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German Self-Interest Suggests Quick, Penalty-Free Brexit Deal

German Self-Interest Suggests Quick, Penalty-Free Brexit Deal.

“Berlin is no fool and aware of its own very material interest in Brexit”

    Britain’s car market is so important to manufacturers like BMW, Mercedes, and Volkswagen that Germany is likely to insist that negotiations on the terms of U.K.’s exit from the European Union are benign, trouble-free and concluded quickly.

    That’s the view of investment researcher Evercore ISI in a report entitled “Germany needs Autos, German Autos need UK/Europe”.

    Since Britons voted June 23 to leave the E.U., panic has spread amongst investors and business in general and the automotive industry in particular. They fear the European Union will seek harsh terms when Britain seeks a new free trade deal to punish it for its impudence, and to deter other countries which may be thinking about leaving too.

    High officials at the Brussels-based E.U., like European Commission President Jean-Claude Juncker, have been sounding aggressive and unaccommodating about Brexit negotiations. E.U. officials might want to deny Britain a good deal because their careers will founder if plans for ever increasing union are compromised. National government officials however, are likely to be more concerned with negotiating a deal which will benefit their citizens and auto manufacturers. A timetable for talks has not been established, and incoming British Prime Minister Theresa May has said she doesn’t wasn’t to rush into negotiations.     

    Evercore ISI analyst Arndt Ellinghorst said Germany is highly dependent on the auto industry, and because of this hopes for a rational dialogue with Britain.

    More forgiving
    “We understand why Berlin’s post-Brexit language has been more forgiving than some European peers, especially those from Brussels. Berlin is no fool and aware of its own very material interest in Brexit. Berlin needs to make sure that a rational, constructive and above all economic stance is taken when dealing with the aftermath of the U.K.’s vote,” Ellinghorst said.

    “Materially weaker E.U. end-markets as a result of a Brexit-triggered E.U. slowdown and or even worse, a breakup of the single currency would have a devastating impact on the German Auto industry and hence, Germany,” Ellinghorst said.

    He said Germany’s auto industry will be at risk if Germany doesn’t support a rational deal which looks to preserve Europe’s existing economic relationship with Britain.

    “And if Germany’s auto industry is at risk, then so too is much of the economic and social progress made over the course of the last twenty years. While not political commentators, we question the value of placing economic prosperity at risk because one country wishes to step away from the European Union,” Ellinghorst said.

    Meanwhile industry forecaster LMC Automotive published its latest thoughts on the implications of Brexit for the local automotive industry. The loss of car sales in Britain will be more than 400,000 by 2018, but given that 90% are imports most of the impact will be felt outside Britain. It calls the impact on European production noticeable not disastrous. 300,000 of the lost sales will come from within the E.U, with Germany the biggest loser at about 100,000.

    Relatively strong
    Tata of India’s JLR, Honda of Japan and Ford Motor have relatively strong exposure to the British market, while JLR and Honda may gain because of their local manufacturing. Ford Motor doesn’t make vehicles in Britain.

    LMC Automotive said if what it calls a “Hard Brexit” is negotiated, with a 10% tariff on cars traded between the E.U. and Britain, manufacturers may eventually switch production from the U.K. It rated General Motors’ Vauxhall plant as the most vulnerable, with Honda, JLR, Nissan and Toyota rated as low to medium risk of moving. BMW’s Mini facility was rated “low” risk.   

    LMC Automotive said because of Brexit, it predicts U.K economic growth will slow with a recession increasingly likely. 

    Evercore ISI’s Ellinghorst said Germany has been one of the biggest beneficiaries of the common market and the Euro, not least because it has been able to price its products lower in the single currency than it could with the old deutschmark. According to Ellinghorst, the German auto industry is Germany’s largest employer with 800,000 direct employees. The auto industry generates 20% of Germany’s industrial revenue and around 13% of Germany’s GDP. Britain is Germany’s biggest vehicle export destination, with 809,000 in 2015 compared with the U.S. at 619,000 and China’s 205,000.

    “A strong and open U.K. economy with a political leadership committed to international trade is important for Germany. What’s true for the Germans is also true for the rest of the European Auto industry and all international vehicle and component manufacturers,” Ellinghorst said. 

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