“‘Never has so much been put at risk for so many by so few for so little,’ says Robert Jenkins, a former banker, fund manager and policymaker, delivering an ironic invocation of Churchill’s description of . . . the Battle of Britain.”
Although over two weeks have passed since the British vote to leave the EU, much remains unclear. However this story unfolds, it will be a fairly lengthy process that will depend on political developments in the United Kingdom and on the continent, as well as on the pace and outlook of negotiations and the state of the economy. In the meantime—and until any negotiations are concluded—there will be no immediate change to people’s rights to travel and work, in the way goods and services are traded, or to the way the UK economy and financial system are regulated.
While Britain and Europe are still reeling from and confused about the aftermath of the June 23 referendum, trends have begun to emerge that provide some guidance for the weeks and months ahead. British voters’ decision to take their country out of the European Union after forty-three years of membership is without a doubt the most significant event on the continent since the fall of the Berlin Wall. It will result in a high degree of uncertainty for the foreseeable future and may see a significant fragmentation—if not the ultimate end—of the United Kingdom. Moreover, it will mean heightened tensions and risks of divisions among the twenty-seven remaining members and have profound implications for U.S. interests on the continent.
Negotiating the Breakup
As Robin Niblett, director of the British think tank Chatham House, aptly put it, “a positive compromise requires a better understanding of each other’s concerns and a greater sense of empathy than currently exists on either side.” While Theresa May, Britain’s seventy-sixth prime minister, has not pinpointed when Britain will trigger the Article 50 process that will set the clock ticking, mapping out a constructive new UK-EU relationship is the crucial issue. But the opportunity to achieve this may well be missed, as a deep and mutual mistrust and disbelief divides many of Britain’s leaders from their European counterparts—risking to further compound the UK-EU split.
Article 50 of the Lisbon treaty sets out how an EU country might voluntarily leave the union. It is entirely up to the departing member state to trigger Article 50 by issuing a formal notification of its intention to leave. However, Britain’s Brexit vote does not require the government to pull the trigger immediately because the referendum is not legally binding. According to the British government’s legal services, the prime minister can trigger the two-year process of negotiating the UK’s withdrawal from the EU without a vote in Parliament, as the PM may invoke Article 50 under the royal prerogative, which does not require parliamentary approval.
Once Article 50 is formally invoked, the country will have two years to negotiate its withdrawal with the other member states. Failure to conclude the negotiations within that two-year period will result in the UK exiting the EU and falling back to WTO rules in its trade dealings with the bloc, unless every one of the remaining EU states agrees to extend the negotiations. WTO rules would apply, as they only allow countries to discriminate in favor of a trade partner in a limited number of circumstances—including a full bilateral trade deal. Theresa May has indicated there should be no general election before 2020 and is not expected to trigger Article 50 before the end of 2016, to give Britain time to “finalize” its negotiating stance.
Extricating the UK from the EU will be a complex affair, and the process could drag on much beyond the two-year timeline stipulated by Article 50. The full scale of the task facing Whitehall is massive, as the UK must renegotiate eighty thousand pages of EU agreements, deciding those to be kept in UK law and those to jettison.
When Prime Minister David Cameron announced the morning after the referendum that he would stand down by the autumn, he indicated he was leaving it to his successor to decide when to trigger Article 50. However, many in Brussels, as well as leaders in the UK Independence Party (UKIP), have made it clear they want the separation to move as quickly as possible. Others, including Germany’s Chancellor Angela Merkel, said they saw no rush and that timing was in the UK’s hands. In the end, the remaining twenty-seven are expected to wait until the designation of a new British prime minister to start turning the heat up again, for a probable triggering of Article 50 in late autumn.
However, what is clear from both Chancellor Merkel and French president François Hollande is that there will be no informal talks between the UK and the EU before the country invokes Article 50, despite comments made by Chancellor of the Exchequer George Osborne, who believed the exit process could only begin after attaining a better sense of what the post-Brexit relationship would look like. Furthermore, the UK has already been warned that it wouldn’t be able to cherry-pick EU privileges while shirking responsibilities. This has a lot less to do with the media hype around “punishing Britain” and a lot more to do with the concern, both with the European Commission and key member states, of a risk of referenda contagion, and the need to send a clear message to those who may want to follow the UK and revise their relationship with the EU that there is a cost to leaving the bloc. In other words, you can’t have your cake and eat it too.
