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Brexit: A Friendly Users Guide

by Kenneth Wallace-Mueller, Member of the MEF Board

Fifty days ago, on 23 June 2016, the people of the United Kingdom went to the polls to vote on whether the UK should withdraw from the European Union (the so-called “Brexit”). In the months running up to the referendum, the result was anyone’s guess. In hindsight, it seemed that few really did believe that Brexit would happen.

The news that the UK – with the notable general exceptions of Scotland, Northern Ireland, Greater London and Gibraltar – had voted for Brexit came as an international shock. The unthinkable had happened. Fifty days later – what is going to happen?

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The generally accepted approach to Brexit is the now-famous Article 50 of the Treaty of the European Union (“TEU”). Whilst this Article has been the subject of much media discussion, the key is in paragraph 2:

“A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.”

As Article 50 has never been used before, its interpretation is essential. The generally accepted interpretation is that firstly the UK Prime Minister will give notice to the European Council – the college of Heads of State of the EU Member States. Of note is that this can be done at a time selected by the UK, and it cannot be pressurised into doing so. The new UK government led by Prime Minister Teresa May has suggested that it may be invoked in early 2017.

This will trigger a 2-year negotiation period in which the UK and the EU will negotiate the withdrawal of the UK. It is generally believed that in these negotiations the EU will be represented by the European Commission, however only once given the authority by the European Council and Parliament. During this period, the UK will remain a full member of the EU, continuing to be subject to EU law and jurisprudence, however it cannot take part in discussions which concern its withdrawal as a Member State.

The law does not specify what form the “framework” between the UK and EU should take. In the worst case, there will be no agreement within the negotiation period will expire, and no extension will be agreed upon. More likely however will be a withdrawal agreement or – in the best case – a full UK-EU cooperation agreement.

In any case, there is great speculation what form the relationship will take. This is both a legal and a political issue, driven by the possibilities offered under a wide range of legal sources, as well as political pressure from the British people, EU heads of government, third countries, and other international players. The topics of discussion may range across the 35 chapters of the EU acquis communautaire. In short – the negotiation will be complex, highly technical and without precedent.

An important factor to the UK is the tariff-free access to the EU Internal Market, i.e. free movement of goods, services and capital without customs or other import/export taxes, whilst having control over the movement of EU citizens and people of third countries into the UK. Such a model does not currently exist, as it would normally constitute a violation of the EU fundamental freedom of the movement of people.

As negotiations have not started, in principle anything is possible depending on the priorities of the UK and EU, as well as the signal the EU would want to send to third countries and any other Member States who might consider leaving in the future.

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The main cooperation models currently discussed are the Norwegian model, the Swiss model, the Turkish model, and the WTO model:

Norway: The European Free Trade Association (“EFTA”) is an organisation with four members: Norway, Iceland, Liechtenstein and Switzerland. EFTA is a free trade organisation whose member states historically were either unable or did not want to join the EU. With the exception of Switzerland, the three EFTA states as well as the EU Member States are parties to the European Economic Area (“EEA”) agreement, which created the European Internal Market – the basis for free movement between EEA member states. Post-Brexit, subject to consent of the four EFTA members, the UK could consider membership of EFTA, which has obligatory membership of the EEA. This would allow continuation of tariff-free trade with EU Member states, however – normally – it would prevent the UK from limiting free movement of EU citizens into the UK.

Switzerland: Compared to Norway, where certain bodies of EU legislation (includes those which enforce free movement) are adopted into the EEA agreement, Switzerland’s relationship to the EU and its membership of the Internal Market is regulated by a large number of bilateral agreements. This may be more attractive to the UK, as in principle it may allow it to select which EU laws it wants to apply. In doing so, the EU presents Switzerland with finalised EU legislation, however in practice it is not a conventional negotiation as the EU is not fully prepared to make any significant amendments to the text. In a referendum in 2014, the Swiss people voted to impose quotas limiting the movement of EU citizens into Switzerland, constituting a violation of the free movement of people, a mandatory agreement between the EU and Switzerland. Combined with the slow negotiation process, EU-Swiss relations have since then remained frosty, and the EU will unlikely consider this option for the UK.

Turkey: The EU and Turkey agreed upon a customs union in 1995, which means there are no customs tariffs or quotas between the two parties, i.e. free trade in goods, but not agricultural goods or services. Similar agreements exist with the microstates of Andorra and San Marino. For the UK, this model would have the advantage of not having to implement the principle of free movement of people. As with Turkey however, the UK would have to apply the EU common tariff to all third countries without the ability to control it. As with Switzerland, EU would not apply unless agreed bilaterally, and the Turkey model does not include provisions on banking and financial sectors, another important factor for the UK.

WTO: Whilst heralded as a model in itself, the World Trade Organisation (“WTO”) model is more a default approach should the UK and EU not agree upon a form of cooperation. As both the EU and all 28 Member States are signatories in their own rights, any trade between the UK and EU will be subject to WTO rules. Such trade is governed by five central principles, whereby the most important relating the UK and EU is arguably that of non-discrimination, specifically the “most favoured nation” rule. This stipulates that any WTO member state should offer the same tariffs for trade with all other WTO member states. In effect, this brings neither advantage nor disadvantage for the UK, yet is a back-up plan of sorts.

Brexit will likely be one of the most extensive and significant negotiations seen in human history, with repercussions across the world. No precedent exists, and anything can happen. It is far too early to determine what the outcome will be, but understanding the interest of both parties is crucial. The UK will want tariff-free access to the EU Internal Market whilst being able to set immigration quotas, and the EU will want to ensure the integrity of its principles and laws, whilst discouraging other Member States from leaving – a recent phenomenon in light of dissatisfaction with EU politics. On the other hand, one cannot forget that [despite the policital pressure from different sources and intricacies of constitutional and international law] this will be a negotiation like any other, with the UK and the EU on opposite sides of the table trying to find a mutually acceptable solution.

Whatever happens, as written on the cover of Douglas Adams’s famous book “The Hitchhiker’s Guide to the Galaxy” –  don’t panic.

Please note that the views expressed are those of the author and do not necessarily represent or reflect the views of Munich European Forum e.V.

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