Brexit, Germany And Asia

Britain’s general election went horribly wrong, with the Conservatives forced into a putative coalition with the Democratic Ulster Party. Theresa May’s failure to secure a clear majority has provoked indignation, bitterness, and widespread pessimism. The purpose of this article is not to contribute to this outcry, but to take a more measured view of the situation faced by the British government with regards to Brexit, and the consequences for Europe. In the interests of an international readership, this article will only summarise briefly the current situation in the UK before looking at the broader European and geopolitical consequences.

While it would be wrong to dismiss the precariousness of Mrs May’s position, there are some positive factors, which are being generally ignored. Most importantly, Brexit negotiations are due to start next week. These negotiations matter more than anything else on the government’s agenda, so are a unifying force. Mrs May recognises this, which is why she has brought Michael Gove back into the cabinet (as Environment Secretary), and Steve Baker as a minister in the Brexit ministry. Gove is a committed Brexiteer with a track record as a capable minister, and Baker was the motivating influence behind the parliamentary campaign for Brexit.

All ambitions to replace Mrs May are being put to one side in favour of Brexit. This message of unity has been endorsed by Conservative MPs. They will be regularly updated with developments in future, to keep them onside. There are already signs that the government is reaching out to the opposition as well. This has been read as a separate negotiation, potentially leading to a softer Brexit. While it is dangerous to prejudge the outcome, this is probably incorrect: the purpose is more likely to keep the Labour Party leadership fully briefed on both progress and the rationale behind negotiation tactics.

If this works, and it is an IF, we can expect the mainstream political establishment to align itself behind the negotiating team, more interested in supporting it in a common objective than carping from the side-lines. This is how things have always been fixed in Westminster, with the political parties cooperating out of the public eye to get things done. Furthermore, the Labour Party is likely to become increasingly distracted by its own internal affairs as time goes on.

Much has been made of Jeremy Corbyn’s success in securing enough seats to eliminate the Conservative’s majority. I suspect we are looking at Peak Corbyn. He is driving Labour into adopting Marxist policies, likely to cause increasing dissent in Labour’s Parliamentary Party. His popularity can be expected to decline under these strains, and Labour’s with it. This should help restore public support for the Conservatives, as the memories of the botched election fade.

In short, handled correctly, Brexit has the potential to be a unifying force, not just for the senior members of the Cabinet, but for Westminster and the country as well.

The Negotiations

This is not to say the dangers facing the UK Government should be lightly dismissed, but the EU’s negotiators will find that the British sense of purpose remains strong. There are three broad issues that have already been flagged. First is the status of European citizens in the UK, and of UK citizens in Europe. The EU’s opening position, that European citizens in the UK should in effect have the continuing protection of European courts, is likely to be a sticking point. Otherwise, there appears little reason why an agreement cannot be concluded over related issues, so long as there is a desire on both sides to do so.

Second, there’s the status of the physical border in Northern Ireland, which only becomes a significant problem if there is no trade agreement. In that event, the British could take a free trade approach on the ground, keeping the border open, and leaving it to the Irish government to put in whatever customs restrictions it feels necessary. Large companies attempting to export goods to the UK will still have to fill out the post-Brexit paperwork and pay the duties (if any), while it should be ignored by the British authorities for routine cross-border customs traffic. This would have the advantage of being the least disruptive solution for a divided sectarian community.

Third, are the trade talks themselves. The EU is insisting that negotiations proceed according to its agenda, which includes a demand for up to $100bn from Britain to pay for Britain’s leaving as a quid pro quo. There is no legal basis for this demand. There might however be a basis for Britain to obtain compensation for property in Europe which it has financed, in return for an agreement that Britain has no further claim. It’s called enforcing property rights, though establishing them could be tricky.

This highlights the importance of Britain being prepared to accept that no deal is better than a bad deal. If Britain terminates discussions, the EU loses far more than Britain. One group of losers will be the large continental corporations, and they will almost certainly lobby both their own governments and Brussels for a quick resolution with the lowest tariffs possible. Furthermore, the Brexit ministers appear to have a good grasp of the benefits of genuine free trade, and free-trade agreements.

