Brexit, a struggle on three fronts

By Vladimir Medjak, Deputy President of the Research Forum of the European Movement in Serbia and Member of the Negotiating Team for Accession of the Republic of Serbia to the EU

On 23 June 2016, in a second referendum about leaving the EU1 the citizens of the United Kingdom decided that it was time for the UK to withdraw from the EU. This launched a process opposite to the well-known and elaborate EU accession process, which has characterized the EU since 1973, when the UK joined the then EEC as a member. The conditions for implementing Article 50 of the Treaty on European Union, which defines the EU exit procedure, have thus been created. After 43 years of joint life, a very demanding, expensive, and complex “divorce” begins.


Bearing in mind the extent of the relations on which they need to reach an agreement, it will be impossible for us to consider all of the aspects of this process in this paper, but in our analysis we will tackle the elements that we view as most important, especially: the exit procedure, the positions of the two sides on the most important issues, as well as the challenges that the UK is facing on its path to a definitive exit from the EU.


On 29 March 2017, following a months-long debate in the Parliament, UK Prime Minister Theresa May notified the European Council that the UK would leave the EU, thus announcing the next steps in the EU exit procedure under Article 50 of the Treaty on European Union.


The procedure in itself contains many restrictive elements for a country leaving the EU. Article 50, paragraph 2, envisages that the Union shall 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. This shows that they will first devise transitional solutions to regulate the relations immediately after the exit and provide some time for reaching a comprehensive agreement on the future relations between this state and the EU. The provisional solutions are necessary, considering that paragraph 3 of the same article leaves only two years to reach an exit deal and for it to come into force. Otherwise, in absence of an agreement, the UK will automatically cease to be a member of the EU when the two-year deadline expires, that is on 29 March 2019, unless the member states unanimously decide to extend the negotiation period.


This wording considerably reduces the room for maneuver for the country that is leaving the EU, and in theory gives considerable power to any of the other EU members, regardless of the fact that the agreement with the UK shall be concluded by the Council, acting by a qualified majority (Article 50.2 TEU). The UK has a two-year deadline to negotiate the exit conditions and define mutual relations. The international negotiations practice shows that this is a very tight deadline. With this, the ratification of an agreement in itself cannot last less than nine months, which theoretically reduces the exact time of negotiation to 15 months. In 2017, there will be a presidential election in France, a parliamentary election in Germany, which could be an additional factor of influence on the negotiation dynamics.


By triggering the EU exit procedure, the UK has launched the process of redefining its own position in Europe and the world. In this sense, the UK faces a serious fight on three fronts in the next years.


The first front is the negotiation with the EU on the exit conditions and future relations. Addressing the Parliament, Prime Minister May clearly stated that “no deal with the EU is better than a bad deal for Britain”.2 What would failure to reach an agreement mean for the UK? To answer this question, we must first look at the trade relations between the UK and the EU in 2015.


In 2015, the UK exported £133 billion of goods to other EU states and imported £218 billion of goods (the UK had a trade deficit of £85 billion with the EU, twice as big as in 2011, when it amounted to £43 billion). In 2015, the UK exports to the EU accounted for around 44 percent of total UK exports (down from 54 percent in 2000), which made the UK the least integrated country in the intra EU trade, where the average (or the share of trade of a member with other EU member) is around 60 percent.3


The situation in the services sector was completely different and it is in this segment that we can expect that the EU exit will hit the UK economic interests the most. Experience tells us that it is much easier to negotiate liberalization in the trade of goods than services, considering that access to the services market is more complex and difficult than trading goods.4 In the area of trade in services, the UK has a considerable surplus of £24 billion (£97 billion exports and £73 billion imports) with financial and business services accounting for more than a half of the exports (£45 billion), followed by travel services with £12 billion and transport services with £11 billion. It will be much easier for the EU to accept an agreement on trade in goods (where it has a surplus) than to reach arrangements on trade in services (where it has a considerable deficit). In other words, we can expect that EU members will be glad to divide the market that was, up until now, held by the UK companies.


