Predictable Chaos – Europe Braces for the Effects of Brexit

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Hopes for a last minute deal between Britain and the EU are fading and both sides are now preparing for the consequences of an unregulated Brexit, including higher customs duties, long delays and greater uncertainties. There will be plenty of losers, but also some beneficiaries. By DER SPIEGEL Staff

It was only just a few days ago that it still seemed as though Britain and the European Union might be able to find an agreement that would prevent the UK’s unregulated exit from the EU. But following Prime Minister Boris Johnson’s speech at the recent Conservative party conference, an address that was not exactly well received in Brussels, the path toward a deal is rockier than ever. And once again, the scenario of a no-deal Brexit seems the most likely outcome, complete with the “chaos” and “catastrophe” that has been forecast for months.

For the economy, a no-deal Brexit primarily means that everything would become slower and more expensive. Customs duties would be imposed, border inspections introduced, supply chains destroyed and ownership stakes devalued.

Many questions remain unanswered when it comes to how the pound and stock markets might react on the day Britain crashes out of the EU. How much wealth, how many jobs might be lost? The true impact is impossible to predict.

It is clear, though, that Europeans would feel the impact of a no-deal Brexit: German customs officers and Irish farmers, auto-industry executives and trade-industry workers, diplomats and bankers. Most fear this day, but there are some who hope to profit from it.

The Transportation Manager

In Hoek van Holland, one of Rotterdam’s ferry ports, final preparations are under way. Soon, the Stena Hollandica, one of the biggest ferries in the world, will leave for Harwich, a town on England’s east coast.

A quarter of an hour before departure, the last truck drives across the ramp, completing a load of freighters that, if lined up end-to-end, would stretch for five-and-a-half kilometers. They are carrying fresh strawberries, tomatoes, lettuce and apples — easily perishable produce that must reach its destination on time. Every move counts. It takes exactly one minute and thirty seconds for a truck to be checked in for the crossing, a masterly feat of logistics.

A no-deal Brexit, though, would almost certainly slow things down.

Should it come to that, every load would have to be individually declared and inspected, which would take between six and 10 minutes per truck, at best, and would result in considerable delays and long traffic jams. Or, to put it in the more precise syntax of Marcel van der Vlugt, a Stena Line executive: “It would be a big problem for us and our customers.”

The Brexit Diplomat

Gregor Schusterschitz, 49, is Austria’s Brexit representative at the EU, and as a result, he has been at work non-stop since he was named to the position in March 2017.

He can still vividly remember his first meeting, when he discussed how the EU should prepare itself for a no-deal Brexit with his counterparts from other member states. “At first, with everyone expecting that a deal would be reached, nobody took it seriously,” he says. “But we got to work.”

Hundreds of meetings with member-state representatives were held. There were seminars and PowerPoint presentations, and there were working groups looking into the most complicated questions: What customs will apply on November 1 if the UK becomes a third country? How will the duties for companies be calculated? And will British workers who continue to live in the EU still be allowed to vote in local elections?

The European Commission has now released around 100 informational documents on its website and has initiated 19 laws — focusing on everything from landing rights for airplanes to labels for food products.

Brexit is a balancing act. On one hand, officials want to protect citizens and companies from the consequences of an unregulated exit as thoroughly as possible. On the other, the arrangements that result cannot replace the exit agreement, otherwise further negotiations would be unnecessary. Only one thing is clear, according to the diplomat: “A Brexit without a deal is the worst imaginable scenario.”

The Auto Manager

To this day, the Ford Fiesta is the most beloved car model in the United Kingdom. Many of the engines for the model come from the UK towns of Bridgend and Dagenham, but the cars are assembled in Cologne. Thousands of them are then exported back to the United Kingdom, Ford’s largest market in Europe.

It is a well-honed delivery symbiosis that has been optimized and adapted over the years. A no-deal Brexit could destroy it, with Ford potentially being forced to pay customs twice: about 4 percent for the import of the engines and then 10 percent for the export of the cars to the United Kingdom. The company would find it hard to pass the resulting rise in costs on to the consumers, says Gunnar Herrmann, head of Ford Germany. “For us as manufacturers, it would be fatal if demand in the United Kingdom was to collapse,” he says. “The workload in German factories would also be in danger.”

