is not clear what kind of new compromise could then be reached with the EU, which also commands a majority in parliament. Therefore, despite the legal problems, a longer extension period may well be necessary to find a workable solution and to reduce the short-term uncertainty. In any case, despite the uncertainty resulting from potentially extending the deadline for leaving the EU, it should not be forgotten that a no deal Brexit would be far more costly. For this reason, the business community to some extent welcomed Theresa May’s recent announcement and the decision of 27 February 2019 in parliament, but it is only a relatively lukewarm welcome.

February 2019 - The votes in parliament on 29 January were a small step forward, but the political drama is set to continue

© Shutterstock / lazyllama

There is some hope that the political establishment in the UK may find a solution to the Brexit crisis. Tuesday’s votes in the House of Commons showed that by voting down some of the amendments put forward, a constitutional crisis (parliament seizing power from the government) has been averted for the time being. Forcing the government to renegotiate the border question in Ireland may prove to be a solution as, if reasonably successful, the hard-line Brexiteers can no longer block Theresa May’s deal. This is because they made the border problem the only real stumbling block for passing the withdrawal agreement in parliament. Whether it will be possible to develop and agree the voted for “alternative arrangements” for the island of Ireland remains to be seen. The EU has said that the withdrawal agreement is not open for renegotiation but there may well be other ways to develop a solution which has legal force. However, some compromises will have to be made on both sides for this to happen – Let us hope that a workable compromise can be found over the coming weeks. That parliament has ruled out a no deal scenario gives some reassurance that Britain will not crash out of the EU by default. Nevertheless, as it was a non-binding vote, the threat of chaotic Brexit has not gone away. This “threat” can and may still be used by Theresa May to get her party colleagues in Westminster in line and according to some insiders most of the hard-line Brexiteers know that a no deal Brexit with its consequences for the economy will be blamed on them and potentially put the conservatives out of power for a long time. With so many actors involved it is difficult to predict the outcome of all these developments with any degree of certainty, the only thing which is certain, is that the political drama is set to continue.

November 2018 - In all likelihood, the Brexit Drama will continue into 2019

Only a handful of people believe that Theresa May’s Brexit deal will be passed in the House of Commons on 11 December. Too many MPs from her own party have indicated that they will vote against it and the Labour Party is currently unified in opposing the deal. The exit agreement will definitely need more than one attempt in parliament to have a chance of passing. Only at the very last hour may it be possible that a majority of MPs, out of a feeling of national responsibility, will vote for it because a no deal Brexit will create a chaos by which not only the economic, but also the political landscape will be severely affected. These effects will be largely felt in the UK but also to a significant extent in the EU. Clogged up ports and roads and the resulting shortages of time critical goods are an often cited example of potential problems, but the medium to long term impact on internal and external security in Europe, resulting from an acrimonious divorce, would probably lead to even greater costs in the long run.

Assuming for a moment that the exit agreement is not passed by the UK parliament by January 2019, we can expect the markets to react swiftly and it will quickly become clear that some kind of short-term extension of the UK’s membership of the EU will be necessary. This may finally help Westminster develop a unified approach to Brexit, which allows for an orderly exit from the European Union. As said, everything else will be a nightmare and create frictions in the whole of Europe for many years or even decades to come. Therefore, the best possible outcome at the moment is for the deal to eventually be passed by parliament - if it requires some last minute changes to the exit agreement and to the declaration on the future relationship to achieve this, then so be it. It would definitely be worthwhile. Business in Britain and across Europe has a role to play now. It needs to make its voice heard so that a very costly no deal scenario does not accidentally become a reality.

October 2018 - Brexit: ‘Everything will be okay in the end - or if it's not okay, it's not the end.’

Let us hope that this quote from John Lennon also applies to the Brexit negotiations. Currently, one has the feeling that progress is slowly being made along the lines of two steps forward and one step back. This may well be a necessary approach to the negotiations, as any agreed deal will still have to be ratified by Westminster, a potentially even more challenging task for the Prime Minister than reaching a deal with the EU.

