Brexit blow: German economist warns no deal now likely as UK’s ‘appreciation for EU low’

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Negotiations on trade and the future relationship following the end of the transition period on December 31 have been ongoing for more than four months. Both sides have warned any deal needs to be agreed over the coming weeks as it would need to be signed off by EU member states and ratified by the European Parliament in October. But post-Brexit trade talks have hit a stalemate, with UK and EU negotiators blaming each other for the lack of progress being made and the stubborn stances taken by each on several crucial red lines.

One of the most prominent sticking points is financial services, with the UK demanding businesses in the City of London have access to EU markets after Brexit – something Brussels is refusing to give ground on.

Dorothea Schäfer, research director of financial markets at the German Institute for Economic Research (DIW Berlin), believes the continued impasse means a no deal outcome is most likely, and has pointed the finger of blame at UK negotiators.

When asked by German news website if it is still possible to agree a post-Brexit trade deal, she replied: “I don’t expect it.

“The British Government is still very much focused on the needs of Central England, i.e. England without the financial centre of London.

“The appreciation for the EU remains low.”

Ms Schäfer lashed out at Boris Johnson and his Government, accusing them of trying to return to “Old England” in the 19th century, warning in terms of industrial jobs, the UK has now fallen a long way behind the likes of economic powerhouse Germany.

She said: “Boris Johnson promises a ‘new deal’. The British Government appears to be pursuing the idea of trying to create new industrial jobs with a lot of money.

“They want to return to old England, which matured as a result of industrialisation.

“Great Britain actually left its industry very early and turned to financial services. But now there is growing awareness that the countries that still have industrial jobs are doing better. Like Germany.”

The leading economist also claimed the UK has a “chronic trade deficit” and the bigger this gets, the more chance there is of money being withdrawn from the country.

She warned Brexit magnifies this risk as London’s financial centre is “weakened”, warning this could plummet by around 30 percent in the three years following Brexit.

Ms Schäfer said: “It is not entirely wrong that the British can develop innovative industries with a lot of money. After all, they have very good universities.

“Many Germans would think: If the British state prints money constantly, there will soon be a dangerous inflation.

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“This is not to be expected. Uncontrollable hyperinflation actually only arises after wars – so when there is a lot of money on the move, but the goods are missing.

“This is not the case now. There are enough goods in the UK.

“In the UK, many of these goods come from abroad. The country has a chronic trade deficit.

She added: “The UK deficits are not a problem as long as foreign investors lend. But the bigger the deficit gets, the more there is a risk that speculative attacks will occur and money will suddenly be withdrawn from the UK.

“With Brexit, this risk increases because the financial centre of London is weakened.

“So far, financial services have always produced a surplus, which has then financed the deficits in foreign trade

Explaining why she believes London’s financial market would not suffer an immediate blow, Ms Schäfer said: “This process should take about three years.

“At the beginning there will be transitional rules, because it would be far too dangerous if the financial centre of London were suddenly disconnected.

“The British central bank has already announced that it will not change the regulation for the time being. In the beginning, the rules of the European single market will still apply in London.”

But the German economist said the UK Government wants to set its own standards, and warned: “This is precisely why London can no longer handle financial transactions for Europeans in the medium term.

“The lucrative business with derivatives will also move to the continent, the so-called “euro clearing”.

Additional reporting by Monika Pallenberg.

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