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EU business strategies and Brexit: Balancing proximity with politics

As Article 50 is ‘triggered’ business groups within EU member states are caught in a dilemma between proximity and politics: how to minimise trade barriers with the UK whilst maintaining the Single Market

Scott Lavery, SPERI Research Fellow

Scott LaveryPowerful firms and business interest groups within the EU are likely to have a significant influence over the shape of the Article 50 negotiations. Despite this, there have been few attempts to ‘map’ the strategic positioning of EU businesses in relation to the politics of Brexit.

In a new SPERI project, along with other researchers, I analysed business views on Brexit within three EU member states – Germany, France and Ireland – between June 2016 (the referendum) and March 2017 (the Article 50 ‘trigger’). The research drew on over 150 German, French and English language strategy documents, policy papers and press releases.  These are brought together in two forthcoming SPERI Global Political Economy Briefs.  In what follows, I outline some of the main themes which emerge from our first Brief, EU Business Views on Brexit: Politics, Trade and Article 50, focussing in particular on the relation between German business and Brexit.

Sectoral Exposure to Brexit

Which sectors across EU member states are most ‘exposed’ to UK withdrawal and how have business interest groups within these sectors positioned themselves in relation to Brexit? In the Brief, we identify the top five sectors across Germany, France and Ireland which export most to the UK.  In the German case, outlined below, the automotive sector has the highest value of exports to the UK.  11.9 per cent of the sector’s exports – worth €27.1 billion in 2016 – end up in the UK.

These export-oriented sectors are exposed to a worsening in the terms of trade with the UK in the aftermath of Brexit. This exposure has translated into concern amongst German business actors within these sectors about the possible trade implications of Brexit.

For example, in January 2017, Matthias Wissmann, head of the association of German car manufacturers, said, ‘of course Great Britain is a cause of concern for us…there is no country that we export more cars to than the UK…besides we have production facilities in the UK. So we are very strongly interconnected.’ The German pharmaceuticals industry has expressed similar concerns.  Lobby group Pharma-Fakten noted in January 2017, that ‘between 2011 and 2015 the volume of German pharma-exports to the UK has almost quadrupled. In the list of export destinations the UK has gone from seventh to third place.’

The exposure of EU export sectors to a worsening in the terms of trade with the UK has been underlined by the recent devaluation of Sterling, which has raised the cost to UK firms and households of importing euro-denominated goods and services. For example, German automotive exports to the UK in late 2016 fell by 7.1 per cent relative to the same period in 2015.  At the same time, overall German exports grew at 0.8 per cent.  In other words, the impact of the ‘Brexit’ vote has already begun to negatively impact on German exports to the UK.  The prospect of a further worsening in the terms of trade – in the form of increased tariff and non-tariff barriers –is an ongoing concern for German export sectors.

It is not only German firms in export-oriented industries that are concerned about Brexit. ‘Peak’ employer organisations – interest groups that represent firms from across a number of sectors – have emphasised the importance of ensuring that trade barriers with the UK are kept as minimal as possible.  For example, a policy paper presented by the Association of German Chambers of Commerce and Industry in January 2017 stated that, ‘the Brexit-negotiations…need to… [keep] EU-UK-relations as firm and as close to the status quo as possible.’

Powerful business interest groups within Germany therefore acknowledge that a contraction in trade with the UK would be harmful to their interests. These groups have a powerful incentive to push for proximity with the UK as the Article 50 process unfolds and trade arrangements are subsequently negotiated.  However, important counter-veiling pressures militate against EU businesses pushing for unfettered UK access to the Single Market.

The politics of EU business strategy: Minimise trade barriers, protect the Single Market

Business interest groups within the EU are forced to balance their preference for continued proximity with the UK with the recognition that a post-Brexit trade deal should not compromise the integrity of the Single Market.  In particular, EU businesses state that any compromise on the fundamental four ‘freedoms’ of the Single Market – the free movement of goods, services, labour and capital – would be unacceptable.

This dilemma is illustrated starkly by Volker Treier, foreign business director for the Association of German Chambers of Commerce. Treier states, ‘German business has a great interest in the UK coming out of Brexit undamaged…it would be in Germany’s interest to make concessions to the UK, so that our business can continue operating there at advantageous conditions.’ However, he goes on, ‘we have to be careful about the fact that the European common market maintains its integrity. This goal is far more important. It welds German business together.’

One key concern of EU business groups highlighted in our research is that if the UK is granted ‘special treatment’ – for example if it is granted concessions on freedom of movement – this could lead other EU member states to agitate for further reform. In turn, this could threaten the integrity of the Single Market and even EU integration itself.

There is a tension, then, between the short-term interests of German businesses to manage the negative trade effects posed by Brexit and its longer-term objective to protect the continued functioning and integrity of the Single Market. German exports as a proportion of GDP have increased markedly in recent years and intra-EU trade remains central to this export-led strategy.  Similarly, faced with labour market shortages, demographic pressures and worried by wage inflation, German businesses have powerful incentives to protect free movement in order to ensure continued access to migrant labour. The longer-term objective of protecting the rules and integrity of the Single Market is therefore likely to trump any short-term pain which might be associated with Brexit.

In this regard, Angela Merkel’s call, issued in January 2017, for German business to present a ‘unified front’ on Brexit represented an attempt to cultivate a sense of shared responsibility amongst the German business community. The Chancellor’s invocation represented a warning to business not to be tempted into accepting compromises that could threaten European integration.  Based on the business strategy documents we reviewed, German business has thus far heeded this call.  German business is not only sensitive to its short-term ‘bottom line’.  It is acutely aware that Brexit is an inherently political process capable of destabilising the wider project of European integration within which it is embedded and from which it so clearly benefits.

Within the UK, the position of other EU member states is often characterised as revolving around a conflict between political and economic actors. According to this narrative, whilst EU politicians may agitate to ‘punish’ the UK, EU businesses will push for a comprehensive trade deal on the grounds that this is in their long-term interests.  For those who support Brexit, it is often asserted that the ‘pro-trade’ and ‘common sense’ orientation of EU firms will ultimately prevail.

Our analysis suggests this narrative is too simplistic. Both the German Chancellor and German business have strong incentives to protect the integrity of the Single Market.  Between the attraction of maintaining ‘proximity’ with the UK and the politics of protecting the integrity of the Single Market, it is likely that the latter will prevail.  Ultimately, protecting the integrity of the Single Market may have some negative trade effects for exposed export sectors within Germany and across other EU member states; but the negative impact on the UK economy and polity is likely to be far more severe.

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The research for the project Understanding EU Business Views on Brexit was carried out by Scott Lavery, Adam Barber, Sean McDaniel and Davide Schmid.

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