The British have achieved important goals. Nevertheless, their financial sector will shrink by 30 percent, economist Dorothea Schafer expects.
Queues of trucks in Dover – and yet the outlook for the British is sunny Photo: Peter Cziborra/ reuters
site: Ms. Schafer, are you surprised that there is a trade deal between the EU and Britain?
Dorothea Schafer: Yes. I had expected a no deal. The swing by Prime Minister Johnson can probably be explained by the fact that there were truck jams before Dover because the French had closed their border because of the new Covid variant. With a hard Brexit, the traffic jams would have been even longer.
Dorothea Schafer is Research Director in the Macroeconomics Department at the German Institute for Economic Research (DIW) in Berlin.
The British say they have prevailed in 43 percent of the disputes, the EU only in 17 percent. Is that true?
The British have indeed achieved important goals. They can effectively remain in the single market, but no longer have to pay anything for it. They save about 6.8 billion euros net annually.
Are there no disadvantages for the British?
One problem will be that they leave the customs union. Although the new trade agreement stipulates that there will be no customs duties, customs forms will still be required. That’s a lot of red tape for British exporters.
Switzerland is not in the customs union either and lives splendidly with it.
But Switzerland adopts all the important rules of the EU – which reduces bureaucracy extremely. The British, on the other hand, insist on making their own laws in the future.
The EU was panic-stricken that the British might engage in dumping to gain competitive advantages. Has this danger been averted?
I don’t think there will be any real dumping. But since the British want to deviate from the EU rules, there will be constant haggling about what meets the agreed standards – and what does not. New commissions will be needed constantly; it will be an unbelievable bureaucracy.
Fishing rights were a major issue of contention. The compromise is valid for 5 ½ years. What happens after that?
The British are vulnerable to blackmail: they export 80 percent of their fish catch to the EU. So the Europeans can always threaten with tariffs and quotas if their fishing fleets are denied access to British waters in the future.
The new treaty only covers trade in goods. Services are not covered. What does this mean for London as a financial center?
Many British banks have already established subsidiaries in the EU. They have relocated assets – and also some of their employees. Because the ECB has made it clear that it is not enough to just establish "shells" on the continent.
But in London, the financial sector is almost not shrinking at all so far.
This is due to the transition periods. The EU has agreed that derivatives clearing, i.e., the settlement of betting transactions, can remain in London until mid-2022. But in the long term, the British financial sector is likely to shrink by 30 percent. It will be difficult for the British.
Until now, the British have financed their imports in part by exporting the financial services of their banks. What will become of this business model?
The British will import as before. But in the absence of exports, they will borrow more abroad. This can be done effortlessly, because the pound is a recognized currency. However, the value of the pound could fall.
Brexit supporters argue that British exports will then increase.
It is true that British goods become cheaper on the world market when the pound falls. But the British have little to export. Industry accounts for 13 percent of economic output. A falling pound would mean inflation above all, because imports would become more expensive.
Will the British become poorer?
No. But their growth will be weaker than if they had remained in the EU.