Herrmann’s worst-case scenario envisions a 25 percent plunge in sales numbers on the British Isles, a huge cut from the 400,000 cars currently sold there each year. Such a drop would have a profound effect on the job security of Ford’s 18,000 employees in Cologne and the same holds true for workers in the company’s plants in Britain. They could face shortened shifts and job cuts.

Other German carmakers are also dependent on the unimpeded movement of goods across the Channel. They deliver over 650,000 cars to the United Kingdom each year — more than twice as many as they ship to China, the biggest automobile market in the world. The reason: Unlike in China, where all big-name car brands have large factories, England has not played an important manufacturing role for quite some time. Most of the cars sold in the UK are built outside the country.

For months, car manufacturers have been working on plans to mitigate the direct consequences of an unregulated Brexit. But they are little more than emergency measures for a transitional period.

BMW, Jaguar Land Rover and Toyota have announced plans to temporarily close their British plants in early November in anticipation of the forced closure that parts shortages would trigger. BMW is also considering supplying its British plants by cargo plane if necessary, to circumvent freighter truck backups at the border.

Meanwhile, the ongoing uncertainty surrounding Brexit is causing growing frustration within the companies. In March, carmakers had already made significant preparations for the coming break, but then Brexit was pushed back. Now, the break is again approaching, and it seems that simply going through with it would be better than the constant doubt. “We can’t constantly be setting our contingency plan in motion and then suspending it again,” says Herrmann. “It’s time for political leaders to make a clear decision.”

The Dairy Farmer

Ruairi Cunningham learned a decade ago that milk, too, can be a powerful expression of patriotism. One of the dairy farmer’s competitors began to advertise with the claim that it only used milk from the Republic of Ireland — and the sales pitch “Farmed in the Republic of Ireland” became a thing.

“We get our milk from farms in both Northern Ireland and the Republic of Ireland and bring it to our plant in Northern Ireland. Back then, it was all processed into a single product, packaged and delivered to all of Ireland,” says Cunningham. “But the supermarkets we supplied asked us to separate the milk regionally, so we modified our facility and can now separate the Irish milk from the milk produced in Northern Ireland.”

If a hard border was to reappear, that decision would be a happy stroke of fate. If it weren’t for this modification, he estimates that 15 cents in customs would be imposed on every liter of milk his Northern Irish dairy sends back to the south. “We would be forced to close.”

With his modified facility, Cunningham can take a relatively sanguine view of Brexit: “If an EU product is only processed outside the EU and then delivered back, it remains an EU product.” In that case, only around 1 cent in customs would be imposed, he says. “We can live with that,” he says.

The Customs Officer

There is an old sign hanging in the office of Germany’s top customs officer reading “Zollgrenze,” or “customs border,” in capital letters. It is, or was, but a relic of Europe’s Balkanized past. But now Colette Hercher, the president of the General Directorate of Customs in Bonn, may be forced to deal with the reintroduction of an old border. In the case of a no-deal Brexit, the UK would be dealt with as a so-called “third country.” And if that happens, Hercher would suddenly have more work on her hands, because customs duties might once again be levied on many goods.

Germany is in a comfortable position compared to other EU member states in that it has no land border with the United Kingdom. Nor are there any direct ferry connections. Most of the goods traffic with the UK takes place by air or by sea.

To handle her new responsibilities, over 900 additional positions were approved for Hercher by the German Finance Ministry. One group of new trainees just finished their schooling in late August, just it time to pick up the slack should the need arise.

Hercher is expecting a “clear increase in the workload,” in particular at the Port of Hamburg and the airport in Leipzig, the country’s two largest cargo hubs. If there are too few agents onsite, customs officials from elsewhere can jump in to help out — and because they have the ability to process goods remotely, they won’t even need to leave their computer screens to do so. “Our IT program has been tested for the increase, and it works,” says Hercher. In other words: We’re ready for Brexit.

The Financial Manager

The champagne corks won’t be flying in Frankfurt at the end of October if Britain leaves the European Union as planned, even though the German financial capital has been one of the primary beneficiaries of American and Asian banks having to move their European headquarters to the Continent. According to a study by Helaba, a bank based in the state of Hesse where Frankfurt is located, 31 financial institutions from 14 different countries have already moved to Frankfurt, while only 11 have moved to Paris and even fewer to Dublin, Luxemburg or Amsterdam. A total of over 50 banks have applied for licenses to do business in Frankfurt with the German Federal Financial Supervisory Authority, with others still waiting to see whether Brexit will happen and what it will look like.

