For friends of the CER: A note from Berlin, April 2017

In Berlin I met officials in the Chancellery, Foreign Ministry, Finance Ministry and the President’s office. I also met parliamentarians including Norbert Röttgen, the chairman of the Bundestag foreign affairs committee. I then went to a castle outside Berlin to attend the annual ‘Königswinter’ conference that brings together British and German politicians, officials, journalists and business leaders. Those who spoke off-the-record included Peter Altmaier, the minister in the Chancellery with special responsibility for Brexit, as well as Boris Johnson and Philip Hammond. Both Theresa May’s Article 50 letter and Donald Tusk’s draft response came out when I was in Germany.

These notes cover not only Brexit, but also German views of Trump, the euro, France, Italy and Russia. They are for friends of the CER and will not be published. They should not be cited.

BREXIT

• In every ministry, German officials worry that the British government is not well-prepared for the coming negotiations. For example, the British say they want mutual recognition of the rights of EU nationals to live in the UK and vice versa. But many of them seem unaware of the legal and technical complexities surrounding this issue. Germans worry about the level of expertise in the UK government, compared to the Commission, and its overall capacity to run the negotiations efficiently.
• Officials also worry that May and her ministers have done little to prepare public opinion for what lies ahead; for example the UK will have to compromise on its financial liabilities and on the role of the ECJ in the transition, if there is going to be a deal. Many Germans note the gap between the UK government’s rhetoric and what in reality it is likely to achieve.
• Merkel herself takes a tougher line on Brexit than she did last autumn. There are several reasons for this. One is that she is weaker within Germany and, faced with the Europhile Martin Schulz as an opponent, doesn’t want him to be able to accuse her of undermining EU unity by taking a soft line on the UK. She is also a bit weaker in the EU, with several Central and Southern European states highly critical of her government (because of its stance on refugees and the euro). Then there is the Trump effect: one pillar of Germany’s existence, the Atlantic alliance, is shaky, which means that the remaining pillar, the EU, is more important than ever. That means Merkel has to focus on keeping its institutions strong – and France happy. 
• Norbert Röttgen reckons Merkel is no longer strong enough to pick up the pieces if the Brexit talks crash– though she will certainly try to avert a crash (he puts the chances of a crash at 60%). Others who know Merkel say she has little incentive to help the UK in the Brexit talks, other than to placate the UK’s allies among the 27, who may become unhappy if London is mistreated. However, they acknowledge, she would obviously hope for a close relationship with the UK on trade and security after Brexit.
• Official Germany is much more supportive of the European Commission than it usually is. I heard no criticisms of Barnier or the Commission on Brexit. Officials back the Commission line that the UK must agree to the principle of paying the EU money, and have moved towards settling the acquired rights of EU citizens, before parallel talks on trade can start. Peter Altmaier’s comments implied a somewhat more flexible line on this ‘sequencing’ issue.
• To my surprise, the Germans take a very hard line on the EU budget– harder than what one hears in the Council of Ministers in Brussels. The Finance Ministry, in particular, is against any compromise on the €60 billion figure. This is because if the British pay less, Germany will have to plug a share of the shortfall. And it is because the French have pushed the Germans to take a hard-line on money. The Foreign Ministry is a bit softer than the Finance Ministry on this question.
• Some of this tough line in the ministries is driven by emotion. A lot of officials are very European-minded, and feel Brexit to be a kick in the teeth – that endangers the world they believe in. This colours their view of whether Britain should be helped in the Brexit talks. Brexit must not be rewarded. As the talks progress, officials think particular industrial sectors may lobby to do the British favours. But at the moment many large companies – and the BDI – are backing the government’s hard line on Brexit.
• The Germans are hard on the transitional arrangements that the UK will certainly require. Like the Commission, they say that talks on the transition have to come after those on Article 50 and the future relationship. They argue (as does Tusk in his draft guidelines) that special provisions for the transition would not be viable, and could not be negotiated in the time available in any case. The only sort of transition that could work would be for the UK to maintain the rules of the single market, for a strictly limited period of few years – and to accept European Court of Justice rulings, free movement and payments into the budget during that period.
• In the long run, as a dispute settlement system for the future relationship, Germany might be open to a court similar to the EFTA court (which plays a key role in the European Economic Area), that is to say a court which never goes against the ECJ but is not the ECJ.
• On the City of London, the German line seems somewhat softer than it was last autumn. Officials say they are not angling to pick up business that might leave London. As for euro-derivative clearing, the Germans seem reconciled to it staying in London, as long as the UK accepts that the EU can supervise the clearing houses. They also seem quite constructive on the British demand for an improved system of equivalence. Their concern, said one official, would be to ensure a system was “established to ensure the UK did not gain a competitive advantage through bad practices.” There would need to be a lot of information exchange. Another official seemed open to the British point that rules on equivalence would need reforming so that  they provided more legal certainty, i.e. the Commission should not be allowed to end equivalence on a whim, as it can today.
• As for the future security relationship, Altmaier did not regard May’s Article 50 letter as a threat to withdraw co-operation unless the UK got a good trade deal. Wolfgang Ischinger, the head of the Munich Security Conference, suggested that post-Brexit “the UK should be a full participant in the EU’s foreign and defence policy institutions; we should see this it not as cherry picking but burden-sharing; we need their strategic thinking.” However, he acknowledged that there could be a problem with the UK vetoing EU policies that it did not like. No serving official was so generous to the UK on this subject as Ischinger, though several considered that the loss of the UK’s strategic thinking would be a real problem for the EU.

