What Germany thinks about Brexit

It's important to realise that Brexit is a two-way process and the eventual outcome depends as much (if not more) on what line the EU is prepared to take in the negotiations. With that in mind, I've been speaking on a wide range of European experts on what the UK should expect from Europe.

Given that Germany is the dominant power in the European Union, it seems logical to start with someone from that country. Josef Janning works at the European Council of Foreign Relations, a pan-European think tank, as the head of its Berlin office. He's had close contact with a large number of German and European policymakers and has held positions at Munich University, the University of Mainz, the Hebrew University of Jerusalem, and Renmin University of Beijing. He's also written extensively on Germany's relationship with the wider world and European security policy.

Janning feels that the general reaction of the German political class has been one of disappointment, rather than anger, at Britain's decision to leave the EU. Indeed, some even blame themselves for overestimating British support for the European project. This means that the primary impulse will be to manage the transition as smoothly as possible, rather than make an example out of the UK. Of course, some politicians, such as Sigmar Gabriel, the vice chancellor, have made statements that have been interpreted as supporting a hardline position. However, for Gabriel, this is more posturing for domestic consumption taking advantage of the fact that he has very little real influence on the talks.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Janning thinks that this attitude will be reflected in the "pragmatic" and "cautious" response of Angela Merkel. Initially she was concerned that other countries could follow Britain out of the door. However, the political turmoil after the vote, including Cameron's departure, and the emerging splits in the cabinet, will have reassured her that no European leader will want to risk the former PM's fate. This paradoxically makes her more inclined towards a relatively softer stance on Europe's post-Brexit relationship with the UK. Overall, the good news is that she will actively attempt to avoid European leaders rushing into an "ideological" deal that would punish the UK for its decision.

However, he warns that this doesn't mean that the UK will get off lightly, since her definition of a fair outcome is very different from the British assumption of unconditional access to the single market. While Merkel may have been willing to allow the UK concessions on welfare for recent EU migrants, Janning believes that she (like most of Europe) sees freedom of movement as a core principle of the EU. As a result, Brussels won't make any more concessions to the UK without reducing Britain's access to the single market.

Given Theresa May's pledge that she will impose some controls on European migration, Janning believes that it will be "very difficult for the UK to achieve" a deal similar to that of Norway's EEA membership or Switzerland's series of bilateral accords. Indeed, he thinks that the Swiss should expect to see their economic relationship with the EU significantly downgraded if they go ahead with their plans to impose restrictions on EU workers, as was required by a 2014 referendum.

Indeed, the most likely outcome is similar to the deal between the European Union and Ukraine, which has still to be ratified. This would essentially be a loose free trade agreement with restrictions on various sectors, a very far cry from the status quo. Janning warns that British banks and financial services firms will almost certainly face serious restrictions on their access to European investors. Indeed, Brussels could take a particularly tough line with the City if it feels that the UK is attempting to use Brexit to reinvent itself as a low-regulation offshore financial centre.