Brexit. Brexit? Part I

The title is somewhat misleading, as is the case when the purpose of the title is not necessarily to reflect the content, but rather to attract attention. To dispel any misunderstandings, the question mark does not refer to the fact that Brexit will happen. It will. But when, how and, first and foremost, what will be the new relationship between the UK and EU is now completely uncertain and unforeseeable. It is this unpredictability that raises not one, but a long list of questions.

Both the reasons for what happened, notably the outcome of the referendum, and likely future developments can only be explored and analysed in the widest possible scope, indeed, in a global context. Brexit is a part and a reflection of a series of interrelated global developments that have been witnessed and amply analysed for some years.

The complex economic, geopolitical and cultural developments and the deep changes brought about by them have created the feeling of uncertainty, unpredictability and anxiety that can best be expressed by a single German word, Angst. This is partly rational, partly irrational. According to most objective; economic, sociological, health and educational criteria – despite the growing inequality within societies (and not between societies, i.e. between developed and developing countries) – the world is now a better place than it was 10 or 20 years ago.¹ At the same time, our mood is getting worse; it is characterised by fear, anxiety, foreboding and, for many, by anger. There must be a reason for this gap between reality and perception. In fact there are many and most of them are real. On the one hand, there are alarming global economic and geopolitical developments that might easily get out of control. Because of the interconnectedness of the present world where the flows of causality accelerate (“butterfly defect”)² even minor events may beget major disruptions. World economic data could be much better, but the indicators are not as bad as we anticipate it could become. From the Italian banks to Chinese indebtedness, numerous reasons can be found for the fear of the return of a 2008 type financial and economic crisis. Geopolitical instability and risks generate even more anxiety and are no longer limited to areas outside Europe. While the longstanding tectonic movements are being exacerbated by the sharpening conflict around the South China Sea, where the more assertive Chinese have genuine difficulty in understanding the application of international law in an area carrying their empire’s name, there are new security threats in Europe connected to a more aggressive Russian attitude, not only towards its neighbours as has been demonstrated by the occupation of Crimea and part of Eastern Ukraine, but also in the Middle East.

The new security situation, the spectacular “return of history” greatly contributes to the sense of instability and the fear of the unknown resulting therefrom. Political instability is also growing within many countries in and outside Europe.³ Established political structures are trembling, leading middle of the road political parties and their coalitions are rapidly losing weight; new, more radical political forces emerge on both sides. Many speak about the crisis of democracy, which is not a brand new subject; nevertheless, it cannot be easily dismissed given the cumulation of signals conveyed by the political and institutional failures and gridlocks in many well-established democracies.⁴ The dysfunctionality of both national and international institutions is perhaps the most evident symptom of growing mistrust, not only of them but also of the existing economic, social and political system. This again enhances fear and anger and the sense of loss of control over developments and over our individual and collective future.

Uncertainty and instability create fear, fear creates distrust and distrust enhances divisions and anger. The most salient development of the overall political and social atmosphere is the deepening divide along the major dividing lines that are themselves the subject of controversy. For many the main division is between the elite (whatever it means), the establishment and the anti-establishment, or more generally between those who support the system and those who want to dismantle or even destroy it. In the absence of a coherent doctrine, i.e. an all- pervading ideology (an up-to-date version of 19th century “scientific socialism”) the destruction of the existing system fortunately does not seem to be imminent.

For some, the main divide is between those who want to live in an open world and those who prefer a closed one. The former are called internationalists, the latter nationalists, who are identified as populists, these being the most convenient and widespread negative classifications sufficiently hazy to cover one’s all political opponents.⁵

Gone are the days when the main political families opposing one another could be termed right and left. Hence, the traditional dividing line of the political landscape has become irrelevant and useless, both in theory and in practice. Middle right and middle left both endeavour to expropriate the other side’s political programmes and slogans. Extreme right and extreme left have become closer to one another than any time before, and distinguishing the two has become almost impossible. We differ on the changing dividing lines, but all realise that the gaps separating us are getting deeper and the negative emotions on both sides of those lines are on the rise. The language is increasingly excessive and it is the culture of hatred that tends to dominate public discourse. The new technology is only the means of spreading the culture of hate; the intention to revile and harm others originates in us human beings.

Angst and divisions reinforce the perception of a chaotic world where people are losing control of their lives and future, where unknown and secretive global forces, unelected and faceless bureaucrats (sometimes they have a face, which makes it even worse) and their institutions use and abuse their excessive and growing powers.

What does all this has to do with Brexit?