In case of a no deal scenario of the EU exit, the whole trade with the EU would switch to the most favored nation (MFN) regime under the World Trade Organization (WTO) rules. This scenario is the least favorable for both the UK and the EU, so both sides point out that they want to avoid such a development, considering the importance of trade exchange. However, the biggest loser in this case would be the UK. It is difficult to assess precisely how much such a scenario would cost the UK, but projections range from 2.2 percent of the GDP in an optimistic case, to a 10 percent in a pessimistic case.5


In these circumstances the UK’s initial negotiating position is much weaker than the EU’s. On the other hand, even though the EU will negotiate as a trade block, each EU member is in a position to put forward its own demands for the UK, in exchange for being cooperative in reaching a deal by the established deadline. One of the first questions is the rights of some 2.8 million migrants from the EU to the UK (including 900,000 Polish nationals). On the other hand, around a million UK citizens live in the EU. This is why one of the first points stated by Prime Minister May was to mutually respect the already acquired rights. The EU’s position is the same in principle.


A special issue in the negotiation is what will happen with the UK contribution to the EU budget by the end of the current Multiannual Financial Framework in 2020, which the UK committed to pay in 2013. This will be one of the very important issues in the exit negotiation. Prime Minister May did not mention it in her EU exit plan, while, on the other hand, the EU expects the UK to honor its obligations toward the EU by the end of 2020. In 2014, the UK’s annual GNI-based contribution amounted to €14.52 billion, the VAT-based contribution was €2.93 billion, contribution based on traditional and own resources and customs duties was €2.7 billion, the UK rebate was €6 billion (total UK contributions were around €14 billion), while the EU expenditure in the UK was €6.98 billion. This means that the UK’s net contribution to the EU budget in 2014 was around €7 billion. The UK exit will reduce the EU budget by €4 billion for agriculture, €1.7 billion for regional policy, €1 billion for competitiveness funding, including €750 million for Horizon 2020 etc.6 Bearing in mind that the UK will leave the EU in March 2019, the question is, what will happen with the UK’s net contribution of €12.25 billion in the next 21 months, that is, by the end of 2020. In her EU exit plan Prime Minister May pointed out that the UK intended to continue participating in EU programs, especially research programs, and that it would pay for this participation. The access to EU programs will be especially important for UK scientific institutions, especially through Horizon 2020.


In June 2016, immediately after the referendum, the EU adopted the basic principles of the negotiation with the UK, which are based on three postulates: 1) no negotiations without notification, 2) balance of rights and obligations, 3) no access to European free market without acceptance of EU’s four freedoms. This was a clear message that the EU would not allow access to single market without freedom of movement for workers, which was one of the main arguments of the Brexit advocates during the campaign. In the EU exit plan presented by Prime Minister May in the Parliament in January 2017, she clearly pointed out that the UK did not want to negotiate about the remaining part of the EU’s single market, but sought to keep the greatest possible access to the EU’s market through a new “comprehensive and bold Free Trade Agreement”.7 This was a clear answer to the EU’s third postulate.


By stating that the UK was leaving the EU’s single market, Prime Minister May opened a second, internal front. Considering the complexity of the UK as a state, it is necessary to preserve the state unity in a situation of strong centrifugal forces, which are pulling parts of the UK toward the EU market. This was clearly set as the basic goal in the UK’s exit plan.8The first positions taken on this by the governments of Scotland and Wales suggest that this will not be an easy task. The governments of these two parts of the UK have clearly stated that they wanted to remain part of the EU’s single market and that they were considering options to do so, even if the rest of the UK (England) leaves. The Scottish Government is again raising the possibility of a second referendum on Scotland’s independence, while Wales demands a further redefinition of its constitutional position within the UK. Considering such distant initial positions on a future relationship with the EU, we can expect this “second front” to be as difficult for negotiation as the first one and decisive for the future of the UK itself.
Resolving the issue of border crossing between the Republic of Ireland and Northern Ireland will be a special challenge. After a decade-long conflict, the border issue was resolved by the Good Friday Agreement in 1998. This border is the reason why the UK and Ireland joined the EEC together in 1973 and why they are not part of the Schengen Area. Every day 14,000 people cross the Irish border to go to work or school. After the exit, this will become an EU external border, which can seriously change the situation in this Irish island. This is maybe the most important part of the divorce that must be agreed on within two years, because it concerns peace and security.