The question as to whether triggering Article 50 would definitely cast the UK on its way out of the EU has set chanceries, newspapers and legal experts abuzz. According to the French government’s legal service, the UK would be entitled to rescind a notice to withdraw even though it had invoked Article 50. Such flexibility would mean that even if it was triggered, the UK could reverse a decision to withdraw, if either Parliament or a second referendum endorsed the step.
There is also much talk, in London and on the continent, of finding ways to “reverse the result.” The desire to rerun the June 2016 vote—whether through a second referendum or a general election—will most probably linger and hover in the background, depending on how the negotiations proceed and the British economy performs. However, toying with the result of the June 23 vote would require a very deft hand to pull it off. At this stage, we do not believe this to be a serious political option: Theresa May has made abundantly clear that in her view the will of the people will be obeyed; a second referendum could be politically very costly to the Conservatives, whose Euroskeptic wing would likely split, potentially joining with UKIP; and European leaders heading towards their own elections would step up anti-UK policies.
What Sort of a Deal Will London Seek?
The heart of the debate will pit those in the UK who feel they need to retain a close relationship with the EU, access to the single market and some minor concession on free movement of people, against those who want to curb European migration as quickly as possible and don’t value membership in the EU’s internal market. In other words, this is a battle between a “Norway-plus” constituency and a “Canada-light” caucus.
A “Norway-plus” deal would mean full access to the single market, but in return the UK would be obliged to pay a contribution to the EU budget, accept the rules of the EU club, and hence a majority of EU laws, including free movement of people—all the things the Leave camp loathes about the EU. The “Canada-light” option, on the other hand, would take the form of a free trade deal between the UK and the EU, giving Britain preferential access to the EU single market and eliminating most trade tariffs, without all the obligations that Norway faces. British exporters would have to prove that their goods are entirely “made in Britain,” which imposes extra costs, to prevent imports entering the EU through a “back door.” Crucially, such a deal would not give UK financial services the EU market access that they have now. It would also mean that firms that export to the EU would have to comply with EU product standards and technical requirements without having any say in setting them.
The real issue for the UK however, as indicated by EU Trade Commissioner Cecilia Malmström, is that it cannot begin negotiating trade terms with the bloc until after it has left. Even if other EU Commission officials privately believe it is “inconceivable” for trade talks not to start before the UK’s exit, Malmström’s view of two consecutive sets of negotiations appears technically correct. At the EU summit in Brussels on June 29, the twenty-seven government leaders—without the UK—agreed Brexit “divorce” talks should begin and end before initiating any talks on a new settlement for the UK, with an apparent determination among the leaders not to mix the two.
Among the most critical issues for the proponents of the “Norway-plus” option is the preservation of the so-called passporting rights, allowing non-European firms that are registered in at least one of the EU’s twenty-eight jurisdictions to operate in all other member countries. With Brexit, all businesses operating across the EU from a base in the UK could be affected by a loss of passporting rights. However, European Commission vice president and incoming European commissioner for financial services Valdis Dombrovskis recently reaffirmed before the European Parliament that there would be no passporting for the UK without free movement of people. “The question of the passport is linked to the country being within the EU internal market,” he said, adding that access to the single market would require the UK to accept the EU’s Four Freedoms, including the freedom of people to work anywhere in the bloc. In sum, “there can be no cherry picking.” The fact that this line is being spoken by the incoming commissioner for financial services seems to indicate that the one person in Brussels who should understand UK-based financial services firms’ plight, should they lose the right to passport, is not interested in cutting a deal with the UK. In other words, it appears to be free movement of people or nothing.