First, all or almost all the above factors have their special impact upon Europe and play a particular role in the context of European integration. The general sentiment of loss of control over economic and political decisions, the growing mistrust in institutions, the widening distance between decision making and “ordinary citizens” and all the frustration and anti-establishment anger resulting therefrom did make an important contribution to the final outcome of the British referendum.

Global challenges that seemed to be remote and abstract materialized most concretely with the explosion of the refugee crisis and made the migration challenge the number one issue –rationally or irrationally – in British public opinion. The impotence of the European institutions and their inability to take control of the crisis increased the mistrust in the same institutions and their remote bureaucracies. Paradoxically, for the UK the migration crisis did not have much to do with the EU decision making, as it, not being a member of Schengen, was free to take any necessary measure in its own national competences regarding both refuges and migrants coming from non-EU countries. What could not be prevented under EU membership was the free movement of persons/labour in the single market; that is the presence in the UK of Polish, Hungarian etc. workers who are, in proper terms, not “migrants”, but persons benefiting from one of the basic freedoms of the European Union. Brexit is needed to get rid of these EU citizens and not to resolve the influx of people coming from outside the EU.

Notwithstanding all the above, the EU, its institutions and its member states had and still have their own failures, deficiencies and weaknesses that contributed significantly to the outcome of the British referendum. The overstretching of the scope of the competences deferred to the Union by its member states, the relentless efforts made by the European Commission to extend those competences (“creeping extension”), the frailing respect for the Treaties by these institutions themselves, the disruption of the balance among the institutions by shifting political decision-making to the Commission from the Council and the European Council, the growing self-assertiveness on the part of some institutions, combined with political bias, the recurring disregard of the principle of the equal treatment, the reluctance to duly recognise the national and constitutional identity⁶ of member states as enshrined in the Treaty are all among the negative developments that played a role, not only in the Brexit vote, but also in the challenges with which the EU is now confronted.

At the same time it would be a mistake not to see the special British dimension of the outcome of the referendum. Inside or outside, the British “splendid isolation” as well as the very special cultural, mental and, indeed, political legacy of a world empire has always been present in the UK’s relationship with the “rest of the world”, including continental Europe.

The sentiment of the British people has always been mixed and ambiguous vis-à- vis European integration. Winston Churchill, while anticipating a United Europe, never thought that Britain should be part of it. A respectable senior British citizen, when asked couple of days after the leave vote about his view on the outcome, simply said: “You know very well that I was for Brexit even before the United Kingdom joined the European Community.”“ This succinct judgement reflects not only the English sense of humour – that, among other things, will be missed in the future European Union –, but also the feeling of a significant part of British society, including among the political elite.

It took more than half a century to recognise that General De Gaulle’s refusal to support the membership of the UK in the Community was not without some justification. His premonition turned out to be essentially right after all: the British will be different, as they always have been. They will never be fully committed in their heart and mind to the European integration project. The permanent opt-outs of key projects such as the Euro, important areas of justice and home affairs, Schengen and others only reflected this deep-rooted, historical British “exceptionalism”. The tentative agreement made with Prime Minister Cameron at the February European Council would have further enhanced the special status of the UK, if it had materialized. It did not and now a new relationship will have to be hammered out after a long, difficult and tremendously complex negotiating process.

What will be that new relationship? The shortest answer to this question is that no one knows at this point of time. However, in the light of the huge economic and political impact of that relationship upon the UK, on the EU and all of its member states, as well as upon global economic and geopolitical developments, some forecasts should be tentatively made, at least with some degree of probability.

First, Brexit is politically irreversible. With or without the British parliament⁷, Article 50 will be invoked and negotiations will be started to conclude the agreement setting out the arrangements for the withdrawal, “taking account of the framework of the new relationship with the Union”. The Treaties shall cease to apply from the date of entry into force of the withdrawal agreement or failing that, two years after the notification of the UK’s intention to withdraw unless the European Council, in agreement with the UK, unanimously decides to extend the period.

The decision of the British voters must be respected and it would be a fatal mistake to believe that this decision can be reversed by any kind of legislation or a second referendum. Any attempt to override the popular will would cause immense and incalculable damage, not only to the UK but also for the EU.

While the result of the referendum must be respected and accordingly, the withdrawal process is politically irreversible, in a strictly legal sense the process is however reversible, even after Article 50 has been activated. Notifying an intention is not a legally binding act; it only triggers the start of a negotiating procedure.⁸

This procedure, legally and theoretically, can be stopped and the intention can be withdrawn. Until what point of time? General principles of international law would suggest that legal reversibility would exist until the entry into force of the withdrawal agreement. Once this agreement enters into force, the only way of “reversing” the withdrawal would be to ask to rejoin under Article 49 of the Treaty as it is provided for in para 5 of Article 50.

