Into th the slow lane

‘Car­diac ar­rest’ for Ger­many’s core in­dus­try?

The Daily Telegraph - Business - - Front Page - Am­brose Evans-Pritchard

Ger­many risks an eco­nomic war on three fronts at once. The com­bined shocks would en­dan­ger the post-war mir­a­cle, and ex­pose the un­der­ly­ing fragility of an age­ing na­tion with 20th cen­tury in­dus­tries. Don­ald Trump’s 25pc tar­iff on Euro­pean cars is likely to come into force this au­tumn, shut­ting half a mil­lion Ger­man ve­hi­cles out of the US mar­ket.

This could hap­pen just as Italy’s Lega-Five Star in­sur­gents force a bud­get show­down with the EU, threat­en­ing to set off a chain of events that ul­ti­mately leads to euro rup­ture and a lex mon­e­tae de­fault on vast Ger­man cred­its.

Both sagas may well in­trude be­fore the fi­nal Brexit sum­mit in Oc­to­ber. A “no deal” break­down would then start to have an ex­is­ten­tial feel for Ger­many.

Its car in­dus­try sells 770,000 ve­hi­cles a year to the UK, more than to the US and China com­bined. Britain is their profit cash-cow.

Euroin­tel­li­gence says the com­bined ef­fect of Trumpian tar­iffs and a Brexit bust-up would amount to “car­diac ar­rest” for the core in­dus­try of the Ger­man econ­omy, al­ready reel­ing from the diesel scan­dal and strug­gling to keep up on elec­tric cars.

Of the three threats, Brexit is by far the eas­i­est to defuse. Theresa May is bend­ing over back­wards to avoid a clash.

Yet Ber­lin has cho­sen to take a max­i­mal­ist ide­o­log­i­cal po­si­tion de­spite the enor­mous risk. The Ger­man elites have come to be­lieve their own rhetoric about the sacral qual­i­ties of the EU sin­gle mar­ket, even if a cynic might think it cover for mer­can­tilist ad­van­tage.

Amid the bar­rage of de­mands on May over re­cent days, we have a gem from the Ger­man Fed­er­a­tion of In­dus­try (BDI): “The United King­dom is hurtling to­wards a dis­or­derly Brexit”.

Britain “has to ac­cept” – note the im­pe­rial tone – the cus­toms union, the sin­gle mar­ket and EU law un­der the sway of the Euro­pean Court. There is no glim­mer or recog­ni­tion that both the Tories and Labour fought the last elec­tion on man­i­festos re­ject­ing such out­comes, and that vi­o­lat­ing this is a cap­i­tal crime. It sums up the Ger­man view. They want full ac­cess to Britain’s mar­ket for goods where they have a €50bn (£44bn) sur­plus, while re­fus­ing re­cip­ro­cal ac­cess to services on the nor­mal ba­sis of “mu­tual recog­ni­tion”. They de­mand that Britain re­mains in the full reg­u­la­tory and le­gal struc­ture of the EU just to se­cure this dog’s din­ner.

“The Bri­tish Gov­ern­ment is still play­ing for time. This strat­egy will lead to dis­as­ter,” states the BDI. This leaves one speech­less. It is of course Brus­sels that is play­ing the time game. It is with­hold­ing as­sent on a flex­i­ble so­lu­tion to the Ir­ish bor­der in or­der to force Britain into its le­gal or­bit, aim­ing to evis­cer­ate Brexit.

The high-deci­bel warn­ings by Euro­pean busi­nesses – the Ger­man BDI, Air­bus, BMW, Siemens – are co­or­di­nated and are in­tended to scare Britain into “com­pli­ance” at the Brus­sels sum­mit this week.

On the EU side the push is com­ing from the Euro­pean Com­mis­sion’s task­force on Ar­ti­cle 50, con­trolled by Martin Sel­mayr. On the Bri­tish side it is be­ing fanned by a nexus of Re­main in­ter­ests with an eye on the Che­quers bat­tle over the Brexit White Pa­per in early July.