The level of access to the internal market will depend on the UK’s acceptance of the Four Freedoms; free movement of people, capital, goods and services. It is hard to imagine that the EU will allow the UK to retain these valuable rights without shouldering the same obligations the referendum rejected. As Angela Merkel pointed out in a speech before Germany’s parliament: “Anyone who wants to leave this family can’t expect to get rid of all obligations while holding onto privileges.” Furthermore, if the EU wants to play hardball, it could decide to open any negotiation on whether the UK’s financial rules are equivalent to the EU, and therefore that UK-based firms can operate in Europe only after the bigger bargain over Brexit is agreed. That would add at least a year on top of the two years it would take to thrash out that deal, a timeframe that would almost certainly be too much for most firms. Many of them would simply decide that it’s more convenient to relocate inside the EU now, rather than wait for the unknown to clear.
Beyond its trading relationship with the EU, the UK will want to retain preferential access to the markets of the fifty-two countries currently covered by individual country or multicountry agreements with the EU. Britain may well have to renegotiate trade deals with all of them. Britain is a large market, so there is a clear incentive for other countries to negotiate a deal, while advocates of Brexit argued that it would be in nobody’s interest to interrupt the current trading partnerships.
If the talks both with the EU and with third countries don’t reach a deal before the EU exit takes effect, then under WTO rules, both the UK and the EU would be obliged to apply to each other the tariffs and other trade restrictions they apply to the rest of the world.
Impact on Britain: A Fractured Kingdom?
Voter turnout for the referendum was high at 72 percent, with over thirty million people participating, while the 52-48 result may lead one to believe the vote to have been a fairly close affair. A closer study of the numbers shows a rather different picture, with a map of a highly polarized society emerging as a result of the ballot. The UK is not only split between two roughly similar halves (pro- and anti-Brexit), but also sharply divided along generational, educational and regional lines.
73 percent of people aged 18–24 and 62 percent of those between 25–34 voted Remain, while 57 percent of those aged 55–64 and 60 percent of the 65 and above cohort voted Leave. 71 percent of university graduates voted Remain, against 34 percent of those with only a high-school education. England, with the notable exception of London, voted for Brexit by 53.4 percent to 46.6 percent, as did Wales, with Leave getting 52.5 percent of the vote there. On the other hand, Scotland and Northern Ireland both backed staying in the EU. Scotland supported Remain by 62 percent without a single constituency putting Leave in the lead, while 56 percent in Northern Ireland voted Remain.
Thus, an important implication of the vote is the increased possibility of a breakup of the UK itself. Nicola Sturgeon, Scotland’s first minister, now arguesa second referendum on Scottish independence is “highly likely” as the result of a “material change in circumstance,” leading to Scotland being taken out of the EU against her clearly expressed will. However, the complexities of unraveling the UK at the same time as it negotiates its withdrawal from the EU are such that it is highly unlikely the two could be done concurrently. Spain and France have already indicated they will block separate talks with Scotland, insisting exit talks will only be held with the UK government and not the Holyrood administration. Sturgeon must likely win a new independence referendum to retain her hopes of Scotland remaining an EU member. However, Sturgeon also knows that she cannot afford to call and lose a second referendum, as a second defeat would most certainly terminate dreams of independence. Hence, she will be in no rush to hold another referendum until polls consistently show solid majority support for independence.
The results of the referendum may also have major ramifications for Ireland, with Northern Ireland’s Deputy First Minister Martin McGuinness and Irish political leaders south of the border calling for the reunification of Ireland after Britain’s vote to leave the EU. The UK’s exit from the EU and renewed border controls could undermine two decades of peace between former sectarian rivals and dampen economies in both Irish regions. The dismantling of military border posts was a key aspect of a 1998 peace deal that ended three decades of violence between Catholic nationalists seeking a united Ireland and Protestant unionists who wanted to keep Northern Ireland as part of the UK. Lord Trimble, the former leader of the Ulster Unionist Party who negotiated the 1998 Good Friday Agreement that brought peace to Northern Ireland,conceded that if Scotland did become independent then a united Ireland would be “on the table.”
Gibraltar, which like Scotland and Northern Ireland voted to remain in the EU, has signaled it wishes to explore its options. As long as the UK was a member of the EU, Brussels remained neutral in the ongoing dispute between Spain and the UK about sovereignty over “the Rock.” It is likely, once the UK is officially out of the EU, that Brussels as well as many member-state capitals will back Spain.