All of them, though, are prepared. “Most of the preparations were completed with an eye towards the original departure date in late March,” says Hubertus Väth, who leads the Frankfurt Main Finance initiative as a kind of Brexit lobbyist.

About 1,500 bankers who once had their offices in London are now working in Frankfurt. Most of them commute and live in furnished apartments during the week. Starting on November 1, a further 2,000 commuters may join them. There is plenty of office space, with countless new skyscrapers set to be finished in the coming years.

Nevertheless, not all of Frankfurt’s hopes have been fulfilled. The long-term impact on employment levels by the Brexit arrivals will be limited and the initial estimates of 10,000 new jobs for the city have proven overly optimistic. Helaba is now predicting an additional net influx of just 600 positions, in part due to the recently announced layoffs at Commerzbank and Deutsche Bank.

And even that number may be too high, for a reason that the Germans can only blame on themselves. Their application to host the European Banking Authority (EBA), previously headquartered in London, was so amateurish that the authority is now moving to Paris. Many are now concerned that the second oversight authority, the SSM, which has thus far been headquartered at the European Central Bank in Frankfurt, could also move to the French capital to be merged with the EBA. Indeed, the Germans themselves are adamant that the SSM should work separately from ECB.

Väth speaks of it in polite tones, but his anger shows through nonetheless: “We have remained below our potential,” he says.

The Businesswoman

The Kynast family’s electrical company from the community of Dermbach in the eastern German state of Thuringia has been operating in the United Kingdom for over a decade. The company produces junction boxes and switch cabinets that are delivered to the United Kingdom via the Eurotunnel and installed in supermarkets there. Luisa Kynast, 31, who runs the company together with her father, says that “high-quality production” is vital for their customers, “and that is what Germany offers.”

Still, a no-deal Brexit wouldn’t be a catastrophe for the company. While she expects the economic situation in the UK to worsen, she thinks her company could manage the downturn. Her British firm already only employs domestic electricians as subcontractors.

She says the bigger question is what role the United Kingdom will have in the future as a market for the company. On one hand, Kynast continues to count on the long-term partnership with her customers, but on the other, she says, “ultimately, it is the price” that matters.

The businesswoman is nevertheless not particularly concerned about her company’s future. If the British market falls away, she says, they will simply look around for new customers, for example in eastern or southern Europe. “Luckily there is currently still a construction boom going on,” she says. Kynast already supplies supermarket outlets in Bulgaria.

The Discount Store

Aldi’s latest weapon is two-meter-long sausage wrapped in bacon, twisted into a spiral. The company is hoping British customers will go crazy for it this Christmas season, and it seems to be working. The Sun described the sausage as “whopping” when Aldi presented it in September, while the Daily Mirror gushed that when stretched out, it was “the height of a basketball player.”

The contrast to British supermarkets could hardly be greater. Sainsbury’s, the British supermarket chain, is closing stores, while its competitor, Tesco, is cutting thousands of jobs. All are fearful of Brexit, of unemployment and rising prices, but the German discount chains are outdoing each other with good news for their British customers.

Aldi Süd has plans to open over 100 new outlets in the country, an investment of 1.1 billion euros in the next two years. By 2025, there are to be 1,200 Aldi stores in the UK, with many of them to open in the expensive London city center, long a taboo for discounters. Its competitor, Lidl, is planning to open 40 new stores in the capital, creating 1,500 new jobs.

Many British consumers will have to watch their wallets more than ever, because the British pound will likely lose significant value if the country leaves the EU. The consulting firm Oliver Wyman estimates that the rise in prices following an exit from the EU could cost each British household up to 1,000 euros per year. “It’s the time of the discounter,” says Kai Falk, the head of the German Retail Federation (HDE). “Insecurity always plays into the hands of the companies offering lower-priced products.”

