Slowing EU desperately needs Brexit deal

European Union negotiators should give Theresa May adequate concessions to persuade UK MPs to vote for her agreement. Especially since the EU desperately fears a no deal Brexit. Key economies Germany, France, Italy, Spain and Ireland are already slowing down and their stock markets are weak.

If there’s no deal, without an adequate adjustment period to counter customs and other trade log jams, a recession could develop.

The euro zone’s annual rate of inflation fell to 1.6 per cent in December from 1.9 per cent in November and over 2 per cent mid-year. This illustrates that the region’s economy has been losing steam.

EU Manufacturing Activity declines

IHS Markit’s composite Purchasing Managers Index, which measures activity in the manufacturing and services sectors, fell to 51.1 in December from 52.7 in November. This is the lowest level in four years.

The European Central Bank’s quantitative easing, zero and negative interest rate policy, has weakened the euro. The devaluation against the US dollar has helped exports and reduced the strain on economies. Despite that, economic performance is still poor.

“The slowdown in growth during December reflected lower activity in France. The Gilets Jaunes movement led to the first fall in economic output for two-and-a-half years,” said Chris Williamson, a senior business economist at IHS Markit. “Germany registered its weakest outturn for five-and-a-half years.”

“New orders received by manufacturers deteriorated by the greatest extent in over four years,” Mr Williamson continued. “New business for service providers rose modestly, so IHS Markit’s composite data showed the weakest growth in new work since the end of 2014”.

OECD Warning

The Organisation for Economic Cooperation and Development (OECD) recently downgraded its eurozone growth forecast from 1.9 per cent in 2018 to 1.8 percent in 2019 and 1.6 per cent in 2020. It contends that the European Central Bank should maintain an “accommodative monetary policy” to counter any further economic dips.

“An escalation of trade tensions could further undermine exports and investment,” the OECD warned. “Brexit is not a major macroeconomic risk for the euro area as a whole. But countries with the closest trade links to the UK could be severely impacted if there isn’t a negotiated agreement.”

German Economic Institute spells out the dangers of a “no deal” crash out.

“A ‘hard Brexit’ could cause considerably high costs on both sides of the Channel,” say the Institute’s economists. “In the short run, companies would be charged more than 15 billion euros ($17 billion) in tariffs. In the long run, UK-EU trade could fall by 50 per cent.”

“In the newly opened void, trade from across the Channel could be charged WTO tariffs and exposed to new non-tariff barriers,” the Institute maintains.

The EU could be “cut off completely from market access to many service exporters in the British financial and legal sectors”.

“In the face of this insecurity, businesses are starting to react. They are deciding to pull out of the British market and relocate plants to the continent.”

A no deal implies that EU won’t pay promised £39 billion to EU

Another risk to the EU is that the UK will only pay part of the agreed £39 billion ($50 bn) Brexit settlement if there is no deal. But tariffs charged on British products would somewhat compensate the EU for the loss of British contributions, contends the Institute. On the other hand, tariffs are likely to reduce trade and revenues.

The key example is German industry which would “suffer significantly, especially under a hard Brexit”. The manufacturing-intense regions in Germany face the highest Brexit exposure on the continent. Roughly 5 per cent of German gross domestic product (GDP) is directly or indirectly dependent on the UK, notes the Institute. British exposure to potential losses might be even higher, as some services-exports could lose all market access to the EU.

It follows then that a hard Brexit would be a lose-lose situation for both sides, especially for the UK and Germany, concludes the German Economic Institute.

© Copyright Neil Behrmann

This editorial was first published in The Business Times, Singapore.

Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.  See reviews of both books in:

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