It was a symbolically powerful photo that Nigel Farage tweeted out to the world last week. It showed Farage, the Brexit proponent and head of the British populist party UKIP, grinning broadly with US president-elect Donald Trump in front of a gold-plated door inside the Trump Tower. Since the election victory of the similarly-minded Trump, people like Farage are hoping that Britain can reinvigorate its special relationship with America following the country's decision to turn its back on the bureaucratic EU.
For European companies, that isn't good news. Trump's victory has created yet another variable in the game of Brexit poker: Many on the Continent are concerned that Britain could increasingly turn to the US instead of leaving their economy as open as possible to Europe.
Furthermore, if Trump moves ahead with the kind of protectionism he campaigned on, companies in Germany and elsewhere in Continental Europe will be facing a dual threat: They will have to worry about their exports to the US as well as to the UK.
Trump's election has further deepened the rift between the EU and Great Britain, and previously visible differences are now becoming more distinct. Out of fear of the voters and the populists, the British and the EU are heading more than ever towards a hard Brexit.
There is widespread fear within the EU that nationalist forces will continue gaining strength and that more members of the union will decide to leave. Some in Europe hope that Brexit might serve as a deterrent. "There must be a threat, there must be a risk, there must be a price," for leaving the EU, French President François Hollande said recently in Paris.
For British Prime Minister Theresa May, meanwhile, it is becoming increasingly difficult to follow calls from the London financial lobby and other business leaders to make concessions to the EU and pursue a softer exit from the EU. After all, both the US election and the Brexit referendum were in part votes against the financial elite and their supposed proxies in the White House and 10 Downing Street.
Brexit is not unlike an amputation: The EU is losing one of its most economically powerful members in addition to a member of the G7's exclusive ranks. "It's quite dramatic for us," EU Parliament President Martin Schulz said in Brussels on Wednesday. The British, meanwhile, are cutting ties with their most important trading partner: Forty-five percent of their exports go to the EU.
Since the referendum, the pound has fallen by 11 percent and the International Monetary Fund and several other economists have lowered their growth forecasts for the coming years for both the UK and the rest of the EU. British economic growth may have been surprisingly stable of late, but the effects of the Brexit poison are long term.
The timeline of the Brexit negotiations is only slowly becoming clear. Once Britain officially triggers Article 50, which it intends to do in March, the two-year negotiating period begins. Only then will the country's new relationship with the EU begin to take shape. Companies on both sides of the Channel are facing what they most hate: years of uncertainty.
'New Relationships with All EU Members'
"The most likely scenario is that following its exit, the UK will have a relationship to the EU that is similar to the status of a World Trade Organization member," says Alexander Börsch, chief economist at auditing and consulting firm Deloitte. "When it comes to the financial sector, which is not subject to the world trade pact, the United Kingdom would potentially need to negotiate new bilateral relationships with all EU members."
In Brussels, though, there is little to indicate that historic negotiations are approaching. Since the initial shock, the EU bureaucracy has been approaching Brexit as it would the creation of, say, new eco-design guidelines: the Council, Commission and Parliament have all formed working groups. Over 20 committees in European Parliament are currently working on a questionnaire about which subjects they believe are important for the upcoming negotiations.
The Commission's EU task force is led by former French Foreign Minister Michel Barnier. He is currently traveling through European capitals to get a sense of what EU member states expect from the Brexit negotiations. The result will be a catalogue of criteria for the talks; the real negotiations would then begin next May or June. Member states' expectations are far from consistent: While France is pushing for a tough negotiating stance, small countries like Malta, for example, are worried about university research cooperation with the British.
In London, there also seem to be differing expectations about which path to take out of the EU. Foreign Secretary Boris Johnson is pushing European partners to provide the UK free access to the common market, even after Brexit. Italian Minister of Economic Development Carlo Calenda told Bloomberg TV that Johnson sought to paint a clear image of the disadvantages lurking should Britain not remain part of the common market. "You'll sell less prosecco," Johnson said according to Calenda. The Italian answered: "You'll sell less less fish and chips, but I'll sell less prosecco to one country, and you'll sell less to 27 countries."
The article you are reading originally appeared in German in issue 47/2016 (November 18, 2016) of DER SPIEGEL.
But even before Trump's election victory, the UK's cards in the upcoming game of negotiation poker weren't so bad. EU negotiation leaders were concerned that the British could try to block issues like closer defense policy cooperation in order to get a better Brexit deal.
While politicians on both sides are engaging in unfocused preemptive skirmishes, the business community is trying to save what is seemingly unsalvageable. "We are striving for a relationship to the EU common market that is as close as possible to the current membership," says Miles Celic, head of the lobby group TheCityUK, which represents the interests of the London financial sector. Gunter Dunkel, who was president of the Association of Public Banks (VÖB) in Germany until recently, is calling for the EU to oblige the Brits: "We need to address the four fundamental freedoms -- for goods, services, work and capital -- in other ways, otherwise we cannot keep Europe together."