The tactical response to the EU negotiators trying to control the agenda is for Britain to accelerate negotiations for trade agreements with other countries, ready to be formally signed following Britain’s final departure. Early success in this effort will not only help concentrate minds in Brussels, but will reassure investing businesses of the improved trade prospects for Britain after she leaves the EU. The more of these agreements the better, and it is likely that public concerns about the details of an EU agreement will in turn be replaced by a desire to move on.

Time will tell. However, it would be a mistake to get too distracted by the minutiae of Brexit negotiations. That issue is now in capable hands, at least from the British end. It is better to accept that it is in everyone’s interest to get a sensible deal concluded within the two-year time-frame, and that it will therefore happen.

Germany (And France) Wants To Move On As Well

President Trump has made it clear he will no longer tolerate having NATO members not paying their share of the defence budget. Furthermore, he has said several times that Germany exporting so many cars to America is neither right nor fair. Putting to one side Trump’s economic illiteracy (Americans buy German autos because they like them), it is clear to the Europeans that America no longer supports the integrated Europe originally set up by the American Committee on United Europe in 1948. Germany now finds the post-war status quo is over, and her interests are best served in a wider context than the Europe devised by ACUE.

Under American and British military control, Germany has been continually repentant for her Nazi past. Reunification was a first step to reforming Germany as an independent nation. While politically she has kowtowed to the Anglo-Saxons, she has gained enormous regional power, based on her economic strength. And by dominating the EU as its largest paymaster, the EU itself has become the platform for her wider commercial and political ambitions.

Anyone who doubts Germany’s potential aspirations has failed to notice the strong national and cultural identities of the German people. And with respect to trade, Fortress Europe’s trade policies are increasingly disadvantageous to her. Germany now exports more to China than to any individual European country, benefiting big businesses. The power of the large German corporations, and their influence on the Federal Government, should not be under-estimated. She sees on her Eastern flank, of what used to be Prussian territory, a pan-Asian phoenix arising in the form of the Shanghai Cooperation Organisation, led by Russia and China. And it is growing.

Only this week, India and Pakistan also became full SCO members, taking the rapidly-industrialising membership to nearly half the world’s population. The Silk Road is sending goods to Europe, and will transport Mercedes, BMWs and VWs the other way. Asian demand for German engineering and capital equipment is likely to become the largest market by far for the foreseeable future.

It is becoming pressing for Germany to have Britain leave the EU, because the British support the Americans in their hegemony, and America is virulently anti-Russia. No wonder that only this week Mrs Merkel said, “We want to negotiate quickly.” Germany’s interest is to be free to pursue her own trade objectives, which will mean a change of focus towards trade with Russia and the East, dragging the rest of the EU with her. She will also want to reduce her dependency on NATO, the mechanism through which US and UK strategic policy in Europe is deployed. Plans are already advancing for a joint EU defence force. With the EU becoming both militarily and economically independent from US and UK influences, the world’s geopolitical order is taking another major step away from American domination.

The speed at which this transition happens is likely to gather pace after Germany’s Federal Elections in September. Britain is no longer able to restrict Germany’s diplomatic ambitions, now that Article 50 has been triggered, except through NATO. We can therefore expect to see moves towards a German-led EU rapprochement with Russia over Ukraine to emerge later this year, and for sanctions against Russia to be gradually lifted by the EU, irrespective of the outcome of the turf wars in Washington over foreign policy towards Russia.

Germany has had a bonus in the election of Emmanuel Macron as President of France, a pragmatic banker and businessman who is strongly pro-EU. Macron hopes to change France’s labour laws, which are crippling the French economy. Good luck to that. He will be far better to expose France to global competition, to force the unions to accept that change must occur. He will need the excuse that events are moving beyond the French government’s control. Germany’s ambitions, which he must support, provide him with the pretext.

