The International Monetary Fund (IMF) has warned that a hard Brexit would damage the German economy.
The warning was made as part of the IMF’s annual review of the German economy, which is known as Article IV.
The review was generally positive about the current state of the German economy, highlighting strong economic performance in 2017 and a general government surplus at the highest level since reunification.
However, it also identified “substantial” short-term risks to Germany’s economic performance, notably a “significant rise in global protectionism”, greater risks associated with the Euro and a hard Brexit.
Why would a hard Brexit damage the German economy?
The IMF has warned that a hard Brexit could increase financial stress to the German economy due to two factors: exports and investments.
“A significant rise in global protectionism or a hard Brexit would hurt Germany’s exports and FDI, possibly disrupt supply chains, and weigh on domestic investment and productivity,” the report warned.
The IMF cited a drop in foreign direct investment (FDI) as a key concern. While British investment in Germany has risen following Brexit, restrictions following a hard Brexit would likely reduce this in the future.
The UK also represents a strong export market for Germany, exporting more goods to the country than any other nation. In 2016, the UK imported £65.8bn worth of goods from Germany. The country is also the fourth biggest exporter of services to the UK. In 2016, it exported £9.3bn worth of services.
A hard Brexit would likely jeopardise Germany’s premium position as an exporter to the UK as it would remove the country from current trade agreements. Instead, goods and services being traded between the countries would be subject to higher tariffs and custom controls.
Such restrictions would make Germany less competitive, and so would reduce the amount being exported to the UK from the country.