Germany dismisses protectionist Brexit threats

German politicians have rebuked British Chancellor of the Exchequer Philip Hammond for implying that the UK might lower corporation taxes and raise tariffs to offset the effects of a hard Brexit from the European Union.

"If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short term," Hammond told the German newspaper "Welt am Sonntag." "In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do."

Immediate reactions in Berlin were either withering or nonplussed. "Britain's two big economic weaknesses are the considerable trade deficit and the large budget deficit," the conservative MP Norbert Röttgen told "Die Welt" newspaper. "That's why Hammond's threats with tariffs and tax reductions are threats of self-harm, and as such expressions of British helplessness."

Alexander Graf Lambsdorff, a member of the European Parliament representing Germany's free trade-friendly Free Democratic Party, was equally dismissive: "Hammond obviously wants to impress Brussels with a horror scenario right at the beginning of the negotiation process. We intend to calmly ignore it," he said. "It would make more sense if Britain would finally put a coherent concept on the table of how it sees future relations."

Meanwhile Markus Ferber, MEP for the conservative Christian Social Union (CSU), pointedly reminded Hammond that both the G7 and the Organization for Economic Co-operation and Development (OECD), which Britain has not yet voted to leave, have clear rules on taxing corporations.

Fear and caution

There was similar consternation from German economists. Jürgen Matthes, head of the international economics team at the Cologne Institute for Economic Research (IWK), was unsure how seriously Germany should take Hammond's threat.

"Britain will likely suffer economically from the consequences of a hard Brexit," he told DW. "The question is to what extent the British can afford to lower their taxes, because their budget deficit is already relatively high."

There are a number of uncertainties to iron out, as Matthes points out: The British government's capacity to lower taxes will depend on how well the country's economy will develop in the next few years, which in turn will depend on how hard the consequences of Brexit turn out to be.

On the other hand, Britain would certainly not be alone among European countries with lower corporation taxes. "But, given that Britain isn't necessarily in a position of strength in the Brexit negotiations, the question is whether it's such a clever negotiation strategy to just threaten the other side with something that they don't want at all," said Matthes. "The statements from Brussels and Berlin so far have suggested that they want to talk fairly and constructively with the UK, but want to prevent cherry-picking to avoid bandwagon effects."

"There could be room for constructive compromises which would be beneficial for both sides," Matthes said. An IW Köln study has shown that free access to each other's industrial goods markets - i.e., for UK firms, export products would not need additional testing in the EU - could involve concessions that the British government might be able to deliver, particularly regarding the continued harmonizing of product standards.

But, because the EU has a much larger market to offer than the UK, the bloc would have to agree to such a valuable market access concession. "If the EU is threatened with a tax dumping strategy, which erodes the level playing field in industrial products, free access to the EU's industrial goods market is likely to prove elusive," Matthes said.

Lingering fears in Germany

There was some concern about Hammond's rhetoric in Berlin. Volker Treier, deputy director of the Association of German Chambers of Commerce and Industry (DIHK), was no longer holding out much hope for a "soft" Brexit. "And, of course, if it will be a hard Brexit, the UK will have to do something to increase its competitiveness," he told DW.

The UK is well-aware that some of its key economic sectors - for example, financial services - will be under threat, and, as Treier pointed out, German companies are more dependent on open markets than those in other economies.

But Treier was keen to draw a distinction between protecting domestic markets and making markets more attractive - introducing tariffs is not necessarily the same as lowering corporate taxes. "The latter is less harmful for the development of Europe and other regions worldwide than the former," he said. "The first would be another brick in what German companies are experiencing right now: growing protectionism."

The DIHK has noticed this trend in a series of surveys of German companies over the past few years. "It started in the emerging markets a few years ago, since the financial market crisis," he said. "Now we have this trend in industrialized countries as well. The rhetoric of the president-elect (of the US, Donald Trump) shows that industrial markets are trying to copy what some emerging markets have introduced. And the UK would be another brick in that."

This, as far as Treier is concerned, will only leave normal households worse off, because history has shown that protectionism damages competition in domestic markets, while increasing costs caused by tariffs get passed onto consumers.