Whatever happens, it is unlikely that the current UK institutional setup will come out unscathed from the Brexit vote. The governance of England, Scotland, Wales and Northern Ireland needs to be reinvented if the UK is to be saved from disintegration, an independent all-party group of experts, the Constitutional Reform Group, has argued. The group, convened by former Conservative cabinet minister Lord Salisbury, has made the case for radical constitutional change in the UK, proposing for the existing union to be replaced with fully devolved government in each part of the UK, each given complete sovereignty over its own affairs.
Impact on the EU: Where Do We Go from Here?
EU leaders are struggling to develop a coherent response to the shock of an imminent UK departure. The European Parliament and European Commission president Jean-Claude Juncker have called for the UK to move quickly on filing a notification to withdraw so that exit negotiations can begin swiftly. The thinking behind that push for early action is linked to the fear of a possible “referenda chain reaction” on the continent. Additionally, it addresses the desire to send a strong message that there is a cost to leaving the EU to the potential voters of the Euroskeptic parties Front National and Alternative für Deutschland ahead of the 2017 French and German elections.
The commission has already appointed the head of its EU Brexit taskforce, Didier Seeuws, a Belgian national who served as chief of staff to Herman van Rompuy during his tenure as European Council president. Seeuws will lead the EU’s negotiating team working on a British exit deal. Negotiations will be split into two separate streams: the first stream, to be run by the commission, will manage the “nuts and bolts” of the UK leaving the union. The second, managed by Seeuws on a day-to-day basis, will determine the political nature of the UK’s post-Brexit relationship with the EU.
At the council, representing the member states, things are a little more nuanced. While a clear common position has crystallized as to declining to hold any informal talks with Britain ahead of that country’s official exit notification, a divide between proponents of a quick versus a slow exit has emerged.
Germany, Denmark, Sweden and some central and eastern European countries are concerned about finding a way to limit the economic damage. The UK is Germany’s largest single auto market, while German companies employ nearly four hundred thousand people in the country. Germany’s business lobby has already begun pushing for a compromise to grant the UK continued access to the common market, as it fears the country’s economic performance could drop by as much as 3 percent as a result of Brexit. German companies sell wares and services to the UK valued at around 120 billion euros a year. Chancellor Merkel finds herself in a predicament: Britain is one of Germany’s most important trading partners, but granting the Brits too many concessions would go down badly in such a Europhile country and would be sending the wrong political message to other would-be “leavers.” As a result, Chancellor Merkel has been walking a tightrope, supportive of Cameron in recognizing the UK’s right to decide on when to trigger Article 50, but at the same time standing firm in stating that Article 50 is the only route and that informal negotiations will not occur.
The group advocating for a speedy divorce is led by France and the Netherlands, both countries having to contend with strong populist movements and wary of Brexit’s potential snowball effect. France will seek to convince other member states to undo all treaties and agreements with the UK to quickly remove European subsidies to the UK, reassess trade relations sector by sector, and to establish new migration rules. Without being punitive, the approach has to set the British case as an example: a member state cannot leave the EU and still retain the benefits of its former membership. France will not impose visa restrictions but will likely instead argue for limiting “financial passports” and the nonrecognition of the British supervisory authorities in the financial sector. This would force non-EU businesses established in the UK with the purpose of having an access to the single market to relocate to the continent. Similarly, France might not recognize clearing houses established in the UK, forcing them to resettle on European territory under the authority of the European Central Bank. Regarding trade, the French hope to see the UK seek a Norwegian-like solution, accepting EU regulations, including free movement of workers, in exchange for access to the single market.