The financial crisis initially paved the way for the discount stores to become established in the United Kingdom. Now, Brexit could make them huge. Even just importing European vegetables would become close to 20 percent more expensive, Oliver Wyman estimates. To maintain profits, markets would need to raise prices. But in a sector in which the German discount stores have already gained a 13 percent market share and are now planning their next offensives, that isn’t possible.

The problems afflicting the Brits could work to the advantage of not only the discount stores, but also German consumers. At least at the till. In an internal paper, the British government examined the potential ramifications of a no-deal Brexit and concluded that the inspections of imported goods could take up to two-and-a-half days. Fresh produce would then be stuck on the Continent and would have to be sold there. Falk says it could lead to “lower prices.”

The Sheep Farmer

Anyone who wants to understand the absurdity of Brexit should speak with 66-year-old Irishman Jude Mchugh. Half his life was spent under the shadow of conflict, with the border to Northern Ireland running just a few meters from his parents’ farm, a green border with sheep grazing on both sides of the hills of Swanlinbar.

Despite this idyll, Mchugh’s youth was marked by watchtowers, bomb attacks and dead or injured soldiers, by a battle for identity between supporters of the British province of Northern Ireland and the Republic of Ireland in the south. It sometimes resembled a civil war, and it lasted for almost 30 years.

It has been quiet now for about 20 years, ever since the peace deal was signed on Good Friday, 1998. The watch towers were removed and the border opened. “And now they are saying they will close the borders again,” says Mchugh. “But they can’t.”

The farmer climbs into his orange dredger, which he is using to widen the small border stream. The bulldozer’s shovel digs into the soil on the Northern Irish side, while its tracks and cab remain in the south. After the peace agreement, he built a small bridge over the stream. Mchugh smiles. “Am I supposed to tear it down again now?”

For years he has been farming land on both sides of the border and his sheep also go back and forth. “They aren’t particularly interested in nationalism” he says. Mchugh also has several cows, sheltered in a second facility behind the border in Northern Ireland. After a hard Brexit, those animals would no longer be EU animals and it would no longer make financial sense to deliver them to customers in the south because of the customs charges.

The Economist

Klaus Günter Deutsch likes to surround himself with things that evoke Britishness. There is a teapot on his desk, while an umbrella with a curved handle dangles by the bookshelf. On his wall are a handful of Economist covers focusing on Brexit, bearing headlines like: “The mother of all messes.”

In summing up the atmosphere in the German industry a few weeks before Brexit Day, the chief economist of the Federation of German Industries speaks of general uncertainty. As the leader of a Brexit task force, he spent months in discussions with hundreds of experts from companies and associations. He worked through laws and guidelines and wrote dozens of papers and pamphlets. If former Prime Minister Theresa May had succeeded in passing her agreement, he says, the problems would have been limited. In the case of a no-deal Brexit, however, he says, “many questions are unanswered.”

Thus far, only half of the thousand chemical substances the UK delivers to Europe have been registered. Nobody knows which authority is responsible for the approval of new components in the air- and space-travel sector. And then there’s the question of whether logistics companies in the UK and the EU have rented enough hangars to meet the new inspection needs.

The prediction that Brexit will shrink German economic performance by a half percentage point is mostly based on the predicted consequences of higher customs fees. In the case of a no-deal Brexit, though, there would be far more consequences and not all of them are clear: longer transportation times, for examples, more bureaucracy, and differing rules and standards. “The economic damage,” Deutsch says, “will be larger than many people expect.”

The economist describes a grim scenario. There are the immediate consequences of Brexit: the higher costs, the muddled legal situation, the longer trips, the currency turbulence. But then there are also the far-reaching political implications: the fact that the number of EU member states is shrinking for the first time, instead of growing; the triumph of populism over common sense; the defeat of the European idea. The common market, Deutsch says beseechingly, is a “success story.”

Now it is in danger, especially in the case of a hard Brexit. Prime Minister Johnson is not making any secret of his desire to turn the UK into a kind of offshore haven with lower taxes and more relaxed regulations. Great Britain, the slogan goes, is to become “Singapore on the Thames.” Deutsch argues that this vision might be the biggest threat of all to the future relationship between the UK and the EU. “It would poison the atmosphere.”

By Tim Bartz, Kristina Gnirke, Simon Hage, Nils Klawitter, Peter Müller, Christian Reiermann, Michael Sauga and Sebastian Späth

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