The provisions of Article 50 set only the general guidelines for the exit procedure, and a number of issues will be raised in the course of the process. However, even on the basis of these laconic rules, it seems to be clear that distinction has to be made between the agreement containing the arrangements for the withdrawal (“divorce”) and the framework for the future relationship of the departing member state with the Union (which has to be taken into account when negotiating the withdrawal agreement.) The former is an agreement negotiated in the light of the guidelines provided by the European Council, concluded by the Council acting by qualified majority and obtaining the consent of the European Parliament. Even more scant is the language of Article 50 on the “framework for the future relationship”. If the negotiated agreement does not enter into force two years after the negotiation period, nor is it extended by the unanimous decision of the European Council, the Treaty ceases to apply. No answer is given to the question of what will happen then to a large variety of issues, such as the division of assets and liabilities⁹, such as the contributions to budget, contingent liabilities and other loan guarantees, outstanding payment promises (“reste à liquider”), staff, pensions, international agreements etc., relating to the withdrawal itself. The only reasonable outcome, as well as the likelihood, is that the two-year period will have to be extended and negotiations will continue until all the withdrawal arrangements are agreed upon.

On the other hand, there is no such constraint on the parties regarding the framework for the future relationship. This framework will be an international treaty between the Union and its member states, on the one hand, and the United Kingdom (provided it is still united), on the other, under the rules of international law, duly signed and ratified, for the time being, by the altogether 38 (!) parliaments. If there is no such treaty, there will be no special framework for that relationship and it is the general rules and laws, including all the international conventions, treaties, agreements both the Union and the UK are parties to, that will apply to trade, investments, security and everything else.

The two legal instruments are therefore clearly to be distinguished from one another regarding timing, procedure and substance alike. At the same time they are politically and economically closely interconnected, as the withdrawal agreements will, no doubt, have to take into account the future framework as it is provided by Article 50. But how can that framework be taken into account as long as no serious negotiations are being conducted and before, at least, a limited agreement is reached on the substantive elements of that framework? The result is a significant imbalance between the negotiating positons of the parties, essentially to the disfavour of the UK.

In any case, the tasks of the negotiators are formidable on both sides, as they have to cope with an extreme complexity of interlocking political, economic and legal issues, many of which – as we have seen – are in conflict with each other. There is political irreversibility versus legal reversibility of the exit and legally distinct and separated negotiating processes on the withdrawal agreement and on the future relationship that are economically and, in particular, politically interconnected. Moreover, despite the separation of the two legal instruments, there will be some very sensitive borderline issues that may be settled either during the withdrawal or in the future agreement. Is the recognition of acquired rights, inter alia under existing work permits, a subject-matter that is to be dealt with in the withdrawal agreement (probably yes) or in a future treaty? Border controls will have to be re- established between Ireland and Northern Ireland. Is it a withdrawal issue, or are the agreed arrangements to be included in the new framework?

The complexity is compounded by the extraordinarily high stakes, not only for the two (in fact, 28) parties, but also for the whole world, as the ultimate outcome of the likely drawn-out negotiations will have a major impact upon world trade, the global economy and geopolitics.

Whatever the final outcome will be, the negotiations on the future relationship are not expected to be concluded soon. Even if Article 50 is activated before the end of March 2017 and thereby the two years period starts to run, it seems to be unlikely that the withdrawal agreement will enter into force prior to the expiration of that period. Even if the informal talks or exploratory conversations are started on the framework for the new relationship while the UK is still a member of the Union – and not yet a “third state”, with which formal negotiations aiming at the conclusion of an international treaty can be conducted – the final agreement on the vast complexity of all the various issues will take a considerable amount of time.

What now can be safely presumed is that Brexit will not take place prior to the end of this decade; in fact, until the end of the ongoing multi-annual financial framework. It is only reasonable to wish that, at least, the de facto application of the treaty on the future framework is assured at the same point in time, in order to avoid a vacuum in the bilateral relations between the UK and the Union. This is, indeed, the fundamental interest of both parties for evident political and economic reasons. Nevertheless, the interests on the two sides are not of equal weight, as represented, primarily but not exclusively, by the share of exports to the other side. The time pressure will therefore be stronger on the UK, but both sides have to understand that the agreement is a common interest and stronger bargaining positions are not to be abused.

