July 2016 newsletter – Europe after Brexit

Andrew Duff1 reflects on the UK’s relationship with the EU following the decision to leave and discusses likely future developments.

The future of the European Union has never been more precarious. The EU’s past success has been based on its ability to bring peace, security and prosperity to the peoples of Europe; its present woes stem from its inability to continue to provide such public goods. Unless normal service is quickly resumed the EU will fall apart.

Disintegration has started. On 23 June 2016 the United Kingdom decided to leave the EU after 43 years membership. The referendum was self-inflicted (or rather imposed on the hapless British electorate by its ruling Conservative party which found itself, as ever, in deep disarray about Europe). Nobody asked the British to leave. Circumstances in the EU, although troubled by manifold crises, had not changed recently to a degree that would objectively justify the withdrawal of any member state.

The referendum campaign
The campaign was hard fought. Naturally, it was both simplistic and divisive. Decades of misinformation and distortion about Europe propagated by a political class that has been invariably ignorant or prejudiced were not and could not be wiped out in the space of a few weeks. Many were propelled to vote by the noise and bluster of the campaign, but few were compelled to commit by serious substantive argument. Indeed, the Brexit camp ridiculed the role of ‘experts’, especially those attached to the profession of economics. Although the overwhelming majority of economists warned of the risks of leaving the single market, the likelihood of financial instability, lower investment and reduced rate of growth, a majority of the British people wilfully or wantonly opted in their vote to make the country poorer.

Among the economic facts that were largely ignored was that UK trade is enhanced and not impaired by EU membership: the eurozone slump would have happened whether or not the UK was a member of the EU. Trade in financial services, where the UK has a surplus, will not be liberated worldwide in the case of Brexit: protectionism pervades global commerce, including that of the’Brexiteers’ Anglo-sphere nirvana. The EU has been a force for trade liberalisation: its clout in trade talks will be diminished by Brexit, and it will be difficult to hear the UK’s voice outside the EU. Foreign direct investment into Britain is encouraged, and not impeded, by investor access via the UK to Europe's large single market with its reliable regulatory framework and its uniform social, product and environmental standards. Brexit will require a vast swathe of new home-grown regulation to be put in place by the Westminster parliament to replace that which is surrendered to the EU. Similarly, any savings made on withdrawing from the EU budget will have to be spent domestically, for example on regional development and on supporting Britain's farms and fisheries. UK productivity will still lag our main European competitors after Brexit: the need for large-scale public investment on health, houses, transport and education will persist. The size of the financial cake was in any event continuously exaggerated by the Leave side: the UK’s net contribution to the EU budget runs currently at only 0.5 per cent of its GDP.

While economics dominated the airwaves, the politics of the European Union played next to no part in the referendum. Questions relating to the ‘future of Europe’ were barely discussed (even by ‘experts’), and it would be a mistake to draw many conclusions from Brexit about the EU's own internal reform agenda. The days are long gone when the UK could lay a claim, as both Thatcher and Blair did, to 'leadership' in Europe. The number of British opt-outs and cop-outs from the EU mainstream has risen steadily over the years — most recently from banking union. British exceptionalism was to be compounded had the Remain side won and the terms of the ‘new settlement’ reached by David Cameron with the European Council on 19 February been implemented. The status quo was not an option in the referendum: an In vote would have secured Britain a ‘special status’ as a deviant member state, distant from the core, exempt from all future political integration. In fact, the true choice of 23 June was between hard Brexit of Leave and soft Brexit of Remain.

As things turned out, EU leaders were puzzled, and not a little annoyed, that Cameron’s famous ‘renegotiation’ of British terms of membership which they had endured for three years turned out to have little salience in the referendum. The PM was well aware that the deal he had struck with the European Council would not stand up to too much critical inspection — notably in substantiating his claim that the deal would curb the flow of EU citizens into the UK. Dislike of immigration seems to have trumped all other issues in the campaign, although the feeling that the British people had to ‘take back control’ went wider than control of the borders: a yearning for national sovereignty regained, of bringing democracy home, was irrepressible. The notion of sovereignty weighed more heavily than the reality of political power: a majority of voters preferred not only a poorer Britain but a less powerful one too.

Can we blame them? Where it is not ill-informed, much of the British media distorts the reportage of EU affairs. Britain has next to no civic education in schools, and the teaching of European languages is in decline. British citizens have been deprived of the full fruits of European integration, neither using the euro nor benefiting from the Schengen area.