As we have learnt from the recent EU summit, not enough progress has been made so far and the danger is that time may well be running out. Nevertheless, I am reasonably optimistic that both sides will reach workable compromise by the end of the year or at the latest by early 2019 so that the transition period can commence once the UK has officially left the EU on 29 March 2019. The hugely disruptive effects of crashing out of the EU without an agreement will hopefully convince the majority of MPs to vote for an orderly Brexit. A necessary part of the agreement is a declaration on the future relationship between the EU and the UK after the transition period has ended. This statement will have to be vague enough for hardline Brexiteers to subscribe to it. Furthermore, a “fudge” on the border between Northern Ireland and Ireland must also be found in order to come to an agreement in the first place. For this reason we hope that all the negotiators attended their creative writing classes when they were at school, because this skill will be in high demand in the coming months and may well decide on the future direction of Brexit, the United Kingdom and Europe as a whole.

August 2018 - No deal is not only a bad deal, but the worst deal!

Summer is nearly over and again, despite some apparent progress in the negotiations, every so often there is still talk of a no deal scenario. Is this talk just part of the negotiation strategy or is it a real possibility? Many say that it is only part of the negotiation strategy but the true reasons remain unknown. In addition, we do not know whether the Prime Minister will get any potential final deal through parliament. The die-hard Brexiteers might block any deal, whilst the Labour Party, out of principle, may do the same. If we do end up without a deal, the hard-line Brexiteers will also be disappointed as the UK, out of sheer necessity to minimise costly disruptions, will be forced to accept many EU regulations and principles, solely to keep trade and the economy going. One example for this is the unilateral offer being made to EU citizens to be allowed to remain in the UK whatever the outcome of the negotiations. If this offer had not been made, a no deal outcome would potentially have forced millions of EU citizens to apply for work or residency permits and visas before 30 March 2019. This task would overwhelm the UK immigration authorities and thus potentially turn many of the current EU citizens in the UK into illegal immigrants. Accepting EU health and safety standards for imports is another area where Britain would have to give ground until it has built up its own institutional framework to deal with such issues.

No deal would also lead to costly disruptions on the side of the EU. Due to the EU being unable to reciprocate British pragmatism, because of the diversity in standpoints amongst the EU27, medium and long-term uncertainty would prevail. We sincerely hope that there will be a deal, but out of precaution, we recommend that all parties inform themselves about the EU’s ‘preparedness notices’ and the UK Government’s guidance on a no deal outcome. Hyperlinks to these notices can be found on the Chamber’s webpage.

The next months will be interesting and we at the Chamber will be there to support you with any questions you might have. Feel free to get in touch.

June 2018 - It is time to get down to business again

The Royal Wedding was a welcome distraction for a few weeks but now it is time to get down to business again. With the Brexit deadline slowly but steadily approaching, time is running out and one does not have the feeling that this urgency is felt by everybody.

The discussions about the future customs arrangement show that there is more than one devil in the detail. Whatever the future arrangements will be, the idea of frictionless trade may well turn out to be an illusion – and this may not be the only one. Let us remind ourselves that, independent of any transition period, which still has to be finally agreed and ratified, Britain will be leaving the EU on 29 March 2019. Therefore “business as usual” will no longer apply in a significant number of instances from that day onwards, as Britain will cease to be part of many agreements the EU has concluded on behalf of all member states.

For example, EU free-trade deals with countries around the world will no longer automatically include Britain after 29 March 2019 and therefore individual solutions will have to be found and agreed by all sides.

There are many more examples, and the recent discussions about Galileo and the sharing of intelligence technology after Brexit show how difficult it will be to design a future relationship which minimises the economic and political loss for all. With the summer recess fast approaching and Brexit no longer at the top of the agenda in many EU countries, the British government urgently needs to overcome its infighting, because otherwise an unnecessarily disruptive Brexit cannot be ruled out. When I speak to colleagues from across Europe, I often hear that patience with the UK is running out and this is not a good sign. Together we are stronger and whatever the formal arrangements for future cooperation will look like, we need to work together constructively to master the economic and political challenges of which, as we all know, there are many more to come. We at the Chamber can only hope that the British government will use the coming months to unite in order to produce a proper blueprint for the future relationship it wants to have with the EU so that constructive negotiations on the all-important details can begin.

April 2018 - Transition phase only grants temporary relief to the business community

With the principle agreement on a transition phase some temporary relief has been granted to the business community. We all hope, or even assume, that the negotiations will go well and that the EU and the UK will be able to agree on a framework of their future relationship by the autumn of this year.

