Brexit will speed up once Merkel has won

The Sunday Telegraph - Money & Business - - Business - LIAM HALLIGAN Fol­low Liam on Twit­ter @liamhal­li­gan

Last week­end, An­gela Merkel de­bated with Martin Schulz, her op­po­site num­ber, on television ahead of this month’s elec­tion. What was billed as a “duel” be­tween the Ger­man chan­cel­lor and her So­cial Demo­crat chal­lenger was ac­tu­ally more of a “tea dance”.

Largely agree­ing with Merkel through­out, Schulz made lit­tle im­pact. With a fort­night to go un­til the Sept 24 elec­tion, it’s now al­most cer­tain the Chris­tian Democrats will pre­vail. Hav­ing led her party since 2000, and Europe’s largest econ­omy since 2005, Merkel is ex­pected to win an­other term.

The big ques­tion now is who’ll gov­ern with her. The CDU might in­vite their al­lies, the lib­eral Free Democrats, if FDP can win enough votes to cross the 5pc thresh­old and re-en­ter par­lia­ment. If not, we could well see a “grand coali­tion” of the CDU and SPD – which might ex­plain why Schulz was so emol­lient.

What’s clear is that Al­ter­na­tive für Deutsch­land (AFD) is on the cusp of en­ter­ing par­lia­ment. Founded only in 2013, the anti-eu AFD, which wants Ger­many to leave the euro, al­ready sits in 13 of Ger­many’s 16 re­gional par­lia­ments. AFD is about to be­come the first party to en­ter the Bun­destag on a plat­form to the right of the CDU in over 60 years – a fact likely to dom­i­nate Ger­many’s post­elec­tion head­lines.

AFD could end up with 50 seats. All the “es­tab­lish­ment” par­ties have vowed not to al­low this pop­ulist up­start into any coali­tion – a fact that could boost Afd’s sup­port. Mil­lions of Ger­man vot­ers are out­raged by high refugee num­bers and bail-out pay­ments as­so­ciated with the broader “Euro­pean project”.

Michel Barnier com­plained last week that the UK has so far made “lit­tle or no progress” dur­ing the Ar­ti­cle 50 talks. The EU’S chief ne­go­tia­tor seems now to be in com­pe­ti­tion with Jean-claude Juncker, the Euro­pean Com­mis­sion pres­i­dent, with both men tak­ing it upon them­selves to throw per­sonal in­sults at se­nior mem­bers of the Bri­tish gov­ern­ment.

The re­al­ity is that the UK will con­duct these Ar­ti­cle 50 talks not with Juncker, or even Barnier, but with Merkel and the Ger­man gov­ern­ment. Progress has been lim­ited be­cause Barnier has lit­tle author­ity – and is any­way de­ter­mined the talks fail. Once these Ger­man elec­tions are over, ne­go­ti­a­tions will be­gin in earnest.

Get­ting on for 10pc of Ger­man ex­ports are sold in Bri­tain. Ger­many’s UK trade sur­plus ex­ceeds £20bn. Merkel has re­peat­edly said she wants a “good agree­ment” with Bri­tain and that talks “should not get nasty”. The head of Bun­desver­band der Deutschen In­dus­trie, Ger­many’s main em­ploy­ers’ group, has said it would be “very, very fool­ish to erect trade bar­ri­ers against Bri­tain”. The BDI rep­re­sents 37 sec­tor as­so­ci­a­tions and 100,000 com­pa­nies, em­ploy­ing one in five Ger­man work­ers.

Of course it would be fool­ish. UK ex­ports to Ger­many sup­port around 750,000 Bri­tish jobs, with around 1.3m Ger­man jobs de­pen­dent upon ex­ports to the UK. Once these Ger­man elec­tions are over, I hope and ex­pect these Ar­ti­cle 50 talks to get se­ri­ous. I’d also sug­gest that Ber­lin cares a lot more about a de­cent UK-EU trade deal than about hold­ing Lon­don’s feet to the fire over the pre­cise size of Bri­tain’s “di­vorce bill”.

Barnier will re­main in­volved in the talks, of course – use­ful as a front­man, not least to tem­per sen­si­tiv­i­ties by dis­guis­ing the re­al­ity that the Ger­mans are re­ally in charge. But as Ber­lin en­gages, with Barnier’s in­flu­ence wan­ing and Juncker warned to be­have, I ex­pect the tone of these UK-EU dis­cus­sions to im­prove over the com­ing months. That’s just as well, see­ing this au­tumn’s Brexit shenani­gans at West­min­ster will clearly be very testy in­deed.

The shadow of a newly-em­pow­ered Ger­man chan­cel­lor looms large not only over the Euro­pean Com­mis­sion, but also the Euro­pean Cen­tral Bank. Mario Draghi last week an­nounced no head­line changes to the ECB’S de­posit rate, which stays neg­a­tive at mi­nus 0.40pc, with the main re­fi­nanc­ing rate held at zero. Cru­cially, the ECB pres­i­dent soothed fi­nan­cial mar­kets by pledg­ing to con­tinue “quan­ti­ta­tive eas­ing” at a pace of €60bn (£55bn) per month. The eu­ro­zone’s cen­tral bank’s bal­ance sheet is now big­ger, as a share of GDP, than that of both the Bank of Eng­land and the Fed­eral Re­serve. Hav­ing vowed in 2012 to do “what­ever it takes” to stop the eu­ro­zone from fall­ing to bits, “Su­per Mario” re­mains the toast of traders ev­ery­where.

Draghi hinted, though, that euro-qe could soon be “ta­pered”, or grad­u­ally with­drawn. The ECB is now widely ex­pected to an­nounce a “de­ci­sion to ta­per”, rather than ac­tu­ally start­ing to print less, in Oc­to­ber. I’m not so sure.

Draghi is clearly un­der rhetor­i­cal pres­sure to cork his mon­e­tary bazooka. With the eu­ro­zone fore­cast to grow by 2.2pc in 2017, a 10-year high, he can hardly claim re­ces­sion is im­mi­nent. Ger­many’s bank­ing sec­tor is com­plain­ing loudly about neg­a­tive rates. ECB mon­eyprint­ing is “now caus­ing ever greater up­heavals”, said Deutsche Bank supremo John Cryan.

Much of the Ger­man po­lit­i­cal elite also de­tests QE. Ger­many’s army of savers are sick of ul­tra-low in­ter­est rates. Wolf­gang Schäu­ble, Ger­many’s highly-re­spected fi­nance min­is­ter, has blamed QE for the rise of AFD and says it will “ul­ti­mately end in disas­ter”. The re­al­ity is, though, that QE is now the glue hold­ing the eu­ro­zone to­gether.

Of course, Draghi needs to say he’ll ta­per QE ahead of these Ger­man elec­tions – be­cause that’s what Merkel needs him to say to as­suage her elec­torate. But with the eu­ro­zone’s pow­der-keg bond mar­kets and bank­ing sec­tor de­pen­dent on the ECB drip-feed, once the elec­tion is over, I doubt she’ll force him to ac­tu­ally do it.

‘Ber­lin cares a lot more about a de­cent UKEU trade deal than about the pre­cise size of Bri­tain’s di­vorce bill’

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