Entirely predictably, it was the older, poorer, provincial and less educated people who voted Leave; younger cosmopolitans (London, Oxford, Cambridge) voted Remain, as did Scotland, Northern Ireland and Gibraltar. For the less well-off, unhappiness at continued austerity (real and imagined) coupled with a widespread distrust of the political elite were decisive factors. It should not be forgotten that the Tory party won the 2015 general election on only 37 per cent of the popular vote. And the Labour electorate is deeply divided in terms of social class between pro and anti-Europeans.

The officially recognised campaign organisations, Vote Leave and Stronger In, were not much better at campaigning than the political parties. The former was riddled with inconsistencies and blatant untruths, while the latter appeared defensive and leaden. The rise of immigration as a theme of Leave was not effectively countered by Remain arguments about Britain’s vital need for the supply of new labour; and we heard very little about the advantages, economic and otherwise, of living in a multi-cultural open society. Of the many misconceptions peddled about the EU, the worst was that in 1973 the UK had joined a mere free trade area, dubbed the common market, and that the appurtenances of economic and political integration had been somehow added later surreptitiously without the knowledge or consent of the British people. EU institutions were, apparently, steered by French socialist eurocrats in pursuit of Napoleonic dreams. Foreign judges at the European Court of Justice were particularly attacked; and the European Parliament was treated with contempt, even by Cameron. The prime minister’s last minute conversion from toying with Leave to assuming leadership of the Remain campaign was frankly implausible.

Of the many foreign voices that sought to intervene in the referendum that of Barack Obama was the most distinguished. But it is wrong to think that England is in love with the US. There is a large swathe of public opinion, prevalent especially on the Tory right, which feels itself to be rather superior to the Americans. The warnings from the IMF and OECD were dismissed as stemming from sources funded by the EU. Even Mark Carney, Governor of the Bank of England, who fulfilled his duty scrupulously to advise and warn about the adverse consequences of Brexit, came under harsh attack.

In short, this was a classic referendum in which populism and nationalism flourished, and racism and xenophobia stalked. We should recall here that a young, pro-European MP, Jo Cox, was assassinated. The referendum was a bad experience. Its result will weaken the UK in Europe for many years to come. In the short term, sterling and UK sovereign bonds are taking a pounding, the City of London is agitated, and George Osborne, Chancellor of the Exchequer, has been forced to abandon his precious fiscal target.

The aftermath
In the first week after 23 June, there was much talk of reversing the decision. This state of denial affected not only angry Remainers (including young people, two-thirds of whom did not vote) but also those Leavers who, like Boris Johnson, had never thought they would win the referendum and were now suffering pangs of buyers’ remorse.

On 28 June, however, the European Council told the disgraced Cameron that it wanted the UK government to trigger the secession clause, Article 50 of the Treaty on European Union (TEU), as soon as possible. No informal discussions about the nature of any future relationship would take place unless and until the UK activated Article 50. With the memory of their aborted decision of February still fresh, Cameron’s erstwhile colleagues were once bitten twice shy. On 29 June, the EU 27 leaders met without Cameron. Their mood was tough. As Donald Tusk, President of the European Council, put it: ‘There will be no single market à la carte’. German Chancellor Angela Merkel emphasised that Britain’s continued access to the single market via the European Economic Area (EEA) would be dependent on its acceptance of all four principles of free movement, namely capital, goods, services and labour. There would be no more accommodation with the British who had been offered a lot, possibly rather more than they deserved, and had voted to reject the offer. The negative referendum will not be allowed to lead to an over-privileged partnership where the UK could free-load off its erstwhile partners. The UK will not get better treatment as an ex-member state than it had as a member state. For the European Council as far as Britain is concerned ‘out means out’.

Article 50 TEU was introduced under the Lisbon treaty largely as a precaution and without any particular intention that it would ever be used. It says that a state which chooses to secede from the Union shall notify the European Council. In accordance with guidelines set by the European Council, an agreement shall be concluded with the departing state ‘setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union’.

A period of two years is stipulated for the Article 50 process to be concluded, partly in order to avoid procrastination by the seceding state and partly to prevent the peremptory expulsion of a state by others. Extension of the timetable has to be agreed by unanimity. The withdrawal agreement is negotiated by the Commission on behalf of the Council, which can conclude the negotiation by a qualified majority vote of 20 out of the 27 states; the European Parliament also votes on the final deal.