Such an agreement on the future framework is necessary for the transition period to be allowed to materialise. However, there is no guarantee that this will happen, especially as the Irish question remains unsolved. The problem is that none of the current proposals are acceptable to both sides of the negotiation, simply put: an untested, yet to be implemented electronic declaration system (together with a tolerance for some low level smuggling) versus the, for the British side, politically unacceptable continued membership in the customs union for Northern Ireland only.

An easy solution would be for the whole of the UK to remain in the (or a) Customs Union. A majority of MPs, and probably also the electorate, would be for it and this solution would also not break Theresa May’s promise that Brexit means Brexit. In this context it is worth to look at Turkey which is a member of the Customs Union but clearly not a member of the EU and nobody, be that in the EU or Turkey, thinks otherwise. In other words, there is room for compromise and it only depends on the political class to provide leadership for the best of the country.

Currently 60% of British trade is covered by the EU’s Customs Union or EU Free Trade Agreements with other countries - to endanger this means sacrificing economic growth for no apparent political gain. The argument for staying in the Customs Union becomes more compelling by the day as time is fast running out, especially as it is still unclear how the countries with which the EU currently has Free Trade Agreements will view Britain on 30 March 2019, when Britain exits the EU and thus is no longer automatically party to external EU agreements.

Let us hope that a workable compromise on membership in the or in a Customs Union can be found so that business can continue to flourish to the benefit of societies on both sides of the Channel.

February 2018 - Brexit negotiations will not become easier and let’s hope that the port of Dover will remain open for business on 30 March 2019

Two weeks ago a new grand coalition government was agreed by Germany’s Christian Democrats, their Bavarian sister party and the Social Democrats. However, the final say on it rests with the members of the Social Democratic Party. Whether they will agree to forming another coalition government with Angela Merkel is by no means certain. Should the party members reject the proposals, we would be back to the drawing board and Germany would enter a further period without decisive leadership. The latter also appears to be lacking in the UK, and with two major European governments suffering from this condition, Brexit negotiations – at least in the short run – will not become easier. The front cover of our forthcoming magazine, initiative, shows the port of Dover and we sincerely hope that in a year’s time the picture will be the same and that we will not see a clogged up port as a result of a no deal outcome because political leaders were unable negotiate constructively. Many on the British side had always hoped that Germany would “put in a word” for the UK so that she would get a more favourable deal than otherwise. Whether this hope was ever justified is impossible to know. If the members of the Social Democratic Party reject the coalition agreement, the political landscape in Germany will see further upheaval, and we might see a new election or a different Chancellor. Such prolonged uncertainty would not be good for Germany and the EU, as strong and stable leadership from Europe’s largest economy is important in these testing political times.

Furthermore, many commentators view the agreed political agenda of the grand coalition as more of the same and lacking in radically new policies. Germany faces many challenges, ranging from demographics, immigration and education to digitalisation and it is important for her long-term success that these are properly addressed. Assuming the agreed coalition is confirmed by March 2018, it is crucial that further measures are introduced to make Germany more competitive and fit for the future, so that she can also play a proper part in leading Europe in an ever-fragmenting world.

January 2018 - Agreement on the transition phase may not come early in 2018

Will an agreement be reached on the framework of the future relationship between Britain and the EU? Will the vital implementation or transition phase be agreed early in 2018 or rather towards the end of 2018? These are hugely important questions for businesses, which need to have stability and want to avoid costly planning for a multitude of scenarios. Companies can deal with many outcomes as long as there is certainty about them. Therefore we can only urge all the negotiators to provide some certainty early on. Whether this wish will be fulfilled remains to be seen. The negotiations in this second phase will definitely become more difficult and we can expect the political temperature to rise over the coming months. However, it is important in this negotiation “game” not to shut too many doors. We owe future generations the opportunity and the freedom to develop and live in a European framework of their liking.

Let me make a prediction at this point in time. I know it is always dangerous to do so but an agreement on the transition phase and its length will most likely not come early in 2018. It will happen rather later in the year because to some negotiators it is still not yet obvious that a two-year implementation phase will not be long enough to establish a final settlement on Britain’s relationship with the rest of Europe. Therefore a structure and a wording has to be found so that this phase can be extended or superseded by a new one, which will essentially be an extension of the one to be agreed this year. At the end of this “extension”, four or five years down the line, we will have had a new election in the UK, and also many new leaders will have been elected on the continent. This next generation of leaders will hopefully bring fresh thinking to the table. Truly fresh thinking should be applied by all sides before a more permanent decision about Britain’s future in or with Europe and also Europe’s future is taken. Like it or not, we live in an ever more interdependent world and crucial decisions should be taken responsibly, with more facts and potential consequences taken into consideration.

