18/09/2017 19:19 BST | Updated 19/09/2017 09:57 BST

UK Growth Will Be Hit By Brexit As Trade Costs Rise, Top German Economist Predicts

He backs 'permanent' transition period to smooth UK exit

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Theresa May and Angela Merkel

One of Germany’s leading economists has urged Britain and the EU to agree a “permanent transition” to Brexit amid fresh figures showing UK growth would take a direct hit from quitting the bloc.

In an interview with HuffPost European editors, Clemens Fuest said that British GDP would be up to 4% lower in 2027 than it would have been if the UK had stayed in the European Union.

Fuest, president of the highly-respected Ifo Institute for Economic Research, stressed that Brexit “will not be a catastrophe for the UK” because lower growth will be offset by a devalued pound, boosting exports.

He stressed that the UK would still leave the EU in 2019 and it was pointless to imagine its referendum result could be reversed.

But he left open the option of an arrangement that would keep the status quo as much as possible outside the bloc

And once the UK formally quits the EU, a “transition” deal to maintain trade and other arrangements should be extended indefinitely to avoid disruption to both sides.

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Prof Dr Clemens Fuest

“I hope for a status of permanent transition that could look like ‘Norway Plus’ [with the UK outside the EU but in the single market]. That would be my preference: that state of transition would be forever,” Fuest said.

The economist’s remarks echo growing calls within some British political circles for “permanent” membership of the EU single market and customs union.

Supporters of Boris Johnson say that he fears Theresa May is heading for a “status quo” Brexit after agreeing to demands for a transition period of up to two years.

Deputy Labour leader Tom Watson said this month that staying in the single market “might be a permanent outcome of negotiations”.  

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Deputy Labour leader Tom Watson

And senior Labour figures have also told HuffPost UK that ‘Norway Plus’ – a bespoke version of membership of the European Economic Area [EEA], with some amendments to cover migration – was being explored actively by the party.

One senior Labour peer predicted that Brexit would never be fully realised. “When we are in this ‘transition’ phase, they will realise how complex this all is and how keeping the status quo is the best way of helping the economy,” the peer said.

EU negotiator Michel Barnier is understood to favour the EEA option for the UK, but Tory Eurosceptics prefer a Canada-style free trade deal. 

Many Conservative MPs fear a ‘Hotel California Brexit’, where the UK ‘can check out but never leave’ the EU in reality.

Boris Johnson, backed by Michael Gove, has been battling hard against the EEA route as it is at the heart of his worries over a ‘soft Brexit’.

In his interview, Fuest said: “Trade costs are going to increase. If you look ten years ahead, our studies suggest that UK GDP may be three or four percent lower than it would be without Brexit.”

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Brexit Secretary David Davis and EU negotiator Michel Barnier.

But he added that the devalued pound had already made British exports more competitive and that the impact would be reduced over time.

“I hoped the Brexit vote would be more rational. I believed in the British focus on money. I thought that economic arguments would dominate. But if you value independence and the issue of controlling immigration very highly, you leave despite the cost.

“Brexit will not be a catastrophe for the UK…The UK economy will continue to grow but at a lower rate. It makes a difference, put people won’t notice it. Some costs of Brexit are mitigated by devaluation of 20%. The production in the UK got just more attractive for car producers like BMW due to the devaluation. I don’t think BMW will move its factories.”

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The economist said that German Chancellor Angela Merkel would not want to ‘punish’ the UK for Brexit, but would equally not try to deliver any special deal for her car manufacturers.

“Many people in Brussels are offended by Brexit. Michel Barnier says: ‘We do not want to punish the UK, but there is a pedagogic element in the process’. This approach is risky and could make a deal very difficult.

“Merkel might pressure key politicians in the process like Guy Verhofstadt behind the scenes to avoid a hard Brexit,” he said.

“Many people in the UK overestimate the importance of Brexit for Merkel. Their hope that car producers will push Merkel to a soft Brexit might be an illusion. In Germany Brexit will primarily hit an industry which is very well off, the car indus-try. They can adjust to Brexit. The willingness of Merkel to compromise in order to get a better deal for UK will be limited.”

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European Parliament Brexit co-ordinator Guy Verhofstadt.

Elsewhere in the interview, Fuest said that the EU should not follow the federalist tendencies of European Commission president Jean-Claude Juncker- and warned that the euro currency would collapses without urgent reform.

 “Juncker’s suggestions for a federal future of Europe is not the future I see. We have several poorly connected debates about the EU in Europe. One of them is the Brussels debate, where people do not really understand the mood in the member states. The others are the national debates, each of them very much related to the perspective of the national public.

“Juncker’s strategy is often to say something provocative to push the debate. Some people will take up his idea and support him. And others will object and may grow even more suspi-cious about Brussels. This is a risky strategy.

“The Euro was dysfunctional when it was designed. The Euro couldn’t work with the original institutional framework. To make it work we need to live with the fact that governments of individual member states may be insolvent.

“We need to achieve a situation where government bonds can get restructured without causing a major financial crisis. That can be done, but it will be something new. But either we do some-thing new, or the Euro will fail. We need the reforms now and for the next 20 years, we will live with the decentralized Eu-rozone. If the Eurozone needs to become a federal state for the Euro to survive it will not survive”