Article 50 has been criticised for not being sufficiently precise — but it is admirably flexible. Clearly, Article 50 must cater for all the technical aspects of withdrawal; it may (but need not) include the outline design of the future relationship, although the substance of that deal will take the form of a separate and later treaty under a different legal base. The Article 50 agreement will involve such matters as extrication from the EU budget (including its spending programmes), looking after the acquired rights of British nationals living elsewhere in the EU and EU citizens living in Britain, relocating EU agencies away from British soil (notably the European Banking Authority), managing British officials working in the EU institutions, and so on. These are all complex issues but fairly straightforward, and conclusion of the agreement inside two years should be feasible if the provisions of the treaty are adhered to.

The cohesion of the Union depends on the strict application of the rule of EU law. A seceding state remains a member state until such time as it departs; Article 50 is the only legal way a state can secede; not to deploy Article 50 would result in an even more disorderly situation than we have now. Leaving in any other way — for instance, by repealing the European Communities Act 1972 and unilaterally abrogating the UK’s EC Accession Treaty — would amount to a breach of both EU and international law.

Timing is important. The EU institutions are determined that early application of Article 50 will stem the spread of the British contagion. If Brexit is put off indefinitely, or if Brexit is made to seem too easy, the temptation to copy the British may prove irresistible to certain states, like Hungary, Poland or even Sweden. Nationalist and populists parties across Europe are already exploiting the Brexit adventure — and elections loom during 2017 in France, Germany, the Netherlands and possibly Italy.

There is a lively dispute in train about when exactly the British will invoke Article 50. Cameron, who had promised before the vote to activate it himself, has once again broken his word and passed the buck to his successor. A new Tory prime minister will be in place at the latest by 9 September. It is to be hoped that he or she will take the prudent course and immediately notify President Tusk that the new government wants to conclude a narrow and technical agreement under the terms of Article 50 so as to ensure an orderly retreat from EU obligations and to minimise collateral damage. Were the new prime minister to delay invoking Article 50 indefinitely Europe's crisis would escalate.

Although the treaty is silent on the matter, it is accepted that, having once embarked upon the Article 50 route, the UK (under a new government, after a general election) would be able to change its mind and revoke the secession process before it reaches its denouement. Given the febrile state of British politics that eventuality should not be entirely discounted. At this stage of the Brexit crisis nothing should be ruled out; and nothing should be ruled in.

Beyond Article 50
Assuming a smooth completion of the Article 50 process, however, what happens then? Speculation as to the nature of the next phase of the UK EU relationship is fuelled by the chaotic response of the Brexiteers to their referendum victory. Evidently, they had no single view as to what kind of British-European relationship they foresaw for the longer term. Currently, the options for the UK range from membership of EFTA and the EEA (like Norway) to having no formal treaty relationship with the EU at all, thereby falling back on trade under WTO rules. However, what is most likely in my view is a novel set of bespoke arrangements involving customs union (like Turkey) plus a number of add-ons to deal with scientific research and development, public procurement rules and trade in services. Cooperation between the UK and the EU in foreign and security policy, and in future defence, would also be mutually beneficial.

All the possibilities have drawbacks and none will put the UK in the driving seat. Articles 216 and 217 of the Treaty on the Functioning of the EU provide legal bases for any such arrangement, and Article 218 lays down the negotiating procedures that the EU will follow. In the medium term, as part of the next general revision of the EU treaties under Article 48 TEU, a new category of affiliate membership of the Union short of full membership might be created (Article 49 bis TEU). In the longer term, of course, the UK might change its mind and decide to re-apply to accede as a full member state of the Union (Article 49 TEU).

The question remains about the impact of Brexit on the future of Europe. Had it not been for the distraction of Brexit, the EU would at this time have been following through the Five Presidents’ Report of June 2015 on the completion of Economic and Monetary Union. As it is, there is a clear majority in the European Council, and probably also in the Commission and European Parliament, for a policy of ‘extend and pretend’, of kicking the can further down the road. The euro crisis therefore remains unresolved, mutated but not evaporated. The best efforts of Jean-Claude Juncker, Commission president, and Mario Draghi, President of the European Central Bank, have not so far been able to overcome the resistance of Tusk and Jeroen Dijsselbloem, Eurogroup president, to a course of action which involves deeper fiscal integration and the creation of new competences and institutions, notably a treasury, at the EU level. This is a pity, because without fiscal union and the establishment of a strong executive to manage the sharing of the debt burden among tax-payers, the euro is surely doomed to fail on the impact of one of its future shocks. It is in this sense that the Brexit vote of 23 June 2016 may prove eventually not only to have ruined Britain but also to have destroyed Europe.

1. Andrew Duff is a Visiting Fellow at the European Policy Centre. He was a Liberal Democrat Member of the European Parliament 1999-2014. @AndrewDuffEU