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Why a 'Hard Brexit' Is Good News For France And Germany

Why a Hard Brexit Is Good News For France And GermanyAfter the recent destabilising UK General Election, the Conservative government’s Brexit negotiator David Davies had to enter talks with the EU on the back foot. The government’s intention to call the snap election - to strengthen its hand with an increased mandate - backfired catastrophically, with the ruling Conservative Party losing seats. So instead of drawing an ace or two, Davies ended up with a joker.

However, the Tories’ loss was expected by some to be the UK’s gain. All analysis pointed towards dire consequences for what has been termed a ‘hard Brexit’. In Layman’s terms, this means withdrawing from the Single Market (territorial sovereignty) and jurisdiction of the European Court of Justice (legal sovereignty). The UK could end free movement and stop answering to EU courts, but only if it also lost valuable ties in other areas, such as trade.

While the election vote would throw doubt on negotiations in the short term, Labour’s strong showing was predicted to force concessions, particularly on the nature of Brexit. The public had seemingly rejected the current approach, and a ‘soft Brexit’ rethink was in order. However, PM Theresa May’s ‘keep calm and carry’ on approach since her narrow election win has astounded many, and points to little ground being ceded in negotiations.

Tough talking

This has been borne out in the early stages, with an impasse emerging between May’s protectionist rhetoric and the realities of dealing with millions of expats, both in and outside the UK. While the power-sharing deal with the DUP in Westminster remains a tenuous one, the situation is stable enough that the Conservative government intends to press on with the same leader and policies. A hard Brexit now seems the most likely end-game for Brexit negotiations.

This has always been a distinct possibility for those reading the political sentiment in the UK. There was perhaps a hope that politicians would temper the mood of the public, and better explain the impact of a hard Brexit on the UK economy. But like the referendum campaign itself, efforts to do this have been muted or subsumed by more passionate arguments for leaving.

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Leave voters are perceived to have done so largely on the assumption that immigration would be reduced, and total Parliamentary sovereignty would be regained; these would necessitate a hard Brexit. Even Remain voters have now broadly resigned themselves to Brexit occurring.

Even away from Theresa May, Conservative politicians have been bullish. Foreign Secretary Boris Johnson, who supported Brexit but briefly challenged May for the party leadership, has stated that EU demands for a divorce settlement are ‘extortionate’ and that the EU should ‘go whistle’, while proclaiming that there is no contingency for a ‘no deal’ scenario. Meanwhile hopes of new trade arrangements have boosted economic spirits, with Donald Trump and Australian PM Malcolm Turnbull talking favourably about speedily assembled trade deals.

Plan Brexit

As a result, businesses who had long since concocted worst case scenario plans for Brexit are beginning to put them into action. The CEOs of JPMorgan and HSBC were both recently keynote speakers at an annual banking conference in Paris, and both spoke of their plans to move staff from London. HSBC have openly stated that 1000 staff will move to Paris in the instance of a hard Brexit, while JPMorgan are exploring several new European bases, including Paris and Frankfurt.

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This is obviously harmful to London, which generates 30% of total UK tax revenue, and has more financial institutions than any other city in the world. But its banks and insurers will not be the only business affected. Manufacturers will face as much as 10% in additional WTO tariffs, while both low skilled and high skilled industries could suffer with more limited access to EU labour, data sharing, and funding through schemes like Horizon 2020 and Creative Europe.

Agriculture and food manufacturing, for instance, rely on migrant labour for around 30% of their workforce, and would suffer from tariffs on any imported produce. On the other end of the spectrum, UK/EU film co-productions may be lost entirely. Meanwhile almost 6 in 10 of the UK’s 2000 video game developers and publishers - responsible for the likes of 80 million selling crime romp Grand Theft Auto V - have European staff, with EU hires representing a third of those studios’ staff on average. 40% of all studios surveyed by industry body Ukie are considering relocating after Brexit.

The broader tech industry faces similar hurdles. London’s Tech City UK has faced the problem of rising rent and living costs, with startups proliferating around the city. Plans are in place to help startups in the north of England, with the Tech North initiative and building of the HS2 train line. But the low value of the Pound has so far driven as many buyouts as investments, with the likes of ARM Holdings being bought for £25 billion. And the uncertainty around Brexit could couple with skyrocketing seed investment in France, and the rise of startup hubs in Paris and Berlin (Station F and Silicon Allee, respectively).

Opportunity knocks

What this represents for the latter two countries - and their respective business interests - is a major opportunity. There can be no doubt that the UK leaving is not ideal, and will represent a financial shock in the short term. It will also be a loss of political capital on key European issues, at least for Germany. In Emmanuel Macron however, France has a leader ready-made and waiting to court financial interests, as well as stepping into the political void left by Brexit.

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Macron famously worked as an investment banker before his foray into politics. However, he is also well aware of the potential of the digital economy thanks to his time as Minister of the Economy, Industry and Digital Affairs, and as a champion of the La French Tech initiative.

Germany meanwhile is stable, and in a position to take the hit from Brexit while planning for future growth. Angela Merkel is favourite to win re-election this year, and her CDU Party is well aware of the need to supplement Germany’s manufacturing industry with software expertise. Both countries are likely to enact further business friendly reforms, designed to make it easier for financial companies and startups to make the switch.

It is still very early in the Brexit process, and there remain some shreds of optimism for the UK. But few would claim that the Brexit path it is currently on is a profitable one, even if it establishes certain freedoms that are deemed worthwhile. It only remains to be seen how many businesses stick it out in the world’s 5th largest economy, and how many opt to move to the 4th and 6th.

If you want to open your company in France, start a business in Germany or take advantage of any post-Brexit opportunities in the UK, you can call us on 0033 (0) 1 53 57 49 10 or email us via our contact page and we'll be happy to help.

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