Despite what may have been reported in the media, the French are not out to “punish” the UK, even if Paris will certainly compete with Frankfurt and Dublin to attract any financial services that might leave the City of London. France is losing its closest partner on defense matters (even if the 2010 Lancaster House agreements shouldn’t be immediately affected by Brexit) and fear Britain may downsize its military ambitions once outside the European Union, leaving France as the bloc’s sole significant military power as well as its sole nuclear power. In an EU without the UK, only France, as a permanent member of the UN Security Council, would have a truly global outlook. The French are worried about a strategic withdrawal by the UK and fear that, as a result, the EU might become less active on the world scene. An EU at twenty-seven may take a more mercantilist approach to foreign policy and be less likely to use sanctions as an instrument of pressure on countries like Russia without the UK in the room to argue for them.
Indeed, Brexit will profoundly disrupt the EU’s internal equilibrium. The withdrawal of the UK will mathematically reinforce the political influence of the EU’s large member states (Germany, France and Italy), with the requirement to reach a blocking minority within the council of a least four member states representing more than 35 percent of the EU population more difficult to achieve. Furthermore, for all practical purposes, with Britain out, the eurozone becomes the EU, profoundly changing the relationship between eurozone countries and those not having adopted the euro, primarily to the detriment of the latter. Without the UK, the group of eight non-euro countries will only account for 15 percent of the EU’s GDP, and may strain to get their voices heard, seeing the emergence of a two-tiered Europe and risking political and economic marginalization within the EU.
Brexit will increase Germany’s economic and political dominance on the continent, a prospect that neither Berlin nor its partners necessarily welcomes. Germany remains reluctant to adopt a unilateral leadership role within the EU. For one thing, its lack of experience in international security and its ongoing reluctance to lead in this area undermines its external credibility, making France the only remaining member state with a claim to be a global security actor. However, while many speak of a Franco-German engine for the EU, France’s current economic weakness and inability to implement long-overdue labor market and competitiveness reforms make Paris very much the junior partner to Berlin in a lopsided relationship that was to some extent balanced by Britain.
Germany’s leaders will, however, most certainly continue to exercise restraint. They are fully aware that they are operating at the limits of their authority, as the backlash from the EU’s German-led austerity program or on refugees have clearly demonstrated. It will therefore continue to work with and through its traditional alliance with the French, hoping that 2017 finally brings a reformist government to power in Paris.
Without the British and their advocacy for free trade, the influence of more interventionist European countries, led by France and to some extent Germany, will probably become greater. The UK’s departure is likely to make the bloc less liberal and more protectionist. However, this fear shouldn’t be overplayed as there has been a broad consensus across the Union in favor of moves to liberalize markets for goods, services and labor over the last few years. Much of this has been driven by Eurozone countries’ attempt to improve their competitiveness, a drive that has been happening without particularly active UK engagement.
The final tangible and direct economic or financial impact from a Brexit on the rest of the EU would be the contributions to the EU budget. As the UK is one of the net contributors to the EU budget, all other countries would have to shoulder the missing money. The biggest burden would be on the biggest countries, with Germany having to pay in over 2 billion euros and France over 1 billion euros on top of their current contributions to the EU budget.
Meanwhile, senior officials in Berlin and Paris have started talking about a “Franco-German initiative” for EU political reforms “that would give some powers back to national capitals in an effort to contain possible contagion of the UK's Brexit vote across Europe.” The idea behind this initiative is to focus cooperation on areas such as security, foreign policy, border control, the digital agenda, energy, transportation and eurozone governance, but to shift decisionmaking on other issues back to national capitals. The plan is to be unveiled in September, but should focus on safeguarding the EU’s two biggest achievements since the establishment of the single market: the euro and border-free travel.
Preventing the demise of both Schengen and the euro is not impossible. Better control of external borders and more robust intelligence sharing would make border-free travel safer and more defensible from a security perspective. But, crucially, there will also have to be a downward revision of the benefits available to those who have not contributed to the system, possibly the only way to hold on to Europe’s welfare model without creating an irrepressible appeal for poor migrants. Removing the euro's vulnerabilities ultimately requires the kind of fiscal policy-sharing that EU countries have resisted. France and Germany feel the EU would not survive an unraveling of the monetary union, and they are working hard to show that they’re intent on shoring up the single currency and implementing reforms that have long been on the table. However, while Brexit could give a new impetus to eurozone integration along the lines of the 2015 “Five Presidents’ Report,” any substantive progress in that direction is unlikely before the French and German elections in 2017. The snag here has nothing to do with the UK, but rather with the deep divisions between France and Germany—between the stubborn German-led focus on austerity and southern Europeans’ need for increased spending to restore growth and boost competitiveness—and their inability to reach a new compromise, which is preventing progress.