Once Article 50 is triggered, at least, the present “drôle de guerre” will come to an end; the recurring battle of rhetoric will, one hopes, fade away and, after months of bafflement, perplexity and unease stemming from the astonishing unpreparedness on all sides, serious negotiations will start. The sooner these negotiations produce tangible results, the more the presently prevailing uncertainty and the economic damage caused by it will decrease.

Much has been said and the discussion is still going on about the question of which model will be adopted for the future relationship, with particular regard to trade and economic relations. The best answer to this question is none; neither the Norwegian, nor Swiss, nor Turkish, nor Canadian, nor any other. There will be a special sui generis regime (“bespoke agreement”) which should depart from the standard templates. It is now widely recognised that the UK is different (as it always has been inside the EU as well) and because of all the disparities in size, economic weight and political clout, as well as in view of the different historical background and point of departure, the new relationship should not be locked in the existing categories or “models” of external arrangements. The arguments why the UK would not wish to join the European Economic Area are well-known and evident. It would be a total reversal of the political decision of June 23 to accept control over the UK’s legislation by the EU, including by the case law of the European Court of Justice, without having any tangible influence upon the EU decision-making process in legislation and in jurisprudence. In the framework of the EEA “quasi-supranational” set-up, the EEA countries incorporate more 300 new EU acts per year¹⁰ upon which the EEA Joint Committee has little, if any, influence in the so called “decision-shaping” phase after the Commission has transmitted its proposals to the Council and the European Parliament. This is precisely the limitation of national sovereignty that the British voters hoped to get rid of by allowing Parliament to regain full control over political and economic decisions.

The frustration of being deprived of control over their life may have been even a stronger factor than the fear of immigration. Indeed, the migration issue was not even on the table when the exit movement started and, paradoxically, in 2004 it was the UK government (together with Ireland) that opened the door immediately and unconditionally to free movement of labour from the eight new member states, not using the option of a transitional arrangement of a maximum seven years of restrictions. (Demanded, insisted upon and implemented by Germany… Times change, tempora mutantur, even if we do not all change accordingly with them.) The concerns about intra-EU “migration” were and presumably still are, however, strong despite the huge benefits the UK enjoyed thanks to the significant contribution of EU labour to its economic growth. The four freedoms are, of course, the cornerstones of the EEA and it is impossible to envisage EEA membership, or any variation of a “Norwegian model” without the free movement of labour. It is true that tiny Liechtenstein, with a territory of 160 sq. km. and with foreigners representing one third of its population of 35,000, has a special restrictive system, but these criteria certainly cannot apply to the UK.

The Swiss case is essentially similar to the Norwegian one, though with several differences. While being a member state of EFTA, together with Norway, since its foundation in 1960, Switzerland refused to join the EEA as a result of a referendum in 1992. In the absence of EEA membership a bilateral approach was taken and a set of sectoral agreements has been concluded (20 main and more than 100 so-called secondary agreements) based upon its 1972 free trade agreement with the European Communities.¹¹ The agreements also include one on the free movement of persons but, due to the result of the referendum in 2014 requiring the constitutional introduction of immigration quotas, free movement was not extended to Croatia and the EU rejected a safeguard clause with national ceilings on EU migration. Negotiations have not yet produced result and the whole complex system of bilateral agreements is put at risk. The agreements do not cover the area that would otherwise be the most relevant for the UK, i.e. financial services. The control issue is also somewhat more complex with the establishment of the EFTA Surveillance Authority and the EFTA court, but the end result is that Switzerland has minimal, if any, influence upon the adoption of the new acquis to be accepted by EFTA members. Extreme complexity, uncertainty regarding the solution of the present difficulties (that have not been made easier by Brexit) and risks resulting from them, regarding the overall system of sectoral arrangements, would not make this “model” attractive to any parties, even if there was a remote chance of its applicability.

Whether the UK would consider remaining in the customs union does not seem to have been raised by either of the two sides in the referendum campaign. Turkey has been a member since 1996, as have Monaco, Andorra and San Marino. Turkey‘s position is certainly not very fortunate, at least from a trade policy perspective. Important areas of trade, primarily agricultural products, are not covered by the bilateral arrangements either, and the provisions agreed in the Additional Protocol of 1970, notably on the free movement of labour, services and capital, have not been implemented.

Turkey has to follow the EU common commercial policy, but has no influence upon it. The trade agreements made by the EU with third countries open the EU market for these countries’ exports, but deny this preference for Turkish exports to the same third countries. (This is now a major concern for Turkey regarding the TTIP negotiations.) While this customs union “model” would resolve the immigration issue from the British government’s current viewpoint, it would deprive the UK of what Brexit primarily wants to achieve, namely an independent, sovereign trade policy aiming at the creation of “Global Britain”, champion of free trade and concluding its own trade agreements and dismantling possibly all tariff and non-tariff barriers with the largest possible number of countries.

