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Why Brexit is a double-edged sword for Germany: Special report

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Why Brexit is a double-edged sword for Germany: Special report
The British flag, the EU flag and the German flag. Photo: DPA
12:38 CEST+02:00
“We need the British...because they are part of the community of pragmatic, reasonable countries and because they are politically, culturally and economically similar to us Germans.”

So wrote Germany’s largest weekly, Spiegel, in a piece headlined ‘Don’t Leave Us’ and published in the UK shortly before the Brexit referendum in June 2016.

Germany had a €37 billion trade surplus with Britain in 2017: the main reason German exporters “need the British.” More than 10 per cent of all exported goods and services in some German regions go to the UK. The bilateral trade partnership is worth €120+ billion a year. 

Germany has much to lose, but also to gain, from Brexit. Britain exports €188 billion in goods to EU countries and commentators have suggested Germany could sweep up some of Britain’s share of the EU market after Brexit. 

“Regardless of the trade rules that will apply after Brexit, one thing is sure to come,”  Annika Pattberg, director of Germany Trade and Invest (GTAI)’s London office, told daily Die Welt. "British goods are likely to lose supplies in EU countries because they will be more expensive and less readily available."

Hamburg to be hit hard

More than 80 per cent, 41 out of 50, of Brexit-exposed regions in the EU, as identified by the European Committee of the Regions (CoR), are in Germany, the EU epicentre for any consequences of a hard Brexit.

Hamburg is set to be struck hardest, followed by the capital Berlin.

More than 1,000 companies in Hamburg trade with the UK, according to the city’s chamber of commerce. 

SEE ALSO: 'Horror scenario' - how Brexit could affect Germany

“With all conceivable negative consequences, Brexit also holds opportunities for Hamburg as a business location,” says the Hamburg Chamber of Commerce.

The city is profiling itself as “an alternative to London” for Far East Asian clients. “Especially for Chinese and Japanese companies, it makes sense to choose the Hanseatic city, because there are already numerous companies from both countries,” adds the statement. 

Winning new markets is as important for German industry as not losing existing ones, even if alarm bells have been ringing among UK-engaged exporters across the country for some time. 

Pros and cons

One study argues that four German federal states – North Rhine Westphalia, Baden Württemberg, Bavaria and Lower Saxony – will take 70 per cent of any Brexit impact. 

For some of these regions, Brexit still has pros and cons. Banking hub Frankfurt and the North Rhine Westphalia powerhouses of Dortmund and Cologne all want to lure talent, capital and companies from the UK. 

North Rhine Westphalia, the industrial heartland of Europe, exported €13.2 billion in goods, mainly cars and vehicles, to the UK in 2017. 1,500 of the 19,000 foreign companies in the Ruhr region are British and the head of the region hopes more will come. 

"At the end of the day, I would like to see North Rhine-Westphalia regarded as an attractive location in the eyes of those who now have to leave the UK," Friedrich Merz, a Brexit consultant to the NRW regional government, told Deutschland Funk. 

On the other hand, nearly 20 per cent of all manufacturing in the Ruhr valley, a highly concentrated industrial area in western Germany, is exposed to Brexit through exports and just-in-time supply chains, reports WDR. Cars are what drive the engine of the Ruhr  – 800 companies employ 200,000 people. A third of all German cars are made in NRW. 

The neighbouring region is more focused on banks than cars. Hessen’s authorities are pushing Frankfurt, the EU27’s major financial centre, as a relocation-hub for British banks and companies worried about passporting rights in the EU post-Brexit.  

“We are one of the few federal states that not only has risks, but also opportunities that can at least offset the loss. Frankfurt's role as a European financial centre is strengthened” by Brexit, Hessian Minister of Economic Affairs, Energy, Transport and Regional Development Tarek Al-Wazir told his regional government’s portal.

Frankfurt’s predictions that between 8,000 and 10,000 jobs could be relocated from London because of Brexit have so far failed to materialise, reports German daily Frankfurter Allgemeine Zeitung. 

Long-lasting consequences

Bavaria also has a strong stake in the UK market and a lot to lose with Brexit. Just over 7 per cent of all exports from the region went to the UK in 2018, down one per cent from 2016, making the isles departing the European Union Bavaria’s 4th largest export partner. Nearly 20 per cent of all cars made in Bavaria, home of BMW and Audi, go to the UK. One in three euro of €12 billion in annual exports to the UK in 2016 from Bavaria was linked to cars and automobile parts, according to the regional government. Car-exporting regions in particular could face long-lasting consequences, regardless of the outcome of the Brexit negotiations. 

“Brexit will force changes in the value chains - such as the construction of warehouses, since a just-in-time production will no longer possible due to the resulting customs modalities. Supply chains may be torn apart,” Kurt-Christian Scheel, CEO of the German Association of the Automotive Industry (VDA), a lobby group that represents BMW, Volkswagen and Daimler (parent company of Mercedes), told The Local. 

While UK sites are likely to be hit hardest, there will be a boomerang effect. “A downturn or even a recession in the UK would also impact the economy in Germany and Bavaria. A decline in demand from one of our most important sales markets would burden our exports. Our exports are already showing significant effects, essentially on the exchange rate,” states another report by the same source. 

Shipping routes

Lower Saxony shares concerns with its French counter ports.  The government in the northern German coastal region has called on the federal government to protect its shipping routes, which ensured €6.3 billion of exports went to the UK in 2017. “Otherwise shipping routes would be relocated to other ports with faster clearance and Lower Saxony's ports would lose cargo,” states an analysis on Brexit by the Lower Saxony government.

At least 900 new customs officers will be needed in Lower Saxony to compensate for Brexit. 

Other regions are worried too. “Brexit signifies a turning point for the close economic interdependence between Baden-Württemberg and the United Kingdom,” reads a statement by the Baden-Württembergregional government. 

'Prepare for no-deal'

Angela Merkel’s federal government has refused any subsidies or bailouts for German Brexit-exposed companies.

The spectre of the far right and issues with her migration policy domestically have seen Chancellor Merkel take more of a back seat in the Brexit saga.

Trade and industry lobbies however have been telling the 2,500+ German companies trading with the UK to make preparations for a no-deal Brexit for some time.  

The German Chambers of Commerce and Industry (DIHK) has constantly warned of the consequences of a no-deal Brexit. "With the release of the UK technical notices, one thing is clear: both sides lose at Brexit. Especially on the British side, it seems to have been a long road to recognize what is at actually at stake economically with Brexit,” commented Martin Wansleben, chief executive of the German Chambers of Commerce and Industry (DIHK), in a statement released in late August.

The DIHK published Are you ready for Brexit? – a set of 17 guidelines for companies trading with the UK – in April this year. 

Not only do more than 2,500 German companies operate in the UK, major German firms like Siemens, Bosch, BMW, Volkswagen, RWE, E.ON, Deutsche Telekom and Deutsche Post have invested billions in the UK. 

What about citizens?

There will of course be consequences for the 116,000+ Brits who live in Germany too. British in Europe, the grassroots citizens’ rights group, has published a series of no-deal Brexit guidelines for British citizens in Europe. 

“In a no-deal scenario, what happened to UK citizens in EU countries would of course be a matter for host governments. But I would be surprised and disappointed if the German government did not take a similar approach, and do the right thing by British citizens who have made their lives here in Germany,” British Ambassador to Germany Sir Sebastian Wood told The Local, echoing British PM Theresa May’s recent offer to the three million EU citizens in Britain. 

This article originally appeared in The Local's 'Europe and You' newsletter. You can subscribe to the free, weekly newsletter with essential news, analysis, insights and events about Brexit and the EU27 here.

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