In any case, if we look at global developments over the medium term, we see that despite many upheavals, the world overall has become more open and the rule of law has become more prominent. The basic principles of living, working and interacting with each other as well as the approach to tackling problems has in many cases become more structured and similar across the globe. In whatever global or European framework we will live in future, this trend – of course with ups and downs – is going to continue and it will create an ever stronger need to cooperate. It would be more efficient to organise this cooperation on a multilateral rather than on a bilateral level but this will hopefully be for future leaders to decide. Therefore let’s remind current leaders not to rush into permanent decisions too quickly.

December 2017 - Brexit negotiations are set to move on to the second phase – a sigh of relief can be felt in the business community, but hold your breath as in the end a 'no deal' scenario can still not be ruled out!

The German-British business community welcomes Brexit negotiations moving on to the second phase, because it is only in this phase that a clearer picture of the future relationship between the EU and the UK will emerge.

Despite the impression gained from the media, the first phase of drawing up the Brexit bill, sorting out the rights EU citizens in the UK and British citizens in the EU as well as agreeing on a framework for the island of Ireland was relatively straightforward.

Over the next nine to twelve months, when both parties need to agree on the future, we will find out that, as ever, the devil lies in the detail and many more difficult compromises will have to be made on both sides.

Will the Prime Minister be able to sell these compromises to her own party? That remains to be seen – we can only hope that she will have the stamina to do so and to continue to lead Britain through the negotiations as any change in leadership will create even more upheaval. However, looking at the political landscape we might still easily end up with a ‘no deal’ scenario, even if unintentionally. This would have disastrous consequences in the short-term for both sides, but more so for the UK than for the EU.

Of course in the longer term Britain will be able to adjust, but to paraphrase the Economist’s Matthew Symonds, I expect that Britain’s economic prospects will still be good but far smaller than they have been. Therefore despite the current positive news, companies still need to consider a ‘no deal’ scenario as part of their Brexit strategy and in the short term they should focus on analysing their value added chains, logistics and warehousing capacities, tax and customs implications.

We at the German-British Chamber hope that, in the end, this will largely be an unnecessary exercise and that the second phase will be concluded with a transition agreement lasting for a number of years to enable a final settlement which works for all to be negotiated successfully – but don’t hold your breath!

November 2017 – A Higher Degree Of Clarity is Urgently Needed

At the time of writing we do not yet know when the real negotiations about the future relationship between the UK and the EU will begin but one does have the feeling that not much real progress has been achieved so far.

We all thought that the “no deal is better than a bad deal” scenario had finally been buried after the Prime Minister’s speech in Florence. Unfortunately, this does not always appear to be the case. The impression is that reality has not yet fully sunk in with the British negotiators as, apart from lofty visions about a future relationship with the EU, not much real substance has been provided so far.

Theresa May’s recent comments on the uncertain future status of EU citizens in the UK were also not overly helpful and have not been well received by many of the 3 million EU citizens living and working in the UK. This continued insecurity will contribute to making the country a less attractive place for foreign talent, possibly resulting in a negative effect on the longer-term economic potential of the UK as it is unlikely that the skills provided by recent immigrants can easily be replaced by home-grown talent.

On the other hand, the EU needs to show some more flexibility in terms of coming to an agreement with the UK. For example, it is difficult to sort out the Northern Ireland border issue if it is not clear what kind of trading arrangement both parties will enter into once Britain has left the EU.

It is important to note that if significantly more clarity about the future direction is not provided by the end of this or the beginning of next year, more and more international companies will have to implement contingency plans for their operations in the UK. British companies will have to do the same for their operations and activities on the continent. These will be costly exercises, which will have a negative impact on the economy, especially in the UK. Therefore, in addition to showing a higher degree of flexibility on the part of the EU, we can only urge the British government to develop a clearer and realistic approach to what it wants the future to look like – to have your cake and eat it was never and will never be a realistic outcome.

Dr Ulrich Hoppe
Director General
German-British Chamber of Industry & Commerce