May is boxed into a cor­ner. She de­cided be­fore last De­cem­ber’s EU sum­mit to pur­sue a friend­ship pol­icy hop­ing that it would un­lock a tol­er­a­ble deal, even pledg­ing to­tal sol­i­dar­ity in de­fence re­gard­less of Brexit talks.

This strat­egy has failed. The ges­tures were pock­eted. The De­cem­ber pledge to move on “Phase II” talks has come to noth­ing. Pro­pi­ti­a­tion has em­bold­ened Sel­mayr and the Franco-Ger­man axis to push harder.

We have in­ces­sant leaks from Brus­sels, one day sug­gest­ing Bri­tish air­craft might be de­nied land­ing rights at EU air­ports, an­other that Bri­tish cit­i­zens might need EU visas, un­like cit­i­zens of Venezuela, In­done­sia, Botswana or Kaza­khstan.

I do not ex­pect the Bri­tish Gov­ern­ment to de­vi­ate from its cur­rent course. It has ef­fec­tively aban­doned Brexit and will opt for the lam­en­ta­ble half­way house of EU du­ties with­out EU rights. There is a 1940 feel to this, ex­cept that this time we are France.

Sev­eral read­ers told me af­ter my last jeremiad that it is still not too late for a new de­par­ture, and some sug­gested that the UK should ex­ploit Ger­many’s trou­bles with the US and Italy to force bet­ter terms. My an­swer is to out­flank the en­tire Sel­mayr struc­ture. We should not ne­go­ti­ate at all with peo­ple who have demon­strated an in­tent to harm us. The only way to achieve this safely at such a late stage is to rip down our en­tire tar­iff wall and de­clare uni­lat­eral free trade from March 2019. There should be a five-year carve out for agri­cul­ture.

It would change the global nar­ra­tive of Brexit overnight. It would cut through the Gor­dian knot of Ire­land. If there were a hard bor­der it would be erected on the or­ders of the EU, on one side only. If the EU re­fused to en­ter­tain a hi-tech “MaxFac” and “trusted trader” scheme for in­tra-Ir­ish trade – and a waiver for the 80pc of small busi­ness traf­fic – it would be on their heads.

Uni­lat­eral free trade would elim­i­nate the worry over long queues at Dover. The queues would be in Calais, and the EU side would suf­fer the op­pro­brium of chaos, and the re­proaches of Euro­pean com­pa­nies with bro­ken sup­ply chains.

The pre­sump­tion that it would lead to a flood of cheap goods and wipe out Bri­tish in­dus­try is un­sci­en­tific.

Av­er­age tar­iffs are just 1.6pc. Ster­ling moves by that much in a sin­gle day. The cur­rency would find an equi­lib­rium rate for the cap­i­tal ac­count, as it has in free-trade Sin­ga­pore with a boom­ing man­u­fac­tur­ing sec­tor greater akin to Ger­many as a share of GDP.

Where there are pock­ets of hard­ship, the Gov­ern­ment would have wide lat­i­tude un­der WTO rules for state aid. It takes 20pc of GDP to fight a big war. Let us ear­mark a fifth of that – £80bn or so – as a tran­si­tion fund fi­nanced by bor­row­ing to get the coun­try through the cri­sis un­til Bri­tish in­de­pen­dence is safely re­stored.

Not a penny of the £39bn exit should be paid un­less the EU acts in a civilised fash­ion over Eu­ratom, land­ing rights, visas, and a long list of house-keep­ing is­sues.

It is a fair bet that Britain would en­joy a surge in global in­vest­ment and eco­nomic dy­namism once the dust had set­tled. It would no longer be a piti­ful sup­pli­cant, beg­ging for mercy at one ex­cru­ci­at­ing sum­mit af­ter an­other. The ven­ture would be mar­vel­lously dar­ing. Can it be any worse than what is now com­ing straight at us?

‘We should not ne­go­ti­ate at all with peo­ple who have shown an in­tent to harm us’

Ger­man chan­cel­lor An­gela Merkel along­side Ru­pert Stadler, chair­man of car maker Audi. Merkel faces an eco­nomic war on three po­ten­tial fronts

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