Two Paths for Banks
Such a redesign, however, is something that nobody in Brussels wants. May's desire to continue providing goods and, especially, financial services to the EU without any barriers while limiting the immigration of workers will not be implementable. If she wants fewer EU foreigners in the UK, then Britain will be unable to remain in the common market. For this reason, the financial sector, particularly financial conglomerates that use London as a gateway to the European common market, is preparing itself for the worst-case scenario.
A significant number of foreign financial institutions have already made the decision to move their bases for EU business away from London, consultants are saying. They are concerned that Brexit will mean that their London subsidiaries will lose their so-called "EU passports," meaning the right to sell products and services in the European Union from London. The only remaining question is where they will move them to.
To be on the safe side, foreign banks are considering two models. The more radical of the two would involve giving up their London subsidiaries and carrying out all future EU business via a new subsidiary in the remaining Union. The Russian bank VTB apparently has chosen this path: It has announced that it plans to carry out its European business operations from Frankfurt, Vienna or Paris in the future.
But most banks are leaning towards keeping London as an intermediate holding company and establishing a further subsidiary in the EU so as to maintain access to the common market. The investment bank Goldman Sachs, for example, is considering installing its European headquarters in Frankfurt. Many banks are planning on keeping their EU-based subsidiaries as small as possible, though EU regulators would not approve of mere shell companies.
According to Thomas Steffen, state secretary in the German Finance Ministry, the first relocations will take place next spring. Representatives of London-based financial institutions have made frequent visits to the German Finance Ministry in Berlin, he says, to see what kind of advantages they might be able to secure in the event of a move.
If a bank CEO comes in person, German Finance Minister Wolfgang Schäuble often speaks to them himself in an effort to praise the advantages presented by Frankfurt. When Schäuble was at the IMF and World Bank fall meetings in Washington in early October, the heads of four American banks sought him out to discuss moving their London subsidiaries.
Schäuble points to Frankfurt's quality infrastructure, affordable cost of living compared to London or Paris and the proximity of the European Central Bank, which is responsible for the supervision of European banks. Unlike France, however, he isn't interested in offering financial institutions a tax break.
Still, even if Frankfurt might profit from Brexit, Britain's departure from the common market would create mostly losers in Germany. Cross-border trade would suddenly be slapped with new tariffs.
This is a horror scenario for the pharmaceutical industry in particular. According to a study by the Center for European Economic Research (ZEW) in Munich, it is "by far the most affected industry." If the British introduce the external tariffs that are standard today, it could make the exports of chemical products to Britain around 200 million euros more expensive.
The car industry can also expect problems -- on both sides of the Channel. "If there's a 'hard Brexit,' then we will see a shift to central and southeastern Europe," Matthias Wissmann, head of the German Association of the Automotive Industry, said according to the Financial Times.
Americans Need EU More than UK
German car exporters would also suffer. In the past year, German auto makers delivered 810,000 cars to the UK, the third largest buyer of German vehicles. There are dozens of production facilities in the UK that are tightly integrated into the EU network. All of that is now in danger.
The example of the auto industry, however, also shows that Brexit negotiators understand the language of the lobbyists when jobs are in danger. Carlos Ghosn, head of Renault-Nissan, received an appointment on short notice at Downing Street when the decision arose as to whether the company's Qashqai SUV should continue to be built in the UK. Prime Minister May hastily reassured him that he didn't have to fear any negative consequences from Brexit. Nissan promptly announced that the new Qashqai would continue to be built in the UK.
Not even May knows if she can keep her promise. The EU Commission now wants to find out what concrete agreements May made with Nissan. If she promised financial help, her deal with the company might ironically trigger EU competition proceedings for unlawful subsidies just as Britain is leaving.
Prime Minister May's newfound affinity for Trump won't be able to help her out of the dilemma currently facing her and the British, especially since the fundamental rules of arithmetic still apply. "The EU is a much more important as a trade partner for the UK than the US is," says Börsch, the Deloitte strategist.
The Americans also need the EU more than the UK as a market for its exports. Consequently, they are eager to avoid disrupting their supply chain to the European continent.
A recent policy paper by the US Chamber of Commerce notes that the outcome of the Brexit negotiations will have substantial implications for US investments in Britain, which the paper identifies as being worth $590 billion dollars, resulting in some 1.2 million jobs in Britain. The paper predicts a dark future for Britain: If the United Kingdom "were not to retain its current level of access" to the European market, the cost of doing business in the EU would increase -- and "these costs are likely to be borne by British workers and consumers."
The entire document is full of warnings to those in Britain who might dream of a close alliance with the US. Particularly since the financial centers of London and New York are in fierce competition. To understand what that means, the British only need to recall the slogan that helped Trump win the election: "America first."