For all these reasons, it should become increasingly clear by the end of this year that the interests of the EU’s dominant players will call for a speedy resolution of the Brexit issue. Brussel’s room for prevarication will be restricted accordingly. You could say that Britain is now being kicked out of the EU at Germany’s behest. We shall now look further into why Germany must refocus her trade eastwards.

India And Pakistan “Shanghaied”

The announcement this week that implacable enemies, India and Pakistan, are now full SCO members is a major milestone in global geopolitics. This agreement comes only weeks after India boycotted China’s One Belt One Road summit in Beijing on 14th May, over China’s investment in Pakistan and in Pakistan-occupied Kashmir. The fact that India and Pakistan are effectively at war over Kashmir makes their sudden joint membership of the SCO truly remarkable.

The population of this economic unit is now estimated to be nearly half the global total, to which must be added the populations of the South East Asian countries, where there are strong Chinese influences and economic ties. With South Korea and Japan turning towards China as well, very quietly Russia and China have managed to put together a political bloc that will dominate future world trade, with hardly anyone outside Asia noticing.

More importantly, these are the dynamic economies responsible for most of the world’s economic progress, while the affluent welfare-states have become mired in debt. China’s economy is well on the way to becoming a technologically-driven miracle, no longer dependent on the manufacture of cheap goods for export. Her Silk Road projects will link efficient trade and communications over the whole Eurasian land mass. Industrialisation and infrastructure development will proceed rapidly.

There are still a few building-blocks to put in place. Iran is slated to join soon, maybe in the coming months. Turkey is now on-side to become a member of the SCO, and only this week Russian politician Vladimir Zhirinovsky called on the SCO to speed up Turkey’s membership process. That would extend the SCO’s reach from the Pacific to the shores of the Gulf and the Mediterranean.

From Germany’s perspective (she has long held close ties with Turkey), Turkey must be another nail in the coffin of the post-war American order. It is hard to see how Turkey can remain a member of NATO while she aligns herself with Russia, Iran and the SCO. And as NATO diminishes in its authority, it will leave a military vacuum in Europe. This is the background to the plans to establish a separate European army, and while it is fronted by the EU, there can be little doubt that the prime mover is Germany, backed by France.

Germany will remain a staunch supporter of the EU and the euro, if only because it is still the glue holding together European relationships that can be moulded to her own objectives. Furthermore, she is the dominant creditor of the weaker member states, and Germany has no intention of writing off obligations owed to her. However, the sooner Brexit is dealt with, the sooner plans for an EU-wide taxation system can progress. Macron is strongly in favour, and Brussels will need to replace British contributions. Only when the tax issue is dealt with can the EU become a true super-state.

The election of Macron in France has subdued France’s anti-EU movement, at least for the time being. Both Germany and Brussels will want to seize the opportunity to take the EU project to the next level. This can begin immediately, now that Britain has triggered Article 50. It will also make it easier for Britain to accept no deal on Brexit, if need be, because there is no support in the British public for personal and corporation taxes to be paid direct to Brussels.

The good news in all this is that a German-led EU will be steered towards freer trade. It has long been apparent to Germany’s leaders (informed by Germany’s corporations), that freer trade benefits her own economy, and a strong economy is the route to political power. In this appreciation, she is now joining China and the other SCO members. Too few British politicians appreciate this fact today, but increasing numbers are likely to do so in future.

If the EU negotiators try to impose trade penalties on Britain, they will find themselves arguing against their own long-term policy direction. The focus for every nation, outside the Americas, is increasingly on Asia. While there is much work yet to be done, China and Russia have successfully advanced their security and trade policies through the establishment of the SCO. When over three billion people are on a journey from relative poverty to Western standards of living, no one can afford to ignore the opportunities.

Perhaps we will look back from a future time and see that the only major country left sinking under its self-imposed trade delusions is America, with the President still grouchy about the unfairness of foreign competition.

Alasdair Macleod

HEAD OF RESEARCH• GOLDMONEY

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