The outcome of the referendum is clear, the U.K. wants out. Fast. However, the whole process of the Brexit has not even started yet. Hard statements during public appearances set the scene. Is this negotiation rhetoric or something else? What are the consequences we could anticipate? What exit scenarios are available? How does the legal framework interfere?
The working title of this article “Will Theresa May get what she wants?”, hints towards the issue .On the one hand there is a desire for a hard (swift) Brexit. On the other hand there is a need for a tailor-made exit, which undoubtedly will result in a lengthy process.
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The procedural framework (“the famous Article 50”)
The starting point of withdrawal from the Union is Article 50. As soon as this article is triggered the divorce period will start. The procedure is new, there is no precedent, and the article itself is also relatively recent, inserted since the treaty of Lisbon (entered into force on 1 December 2009).
Triggering Article 50 will lead to at least 2 new agreements. First of all, the “withdrawal agreement” (divorce) and second, the agreement governing the future relation that The Union will have with the UK. There is a lot of speculation on the form of this “future trade agreement”, potentially there could also be an agreement covering the transition period.
Interestingly, Article 50 sets forth that The Union shall negotiate and conclude an agreement with the exiting State, taking account of the framework for its future relationship with The Union. This means that we negotiate our divorce, keeping in mind the relationship we want to have in the future. Exceptionally tricky.
European Court of Justice
In the U.K. there are strong feelings against the European Court of Justice. Theresa May often indicates that the U.K. does not recognize its authority. It is therefore unfortunate for the U.K., that the Court most likely will have to give an obligatory advice on the agreement(s) that will be negotiated. The Court will probably have a final say as it pertains to the wording of the agreement(s). This topic has not been given much attention.
If you’re not out, you’re in
It is interesting to see, and important to realize, that tension will originate from the fact that until the withdrawal procedure is completed, the U.K. is and remains a member of The Union, with everything that that implies (financial contribution, free movement, transposing directives that have already been voted upon, respecting state aid rules etc.). The only exception is the participation in meetings of the counsel. Whether they like it or not, until they’re out, they’re in. Unless the divorce is completed, we’re married.
Divorce metaphor. Once two partners decide to go separate ways, it is not necessarily the easiest period when they are obliged to live under the same roof. If that period takes a long time that will create tensions.
Sure Mrs. May can visit President Trump and create new alliances and make new agreements. However, the U.K. is not allowed to conclude any form of trade agreement that touches upon any of the competences of The Union until the final agreements are completed.
Catch 22
As coined by Joseph Heller, in his 1961 novel, the U.K may find itself in a paradoxical situation from which there is no escape because of contradictory rules. The U.K. wants out and therefore wishes to divorce quickly. However it doesn’t want to cut and paste standard divorce scenarios but tailor the divorce settlement. This will take a lot of time, time the U.K. doesn’t have to spare
Which standard (cut and paste) scenarios for “future trade agreement” are available?
Strictly speaking, there are two types of scenarios available: “trade agreements” and “association agreements”. The concept of an association agreement is interesting but not defined legally. Basically, it means a country with which we have privileged links (like the agreement with the Ukraine, Turkey and former colonies). This is usually used for the purpose of a pre-accession, a way in. So to use this formula in this context is a bit odd. As Brexit is a way out. Nevertheless, it does seem for all purposes, the legal format that is going to be used.
Which highlights of formulas are implemented today? (not necessarily in order of hierarchy, but ranging from very intensive cooperation to loosest type of agreement).
- Full EU Membership: Free movement of goods, services, capital and people. Substantial contribution. Application of EU rules with influence and vote. Not free to make third party deals. The U.K. already voted against this, and is ruled out.
- Full internal market participation (or so called Norwegian model (European Economic Area, EEA)): Full access to single market but with little influence. Free movement. Financial contribution. Anticipating on the basis of what Theresa May has mentioned in public appearances, this scenario seems very unlikely. The EEA emphasises the free movement of workers, which would be against what the U.K. desires for the future.
- Free movement. Or so called Swiss model (European Free Trade Association, EFTA): Only free movement (including free movement of workers). For the same reason (free movement of workers) this is probably also more than the U.K. wants at the moment. Furthermore the Swiss model excludes free movement of financial services, and that seems to be something the U.K. does want.
- Customs Union: Or so called Turkish model. This is something Theresa May seems to want. However key to the customs union is the fact that there are no internal tariff barriers and one common external tariff. Turkey does not decide on the tariffs it uses, but the Union does. It seems that for the moment the U.K. doesn’t want to accept the common external tariff, hence a legal impossibility.
- Association Agreement: Or so called Ukrainian model or DCFTA (Deep and Comprehensive Free Trade Area). Taking on board community law. Something the U.K. would most likely end up with.
- Free Trade Agreement: Or so called Canadian & Singapore model.
- No deal. WTO and MFN based approach
Irreconcilable
Theresa May indicated, in her speech on January 17, 2017, a list of elements as priorities for the U.K. government. These elements also need to be addressed prior to finalizing the agreements (i.e. prior to finalizing the divorce). However some of these points seem irreconcilable at first glance. Negotiation rhetoric? Maybe. But a number of these points seem really hard to realize. Consequently the negotiations and decisions will take even longer.
- “Control of immigration” simultaneously with “Free trade” (free trade but without free movement seems to be the message).
- A Customs Union, but without the common external tariff.
- No financial contribution but participation in individual programs (for example the exchange of students) and projects (agricultural).
- Extreme allergy for The Court of Justice. Besides the obligatory advice on the agreements (temporary), after the final agreement between the UK and EU, for all years to come, the final word on the way how that agreement will have to be interpreted shall be given by The Court of Justice. Weather the U.K. likes it or not, there will still be jurisprudence affecting the agreement that forms the basis of cooperation. The same court will also be appointed for the resolution of disputes.
Conclusion
It is not expected that the Brexit will be concluded before Mrs. May’s term (3 more years) is over. Most likely the final agreement will contain thousands of pages of complicated text that need consensus. Furthermore all parliaments of all member states will have to ratify the final agreement (shared competences). So by the time the Brexit is negotiated and settled in all its aspects, the U.K. government most probably changed. Maybe by then we will see ourselves amidst a Bremain scenario instead of a Brexit scenario. For now it would be best that this Brexit simply starts happening.
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Footnote 1. List of priorities for the U.K. government
- Certainty
- Control of own laws
- Strengthen the Union
- Maintain the Common Travel Area with Ireland
- Control of immigration
- Rights for EU nationals in Britain and British nationals in the EU
- Protect workers’ rights
- Free trade with European markets
- New trade agreements with other countries
- The best place for science and innovation
- Cooperation in the fight against crime and terrorism
- A smooth and orderly Brexit
TREASURY INSIGHTS & CURRENT TOPICS 