Impact on the United States: Whither the Special Relationship?
Brexit will affect transatlantic relations by the United States losing its most like-minded ally within the bloc and a critical link between Washington and Brussels at a time when EU-U.S. relations are strained. Without the UK, Brussels may well become a more difficult foreign policy partner, resulting in the revival of key bilateral relationships as a result to offer Washington alternative channels for influencing European policymaking.
The EU at twenty-seven will remain an important regional partner for the United States, but it will, at least at first, be less capable, more inward-looking and even more dependent on the United States for its security interests. Europe post-Brexit may be seen in Washington as an economically laggard and politically dysfunctional region, less stable, less secure and less capable militarily and diplomatically.
Brexit reinforces Germany’s status as Washington’s primary ally on all things European. As the dominant country in the Eurozone, Germany is already America’s main European partner in addressing the global economic crisis and in resolving the Ukraine conflict. Brexit will only reinforce this trend. Paris, meanwhile, has for the last few years emerged as a critical ally on defense and security issues in the Middle East, North Africa and the Sahel, showing itself more willing than London to undertake potentially risky military operations.
With the fourteenth TTIP round of negotiations between American and EU officials underway in Brussels as of July 11, one could almost believe that it was business as usual and that nothing really happened on June 23 that may derail the TTIP train. However, and despite EU Trade Commissioner Malmström’s comments that TTIP would survive Brexit, the trade deal that was already on shaky ground before the vote may well have been killed off. Brussels will be focused in the weeks and months to come on dealing with the economic and political fallout of Brexit and may lack the bandwidth to continue pursuing the TTIP talks. Even if it didn’t, it would need time to recalibrate its proposals to reflect the UK’s exit, just as the negotiations were supposed to be entering their endgame. David O’Sullivan, the EU’s ambassador to the United States, is still upbeat about the prospects for TTIP, having been quoted as saying that“the most important thing now is to reach a conclusion between the negotiators this year, and that is how we will go forward.” We believe that former U.S. Trade Representative Susan Schwab is much closer to the truth when saying that “it is almost impossible to imagine TTIP closing this year at this point.”
The question should rather be whether Brexit isn’t really the nail in the coffin of a proposed trade deal that has become hugely unpopular in Europe and controversial in the United States as a result of the anti-trade attitudes displayed during the 2016 U.S. presidential campaign. While a separate U.S.-UK trade deal may make sense—most certainly for the UK—London won’t be able to engage in any meaningful discussion with Washington until it has formally disentangled itself from the EU and agreed on the type of trade relationship it wants with Brussels.
Conclusion
The Brexit saga is likely to remain a simmering issue with its related uncertainties for the foreseeable future, whether the UK actually triggers Article 50 or not. If and when negotiations begin in earnest, the remaining twenty-seven EU member states should not try to punish the British. Europe and the UK have no choice but to maintain a working relationship with one another; both sides will have to make compromises. Nevertheless, the UK will evidently end up in a less positive situation than the one it enjoyed before leaving; if an EU member state has a better life outside Europe than inside, why should anybody stay inside? The EU’s priority will be limiting contagion and seeking to recalibrate Europe to respond to its citizens’ distrust. The future EU at twenty-seven has the potential to look very different from the EU that has evolved over the past twenty years. Many in the EU are convinced that crises provide the EU with the impetus to advance and move forward, though the key question remains as to whether there is enough vision and leadership to create an institutional structure that isn’t aimed at generating “more” or “less” Europe, but at making the EU more effective.
Richard Burt, former U.S. ambassador to Germany and Assistant Secretary of State, serves as Managing Director at McLarty Associates and chairman of the National Interest’s Advisory Council. Philippe Maze-Sencier is a Senior Director at McLarty Associates.
No comments:
Post a Comment