For Europe, the Threat of a No-Deal Brexit Comes at a Bad Time

0 0
Read Time6 Minute, 43 Second

LONDON — For a major economy, the best time to descend into befuddling uncertainty over the rules that govern trade is never. As the European Union now confronts the prospect that Britain may bolt its ranks without a deal, most likely triggering mayhem, this is an especially unfortunate moment.

Germany, Europe’s largest economy, is teetering toward recession as factory orders diminish. Italy is weakening in the face of tumultuous politics that have discouraged investment. The rest of Europe is still growing at a healthy clip, but Germany and Italy alone account for 40 percent of the annual economic output of the eurozone — the 19 countries that share the euro currency.

This is the backdrop as Prime Minister Boris Johnson of Britain intensifies preparations to yank his country from the European Union at the end of October absent a deal governing future relations.

The implications have been a source of anxiety for months on both sides of the English Channel — predictions of crippling traffic jams at ports, confusion over customs procedures, and a general state of business-disrupting bewilderment. Now, without an emergency intervention this week in the British Parliament, things are about to get very real.

For Europe, heading toward the Brexit cliffs in a diminished state was not supposed to be part of the plan.

Only two years ago, Europe’s economy was expanding more rapidly than at any time since the global financial crisis a decade before. European leaders assumed they could drive a hard bargain with Britain in negotiating the terms of their breakup. If Britain followed through on threats to walk away without a deal, trade would surely suffer, but Europe calculated it was strong enough to weather the resulting chaos.

“There was an idea that the European Union could withstand a hard Brexit, that it would be bad but manageable,” said Angel Talavera, senior eurozone economist at Oxford Economics, a research institution in London. “Now, there is an increasing concern that the eurozone is really weakening significantly, and that a hard Brexit could be the thing that would send it into recession.”

Not that Europe’s deepening economic troubles are likely to alter the political calculus in its standoff with Britain. Ever since the June 2016 referendum that set Brexit in motion, Europe has shown unwavering unity in its negotiations with its interlocutors across the channel. After three years of fierce politicking in London without any semblance of clarity on a national Brexit position, a recession will not prompt the Europeans to go soft and submit to British demands, analysts said.

“It’s actually the opposite,” said Christian Odendahl, Berlin-based chief economist at the Center for European Reform, a research institution. “There has been a slight hardening, a tendency among Germans to say, ‘Let’s at least end this uncertainty and let the Brits go their own way.’”

European leaders have refused to gratify demands from London to make changes to a deal struck last November with former Prime Minister Theresa May. That arrangement would have ended Britain’s participation in Europe’s single marketplace while still making the country subject to key European laws.

In Britain, the deal came with something for everyone to detest. Those against Brexit portrayed it as historically retrogressive, taking the country out of the collective European project while imperiling access to the European marketplace — the destination for nearly half of the nation’s exports. Those in favor of Brexit assailed the deal as a humiliating affront on British sovereignty.

Mr. Johnson took office promising to force the Europeans to reopen negotiations, especially on his biggest bone of contention, the so-called Irish backstop, which could keep Britain in a customs union with Europe to prevent turmoil between the two Irelands. That provision was crafted to avoid the reimposition of a hard border separating Northern Ireland — part of the United Kingdom — from the independent country to the south, the Republic of Ireland, a member of the European Union.

ImageGermany, Europe’s largest economy, is teetering toward a recession as factory orders diminish. Here, workers at a BMW plant in Leipzig assemble hybrid cars.
CreditSean Gallup/Getty Images

European leaders have steadfastly refused to reopen the deal. They insist that the backstop is needed to ensure that Ireland is not physically divided anew, a step that could reinvigorate the lethal divisions that prevailed before the signing of a peace agreement two decades ago.

But Mr. Johnson has warned that if he cannot wrest some change, he will allow the Oct. 31 deadline to pass with his country crashing out of the European Union.

Last week, that deadline came into sharper focus as Mr. Johnson, in a surprise move, secured an order from the Queen that effectively puts parliament out of commission for five weeks, limiting opportunities for his opponents to use legislation to thwart his designs.

Troubles in the global economy have rendered Europe increasingly vulnerable to the consequences of a no-deal outcome.

The slowdown in Germany is in part the result of factors challenging the auto industry, which lies at the center of its economy. Around the world, automakers face pressure to invest vast sums of money in pursuit of new technologies that limit emissions, even as demand for electric and autonomous-driving vehicles remains uncertain.

Germany’s declining prospects also stem from President Trump’s trade war against China. Germany has shipped enormous volumes of factory machinery to China in recent decades, contributing to its breakneck development. American tariffs have added to a slowdown in China, shrinking its appetite for German wares.

Italy has suffered an increase in borrowing costs as its political leaders have squabbled, bringing in a new government — a potentially fragile amalgam of the center-left Democratic Party and the unorthodox populists of the Five Star Movement.

In the run-up to the Brexit referendum, those who campaigned to leave Europe swore that economic concerns would eventually force European leaders to assent to British demands for a favorable deal. After the requisite statements about principles and rules, the theory went, the German auto industry would grow worried about risks to its lucrative sales in Britain and pressure European leaders to compromise.

But that never happened. For the 27 jilted members of the European Union, Brexit presented existential worries that other countries might be inspired to head for the exits. Since then, Brexit has become a rallying force, the one issue on which Europe’s members can summon agreement.

“Brexit is something of a team-building exercise for the E.U.,” said Mujtaba Rahman, managing director for the Eurasia Group, a risk consultancy based in London. “There’s so much division in so many other areas — what to do about China, how to deal with Trump, the provisions underpinning the euro area. They need Brexit as an exercise in keeping them united. It’s something that makes the union feel better about itself.”

Not least, say European leaders, their union has made its members wealthier and less likely to wind up in a war. In their telling, Britain has used Brexit to try to freeload, threatening the virtues of the bloc for all. It has sought to keep the perks of being in the union — unimpeded access to a marketplace of 500 million consumers — without the attendant responsibilities.

For the market to maintain its value, the rules must be defended. This is the logic that appears to carry the day in European capitals and European boardrooms alike.

This is why a fear of recession does not appear to be generating pressure on European leaders in this Brexit battle. If the cost of fending off a no-deal Brexit is undermining the rules in the European marketplace, that is not a cost the members are willing to pay.

“In the E.U. position, there is a tremendous amount of economic self-interest,” said Mr. Rahman. “It’s about protecting the functionality and integrity of the single market. The E.U. is willing to accept a short-term economic shock in order to protect its long term economic interest.”