The third front that Prime Minister May will have to manage is to provide access to the markets of third countries after leaving the EU. In 2015, the UK exported £171 billion worth of goods outside the EU (with the United States as its biggest single partner, accounting for almost 17 percent of the overall exports of goods and services) and imported £192 billion worth of goods and services. After joining the EEC in 1973, the UK conferred the foreign trade management powers to the EEC, ending previously reached agreements. This means that, at the time of the EU exit, the UK will not have any agreements on foreign trade with third countries, or that it will have to return to the starting point, that is the status of a WTO member and the MFN regime. Legally and in principle, the UK will not be able to sign trade agreements until the moment it leaves the EU. All of the trade partners with which the UK will want to negotiate are aware of this, so the UK needs to regulate its trade relations as soon as possible, which again undermines its negotiating position. Another issue is the political course of the UK’s biggest individual trade partner, the United States under the leadership of President Trump, who demonstrates a protectionist approach to international trade.


The European Union’s plan for negotiation will be known in the next days. In December 2016 the European Council agreed on the procedure for talks with the UK. The main elements known so far are that the European Commission will negotiate on behalf of the EU, while former French Foreign Minister Michel Barnier has been nominated as chief negotiator. The personality of the EU’s chief negotiator can set the whole tone of the negotiations and Barnier’s appointment suggests that they will not be simple. After the UK’s announcement on triggering the Article 50, he stated that the absolute priorities, which must be agreed on before a trade deal, would be: 1) regulating the issue of Irish border functioning, 2) the issue of rights of EU citizens in the UK and British citizens living in the rest of the EU, and 3) resolving the issue of settling the UK’s debt to the EU budget. With this, the EU has demonstrated what the priorities and its initial position for the negotiations would be.


Despite the fact that the EU countries are aware that they also have a lot to lose in case of a failed attempt to reach an agreement with the UK, EU officials’ statements suggest that the EU will insist, with an aim to preserve unity and survive, that the UK must not be allowed to have the same benefits after leaving the EU as while it was an EU member and that the EU principles are non-negotiable. Regardless of what both sides have said so far on being ready to compromise and on mutual understanding, the negotiation will be very complex, considering the economic and other stakes that both sides have in this and the need to find specific solutions.


We must notice that both sides have underlined preserving their own unity9 as one of their basic principles (or goals) in the negotiation, which shows that the processes of disintegration, once they are triggered, must not necessarily stop at state borders and that Pandora’s box will be difficult to close once it is opened. Both sides will set as a priority to do everything in their power to prevent further disintegration, and only after that will they take into account the demands of the other side.
We could say that the EU has a better initial position in the forthcoming negotiation. However, we cannot neglect the fact that the UK is the fifth biggest world economy and a traditional trade nation. Also, despite all of the challenges that the UK will face in defining its position internally, it has a strong central Government and a more coherent system of management and decision making than the EU.


The next two years will be very dynamic in the Old Continent. The state of the European Union and elections in France and Germany will inevitably influence the negotiation with the UK and further evolution within the EU. The exit of the UK will strongly influence the future outlook of the EU and future integration. The UK exit from the EU process and the process of redefining the EU itself will go in parallel and will shape Europe’s outlook in the decades to come. At this moment, we do not have answers to the questions on what the relationship between the UK and the EU will be like at the end of this process, and how long it will last. Both sides have embarked on a process where written or unwritten rules do not exist, and the stakes are high.

 

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1The first one, on leaving the European Economic Community, was held in 1975.

“The United Kingdom’s exit from and new partnership with the European Union”, January 2017, www.gov.uk, point 12.

3As a comparison, in 2016, Serbia, as a non-member, exported around 63 percent of its total exports to the EU, and imported around 64% of total imports.

4It took the European Union 20 years to reach an agreement on the liberalization of services within the EU, the negotiation lasted from 1986 to 2006, when they adopted a Directive on Services. The SAA between Serbia and the EU envisages trade liberalization for 95 percent of the tariff lines/goods but does not foresee the liberalization of services.

5 “Brexit or Fixit? The Trade and Welfare Effects of Leaving the European Union”, London School of Economics, Centre for Economic Performance, May 2014, available on http://cep.lse.ac.uk/pubs/download/pa016.pdf

6Jorge Núñez Ferrer and David Rinaldi, “The Impact of Brexit on the EU Budget: A non-catastrophic event“, CEPS policy brief, No. 347, 7 September 2016.

7“The United Kingdom’s exit from and new partnership with the European Union”, January 2017, www.gov.uk, point 8.

8ibidem, point 3.

9“We intend to conduct the withdrawal negotiations in a spirit of trust and unity among us”, Conclusions from an informal EU summit, 15 December 2016.