Days after Prime Minister Theresa May triggered Britain's exit from the European Union, Chancellor of the Exchequer Philip Hammond described to Handelsblatt what it will mean for German businesses and his government's priorities in the negotiations ahead.

Philip Hammond remains optimistic about trade opportunities between Britian and the E.U. Photo: Marko Priske/Handelsblatt

On Wednesday, March 29, the United Kingdom officially triggered Article 50 of the Treaty of Lisbon, starting the process of leaving the European Union.

Chancellor of the Exchequer Philip Hammond described his government's priorities in the negotiations, which will stretch two years, in an interview with Handelsblatt.

With E.U. businesses anxious to find out more about the future of trade with Britain, Mr. Hammond offered some qualified reassurances.

While finance minister insisted that Britain is willing to make concessions on tax and financial regulations in order to secure a free-trade agreement with the bloc, he also stressed that Britain will keep its options open to shift trade to outside of the E.U. if the union doesn't extend its hand.

Handelsblatt: It was a historic moment last week when Britain officially initiated the exit protocol from the European Union. What was going through your head at the time?

Philip Hammond: We’ve been working on this for nine months, since the referendum. We made our decision back at the time of the referendum. What we did yesterday is start the process. And the focus of all of us in government is making that process work; getting the best, most constructive deal we can, so that we have a good basis for future collaboration with the European Union from outside the union.

The European Union said it wants to talk about money first, specifically the so-called "exit bill," which is comprised of Britain's previous financial commitments to the E.U. The number floating around is €60 billion.

Philip Hammond: First of all, this is a negotiation. […] I don’t have a great surprise that Mr. Barnier [French chief negotiator of Brexit terms for the E.U.] has a very large number to start that negotiation. Equally, I just met in a meeting one of our colleagues of the House of Lords' legal committee who has come up with a very much lower figure.

Our preference will be to have a deep and comprehensive partnership with the European Union and a strong trade partnership with the European Union. But if the European Union chooses not to do that, then we will have to look elsewhere. Philip Hammond, British Chancellor of the Exchequer

What is your starting point?

Our starting point is we’re a country that always honors our obligations. So, this is not a question of is it this amount or that amount. It is about the precise approach to how we should quantify obligations and rights that the U.K. has in relation to the European Union. […] I’m sure that the European Union will want to talk about these things at the beginning, and of course we can talk about anything and everything. What we shouldn’t do is become fixated on only one issue. We have to discuss all of the issues: how we separate all the various strands of activity that we have between the U.K. and the European Union, how we build a future relationship, how we manage to transition from where we are now to that future relationship.

The famous quote by your Prime Minister, “No deal is better than a bad deal,” was not part of the letter to the E.U. Does that position still stand? What would it mean to have no deal?

No deal would mean, as the Prime Minister mentioned in the eleventh paragraph of the letter, us reverting to trading on WHO terms in terms of trade. As she also mentioned in the letter, it would leave us with a problem on our security collaboration, because we don’t have a framework outside of E.U. law. And if we don’t create a new framework, we would not have a structure within which, for example, to share sensitive information. We very much want to have a collaboration in security, but we need to have a framework within which to do so. We have domestic laws, you have domestic laws and E.U. laws about the sharing of personal data. So it would leave us in a suboptimal place.

As the prime minister said in her letter: We will both cope with that if that’s what happens. It isn’t what we want to happen, and it isn’t what we expect to happen. I don’t hear anybody on the European Union side say, "We think the best solution is not to do a deal." Of course, people have different ideas on what that deal should entail. But there is a clear desire to do a deal, and that’s our desire as well.

In a strategy paper that was obtained by Handelsblatt, the German government has said that a hard Brexit could cause economic shock and, perhaps, a financial crash. Do you expect that as well? And, if so, do you have a contingency plan?

We’re planning for a variety of scenarios. We won’t know until some time through this process what the actual likely outcome is. I recognize the concerns that the German government is expressing in that paper. Of course there are risks in a disorderly exit without an agreement, and that’s something that we all would seek to avoid.

In another interview with German paper Welt am Sonntag, you mentioned that Britain would move to a different economic model if there were a disorderly Brexit. What do you mean by different economic model?

First of all, that is not our desire at all. We want to see the U.K. remain anchored in the mainstream of European fiscal, political and economic thinking. The point that I made was simply that if we don’t reach a deal, the U.K. will have to find another way to do business in the world. We will have to seek new agreements with partners outside Europe, for example, and the U.K. is not simply going to roll over and curl up in a ball. Our preference will be to have a deep and comprehensive partnership with the European Union and a strong trade partnership with the European Union. But if the European Union chooses not to do that, then we will have to look elsewhere.

03 p7 EU Demands for the United Kingdom-01

The time to secure deal is very short. The E.U. wants to talk first about the divorce, and then about the future relationship.

There is a creation of a difference that doesn’t really exist. The Prime Minister said we have to discuss these things together – the exit, the future arrangement and the transition. Chancellor Merkel then said we have to discuss the exit first, and then the future relationship. I don’t think they’re saying anything different. Michel Barnier in his speech last week said we start with the exit arrangements and then as we make progress, we start to look at the outline of what the future will look like. As I understand the Commission’s decision and the German government’s decision, it will be a discussion in parallel. It’s just that all the tracks may not start at the same time. We expect the first discussions will be about exit arrangements, but we hope that we will come – I think Ms. Merkel said "quite soon" in her comments – to a parallel discussion quite soon about the future arrangements, and then we will begin a discussion about the transition between the existing arrangement and the future arrangements.

There is of course some anxiety in the German business community about the next two years. A new poll by the German chamber of commerce shows that 40 percent of companies expect business to be worse after Brexit, and around 10 percent want to bring business back from Britain into the E.U. What can you tell German companies to reassure them at the moment?

First of all, if this is just about bringing business back from the U.K. into the European Union, if I may say so, that’s a very mercantilist way of thinking of it. I was talking last week to a British company that buys auto components from a German company on a rolling three-year contract. Their question was: "Can we continue that contract or do we have to find a U.K. source for our supply?" My answer is "stick with us," and I hope that early in these negotiations we will be able to provide you collectively with some confidence – some reassurance about avoiding a cliff edge. Business needs a reassurance that there won’t be a sudden cliff edge in its arrangements. And I should remind you, of course in trading goods, the U.K. has a 100-billion-pound a year deficit with the European Union.

Even if there is no cliff edge, is there anything you can offer German companies for the loss of some of the advantages of the single market?

There is tension here. It’s clear to me that in our negotiations that the closer our regulatory alignment, the more access we will be able to negotiate to the single market […] I would say to a German company asking these questions that we are looking to achieve a high level of agreed access, free-trade agreements for goods and services to the single market. And if we’re able to do that, it will be on the basis that the U.K. will remain broadly in the European mainstream in terms of regulation and taxation.

That is our strong preference: we want to minimize the disruption to our economy and to the trade relationships between our economy and the European Union. And what we have to do is work towards at the earliest possible time getting clear signals from this process out to the business world, so that business can be confident that they do not have to end their contracts, change their supply arrangements; that the complex supply chains, the business networks that are established across Europe, can continue now and will be able to continue in the future.

Torsten Riecke is Handelsblatt's international correspondent. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. To contact the authors: [email protected]; [email protected]