THE EURO, FRANCE, ITALY, TRUMP AND RUSSIA

• Most senior figures in the German government think the euro is doing OK. They rule out treaty change – Altmaier says there won’t be a major new EU treaty in his professional lifetime. Wolfgang Schäuble has also spoken out in public against treaty change. The Finance Ministry says it will dismiss whatever new ideas the Commission comes up with on reform of eurozone governance.
• The Finance Ministry is quite worried by the prospect of President Macron. This is because it knows Macron would demand some sort of grand bargain – if France constrained spending and enacted reform, it would expect Germany to agree to federalising changes to eurozone governance. Which the Finance Ministry regards as abhorrent. In any case this ministry has a very negative view of France, with its large trade deficit, bloated public sector and a debt-to-GDP ratio that is 30 points worse than Germany’s. The ministry is sceptical that Macron can achieve much reform in France.
• However, in other parts of the government and in the Bundestag, there is more openness to a grand bargain with France, especially if it covers security issues – for example co-operation on defence and the Middle East – as well as the euro. Some say it would help if the bargain extended to France offering Germany the de facto shelter of its nuclear deterrent. Trump’s arrival has led to a debate in Germany on whether the country needs nuclear weapons, though few senior figures are in favour.
• Opinions differ on whether Italy is the weak link in the euro that could bring the whole edifice tumbling down. The Chancellery is relaxed about Italy. The finance ministry worries but is sure that budgetary discipline and structural reform will solve Italy’s problems. Röettgen worries about the country, and thinks Italy may fail, but is confident that Merkel and a majority of the Bundestag would do what it takes to keep Italy in the euro – because the alternative would be a geostrategic catastrophe involving the break-up of the currency. However, an economist who is a senior figure in the Social Democratic establishment thinks that Italy cannot, in the long term, stay in the euro. He reckons, unlike Röttgen, that Merkel and even Martin Schulz might prefer to see it leave the euro, rather than pay for a bail-out. Most people think that if Schulz was chancellor, it would be a bit easier for Germany to move a few steps towards the French on the eurozone governance.
• The arrival of Trump has been more traumatic for Germany than any other country. His values are diametrically opposed to the liberal, post-modern, rules-based, multilateral world-view that permeates Germany’s ruling elite. And as one senior diplomat put it, “it is hard for us to understand his nationalism, which goes against our DNA, yet China and Russia get it.” In addition Trump seems to have a particular hostility to Germany. Nevertheless some German officials are starting to be reassured that on classic foreign policy issues, such as NATO, Russia and Iran, the Trump administration is turning out less crazy than feared.
• Some of the most senior diplomats in the German system are concerned that others in Europe expect Germany to replace the US as leader of the West. They say the Germans lack the resources and the mentality to take on this role. One diplomat says that “if the US walks away from the West, the West will be irrelevant. There is no substitute for the US.”
• Finally, nobody expects German policy on Russia to change before the German election in September. The ‘Minsk’ diplomatic process on the Ukraine crisis, involving France, Germany, Russia and Ukraine, suits Berlin, and the US is happy to be out of it. Would a Chancellor Schulz change German policy on Russia? Not in a hurry, people think. Senior SPD figures like Schulz, Foreign Minister Gabriel and President Steinmeier (who is not close to the other two) are disillusioned with Russia, especially since its bombing of Aleppo. However, the tone, if not the substance, would be softer.

Charles Grant, April 2017.