In the customs union, the UK would be bound by, inter alia, the common external tariffs and this would in itself frustrate any effort to put in place an independent commercial policy and conclude free trade agreements with non-EU countries.

How the UK will become the global champion of free trade and how the undoubtedly attractive objective of creating a free-trading, deregulated and competitive Britain can be reconciled with the idea of seriously restricting the free flow of one of the major production factors remains to be seen. In any case, it is a reasonable presumption that Britain will not be tempted to introduce a kind of “reversed community preference” by excluding the free movement of labour from the future framework of its relationship with the EU and granting more access to non-EU countries to its labour market in its new agreements to be negotiated. (Only after coming to terms on the major elements of the future relationship with the EU.) Restrictions on the free movement of labour are, however, not the only element that might come in conflict with the idea of a brave, new, open Britain. Suggestions have been made to intervene in an “orderly and structured” manner regarding sensitive foreign investments in the UK.¹² At a more general level, a more interventionist economic policy, as proposed in the latest high level political statements and reflecting an ideological shift from traditional conservative policies, may also conflict with the role it intends to play in promoting free trade and competition at the global level.

EEA, EFTA plus, and customs union might be termed, with extreme simplification, as the “soft Brexit” options, although it does not really matter how they are called as none of them is, indeed, politically viable.

A variation of free trade agreement would possibly be a more realistic option. But here again, the reference to existing “models”, Canadian or others, should be avoided. Free access for British goods to the EU market and vice-versa is certainly an indispensable condition of preventing dramatic damage to both sides’ growth and employment, as well as to the global economy. However, the real issues are the scope of the agreement and balancing their mutual interests, benefits, rights and obligations.

A last generation free trade agreement (or an association agreement with deep and comprehensive free trade) with the widest possible scope covering all the areas of regulation, from intellectual property to investments, from services to the environment and social rights seems to be a logical direction to go in. In reality, for both the EU and UK, it would be a terrain full of traps, stumbling-blocks and pitfalls of an economic, political and legal nature. All these difficulties ultimately boil down to the fundamental dilemma, of how and why to grant full access for British goods and services, including financial services (with special regard to passporting rights), and thereby assure the same benefits for the exiting country as those enjoyed by member states, while not having free access to the British labour market, this being now one of the fundamental four freedoms of the single market acquis. This would result in significantly better treatment than the one the exiting country now has as a member state. If, however, the four freedoms were applied in their entirety, this would go against the verdict of the referendum. Full access to the financial market of the EU would otherwise necessitate some degree of supranational surveillance and control, which would, again, come in conflict with the outcome of the referendum. Here is the inherent contradiction of a hard or soft Brexit. Either it goes against the basic principles of the European integration as enshrined in the Treaties, or it does not respect the outcome of the referendum, in particular as it is now interpreted by the former “soft Remainers” now turned “hard Brexiteers”.

On the other hand, even the most comprehensive free trade agreement with the widest possible scope could not cover all the fields of cooperation that should be maintained between the UK and continental Europe. The future relationship will, one hopes, be much wider, more diverse and more complex than one that can be squeezed into an economic agreement. History, geography, values, basic geopolitical and security interests bind together the two Unions, whatever developments will unfold in the upcoming decades. All this points to the conclusion that the framework for future relationship cannot be locked in the structure of presently existing models, and the agreement or agreements will have to reflect the very special - indeed, unique - nature of the relationship between an exiting country, a permanent member of the UN Security Council, a nuclear power, with a population of 65 million and having the 5th largest GDP in the world in nominal terms, and the remaining Union of 27 members.

Notwithstanding all the above arguments for the sui generis nature of the future relationship, one should not forget that, all through the last 60 years, the EU developed a highly sophisticated, essentially coherent and well-structured system of external differentiation of relationships and legal instruments with third counties across the world. This system is based on economic, geopolitical and security considerations and interests, as well as on values and principles which, after all, constitute the backbone of the whole venture, internally and externally alike. Any new agreement negotiated in the future cannot depart from these basic principles reflecting both the values and the interests. The new agreement will also be part of the external acquis and as such, will have an influence upon the further development of the structure of the differentiated external relations of the Union. Any innovative and new solution will, or may have, political and economic consequences, as is always the case with precedents, even if they are not formally recognized as such.

Notes: