The march towards Brexit continues. Finally, the Article 50
Bill has been presented to Parliament. What better time to consider
perspectives from the EU on what Brexit might mean?

With the Article 50 Bill timescale, in theory at least,
Theresa May should be in a position to invoke Article 50 itself during the EU
Council meeting on 9th March in Malta. There will certainly be
cause for reflection amongst EU ministers.

It is worth taking a moment to consider what exactly the EU
is. The highest priority from the Remain side is that the EU is a Single
European Market (SEM), a free trade area for its member states.

A reverse perspective from outside the EU is that it is a
customs union. Barriers to trade may or may not exist among EU members but for
the rest of the world, the SEM is a market to which access faces barriers. The
customs union also includes countries such as Turkey who have yet to become full
EU members.

To many Leave voters and campaigners, the EU is a political
union between 28, soon to be 27 countries. Among those, 14 are also involved in
currency union with fiscal restraint in order to harmonise their economies and
provide currency stability. In practical terms, this benefits some more than
others, more of which later.

On 31st January 2017 the President of the
European Council, Donald Tusk, has written to ministers. His letter can be seen
here.
Tusk is one of five EU presidents who collectively produce reports on the
direction of travel, the 2016 report can be found here.

In short, these views can be seen a representative of the EU
establishment. They are committed to ever deeper union and integration. This
amounts to further convergence, fiscally, economically and in strengthening
institutions.

To that end, Brexit represents a political threat. Tusk has
identified what he calls “xenophobic sentiment” and “national egoism” as
challenges within Europe. In short, democracy
and the will of the people is secondary to maintaining and deepening the power
of the institutions.

On top of the political threat, the EU administration faces
a cut in its budget to the extent of a net £8billion (and growing) per year.
This figure represents around 14% of net contributions. Brexit means that money
will have to be found from elsewhere or that expenditure, with the power that
brings, being diluted.

The EU administration is faced with the dilemma of doing a
deal that respects democracy at the risk of other members being incentivised to
leave or punishes Britain.
The question remains, who would be punished more?

The EU is however still a collection of 27 nations, for the
time being at least. It is remembered that even though its supporters see the
EU as a valuable single market, those 27 states will have different views of
what Brexit means. To explore those, let us start with relative trade
positions.

The above table represents the balance of trade, whether EU
members are in surplus or deficit with the UK.

Top of the list is Germany with a surplus in excess of
£25 billion annually. Their current strength is in full view of those who use Britain’s
roads. Germany is the
leading car exporter globally at almost twice the value of second in line, Japan and three times the value of USA in third.

To give more background, the UK
accounts for 20% of Germany’s
car exports. The car industry accounts for 12% of Germany’s total output.

A new German government would certainly be opposed to any
sort of deal that damages her own interests. Failure to strike a deal
potentially leads to the fall back position of WTO rules. That means of course
that British car exports to Germany
may face tariffs, in the order of 10%.

Reciprocally, tariffs might be imposed on one of the German
car industry’s key export markets. Whilst the SMMT assert this will increase
the price of cars by £1,500, there is also the distinct possibility that
British consumers shift their buying patterns to those vehicles produced here.
Will company car fleets shift from Mercedes or BMW to Jaguar?

There are further threats to Germany. If bilateral free trade
deals are struck between Britain
and other partners, Japan
and the USA,
German competitiveness is further diluted by those exporters into British
markets as well as British vehicles into American markets.

There is a solution for the car manufacturing companies.
German producers, as well as those owned by external investors such as Ford and
General Motors can relocate production elsewhere, even back to the UK.

A summary of Brexit for the German economy is that loss in
demand from the UK
can mean the difference between modest economic growth and recession. Extra
competition in markets where bilateral deals are made and disinvestment can
lead to depression.

The same principle can be applied to those other countries
with significant trade surpluses with Britain,
imported cars coming from 7 of the top 8 EU countries which have a surplus with
the UK.
The exception is Poland
which provides components across Europe. Poland’s main export to the UK is consumer goods, including
shoes, a relatively labour intensive industry.

Incidentally, the UK
happens to be Poland’s 2nd
largest export market accounting for Poland’s
largest surplus.

Poland is
a prime example of another phenomenon, an estimated 800,000 nationals working
in the UK
and sending a proportion of that income home. Free movement has a greater
proportional impact.

The other major trading partners also rely exporting on
labour intensive goods to Britain.
Among these are heavily subsidised agriculture products; wine, cheese, fruit
and cured or processed meats. Reciprocal tariffs would increase these prices in
the UK
market by up to 80%. Conversely some of these products will become cheaper from
the USA,
the Commonwealth and the rest of the world.

Jorge Brotons, President of the Spanish export federation
Fepex has already identified a cut of 15% in his members’ revenues from the UK, largely as
result of currency movements. This would surely be exaggerated by full Brexit
and the imposition of reciprocal tariffs. France
and Italy
can expect similar.

Although campaigners for prioritising access to the SEM
choose to minimise Britain’s
importance, it can be seen that a shift in Britain’s trading patterns has the
potential to impact significantly at the margins. The SEM is not in fact a
single market. Rather it is a collection of 27 markets with one dominant
currency and 9 others using 24 different official languages.

Remember all of those countries have to agree to a deal.

Not all of the EU is prosperous as was identified on this
site here during the
referendum campaign. Intriguingly, those with the highest growth rates are
typically those former members of the eastern bloc, still with their own
currencies and modernising with western investment.

Those with lower growth rates are typically the more mature
EU members, outside the German centred powerhouse and who are struggling to
meet austerity conditions. These economies are also susceptible to small
changes in investment, either through government policy or a fragile banking
system.

This brings us full circle back to the institutions leading
the Brexit negotiations on behalf of the EU. For all of the above reasons, it
is in their interest to delay Britain’s exit, maintaining free access to
British markets, freedom of movement and the net contribution. However, all
nations involved must agree, including the UK. It is in our interests to seek
bilateral agreements with the rest of the world which provides 90% of our
economic growth. The EU can not rely on Britain’s compliance.

Restrictions on budgets, if they are to be overcome, require
extra funding to be found from somewhere when EU growth is negligible. With
elections this year in Germany,
France and the Netherlands, how can they strike a deal that maintains
Germany’s artificial
advantage through a Euro that is too strong for most of the rest of Europe? Will the resolve of members reflect the self
interest of bureaucrats or will “national egoism”, what we call democracy, mean
that they have to accept a scaling down of the vision?

It would not be surprising to see the bigger players in Europe influence the change of direction in of the EU.
What Tusk misinterprets as “xenophobic sentiment” might actually be the embryo
of devolution, seeking to bring decision making closer to home. Mr Tusk, the
concept is called sovereignty.

The EU itself may well find itself in conflict with its
members. Further integration can only work if funds flow from the rich in the
EU to those suffering with austerity. Is that acceptable to the rich? Can the EU survive without?

So we can see a different context. The EU institutions and 5
presidents may seek to take a hard line with Britain. Voters across Europe may thwart their political will by replacing
members of the Council with more nationalistic representatives. The goal may
shift from power maximisation to loss minimisation. The only thing certain in
the EU negotiating position is uncertainty.