Brexit… what you need to know

This is a follow up to UK on EU vote: the basics (*that no one is telling you) and part of a series that will focus on different aspects of the potential outcome of the UK vote. However, each piece can be read as a stand-alone.

Let’s assume UK voters decide they have had enough of the EU, the Brexit scenario.

A lot is being said on what may happen if on 23 June the “Leave” campaign prevails. And let me tell you that most of what the Government is saying is true. It is not a fear-based campaign it is a reality no matter what Eurosceptics say. No one in the “Leave” side risks telling you what life may look like after secession from the EU and that is simply because the horizon is not bright, not in the short nor in the medium-term.

We recently heard that the UK future may be brighter outside the EU ….pay attention to the word “may”, there is no guarantee it will be better, none. That is not to say there is no life after leaving the EU but to simply acknowledge that there will be a major storm before you see the rainbow again. That is what I want to explain in a clear and simple manner.

Should the UK decide to leave, and maintain some kind of relationship with the EU, it will have a few options namely:

The EEA or Norway scenario

Some argue that once the UK leaves the EU it can join the EEA (European Economic Area) but what they fail to tell you is that countries like Norway “pay” a lot to access the EU single market and more importantly, abide by EU legislation without any voice or vote in the EU law making process. In other words, they apply EU law but do not participate in making it. That does not sound like something “Leavers” would like to do.

In words of former Norwegian Foreign Affairs Minister Espen Barth Eide “As an EEA member, we do not participate in decision-making in Brussels, but we loyally abide by Brussels’ decisions. We have incorporated approximately three-quarters of all EU legislative acts into Norwegian legislation – and counting. We have legally secured access to the single market, and we practise the free movement of people, goods, services and capital. Norway is more closely integrated into many aspects of the EU than even some of the EU’s members. Our subscription to freedom of movement and our membership of the Schengen area means that Norway has even higher per capita immigration than Britain” (more here).

Further, Norway’s PM Erna Solberg explained, during a BBC interview, the status quo of the Norway-EU relationship (almost repeating what explained above). She, in addition, said she would like Norway to be a full EU Member.

EEA members must abide by the freedom of movement of people one of the areas of major concern for the UK. So, the Norwegian model seems miles away from the brighter UK future the “Leavers” are portraying, are people understanding this?

The Swiss model

The relationship Switzerland-EU is based on bilateral agreements covering specific topics, mainly trade in goods. That is how Switzerland accesses the EU single market. Beware that those agreements do not cover most services, one of the most important UK exports eg financial services, except for transport. Those agreements are static, meaning they are not revised regularly (more here).

There are 100+ current bilateral agreements Switzerland-EU, their implementation obliges Switzerland to apply relevant EU legislation in the covered sectors (eg free movement of persons, technical trade barriers, public procurement, agriculture, air and land transport, Switzerland’s participation in Schengen and Dublin, taxation of savings, processed agricultural products, statistics, combating fraud, Swiss financial contributions for the new EU Member States, etc). Switzerland contributes financially to projects designed to reduce the economic and social disparities in an enlarged EU (more here).

Negotiating dozens of agreements covering specific topics does not seem to be the way forward from a time-related point of view. The UK would like to extricate itself from the EU so negotiating agreements that would subject it to application of EU legislation without saying in its adoption seems a no-go. Where would the repatriation of powers be left then? surely, free movement of persons will not be a negotiable item for the EU-27.

World Trade Organisation context

The WTO’s agreements, result of negotiations between its members, cover trade in goods and in some services, relevant aspects of intellectual property, dispute settlement and trade policy reviews (General Agreement on Tariffs and Trade (GATT), General Agreement on Trade in Services (GATS), Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), etc). They set the rules all members need to respect in order to trade with the other parties.

Even though a priori this seems a good model to follow the dispute settlement system and the barriers to trade (eg UK goods need to meet EU standards and specifications to access the EU market) coupled with the tariffs system are important obstacles that some countries experience and as such it is regarded as the “default” model. Countries seek alternative ways to trade before using the WTO structure. This seems to be the more realistic solution for a Brexit in the short term post-secession.

Trade Agreement

Similar but not quite like the Swiss model. One or more trade agreements could be signed between the UK and the EU post- or during the withdrawal process. Please note I have removed the word “free” trade as it is somewhat unlikely such type of agreement would be reached with the UK. Usually trade agreements cover goods and very few services so the content, extent and conditions of those are left to the negotiating parties and some kind of tariffs or quotas tend to apply.

Let’s take the EU-Canada agreement as an example. It does not give tariff-free access to all Canadian manufactured goods, does not cover a number of key service sectors eg audio-visual, the majority of air transport and, requires Canada to accept EU rules (and standards) and quotas on some agricultural goods when exporting to the EU. The agreement took seven years to be finalised and is not yet in force.

Keep in mind that no existing bilateral trade agreement provides equivalent access for services as being a EU Member does and services, including financial services, account for almost 80 per cent of the UK economy.

In this scenario it would be naive to believe that the EU-27 would be eager to conclude an agreement in a short period of time or that the UK will be the stronger negotiator. Bear in mind this type of agreements tend to take several years to be agreed upon. In that line, the German Finance Minister Wolfgang Schaeuble recently said such an agreement [free trade] is possible but also mentioned it “would take years of the most difficult negotiations”. This means that the EU-27 could take its time to decide whether to enter into such an agreement and, even if that were the case, the offer may not be appealing to the UK. That would leave the WTO model as last resort.

A bit on the exit agreement (article 50 TEU)

The important parts of the article are the following: “the Union shall negotiate and conclude an agreement with that [withdrawing] State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union”. …  “The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification [intention to withdraw]…, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period”.

In light of the above and the current state of affairs (as we have heard high profile politicians mentioning long and difficult negotiations) it is unwise to believe a satisfactory agreement could be reached within the two year window mentioned in the Treaty. Conversely, it seems increasingly likely that the unanimity required to extend the negotiations will not materialise (all it needs to fail is one unwilling Member State and there may be more than one in the Brexit case). That could leave the UK in limbo, with many pieces of EU legislation that technically will no longer apply (if the Treaties cease to apply all legislation deriving from it will too) and most likely no replacements in place.

Please note the exit agreement can take any form, there is no mentioning of a Free Trade Agreement, but most likely will be one of the above-mentioned (excluding the WTO structure). Here the major concern is the time of the negotiations.

Conclusions

The whole Brexit debate reminds me a bit to the last Argentine last general election campaigns (I am not comparing the UK with Argentina as countries just illustrating a point). One side wished for the Kirchner model to survive, even when their supporters recognised it had brought more trouble than solutions to the nation (and it had exhausted its potential). The other side wanted a change, to break free from the model and create a new brighter future. Both sides knew that tough times were coming no matter which side won (I want to believe both sides recognised that, at least those hoping for a change did). And the population chose change…and, as expected, Argentina is going through its toughest times in over a decade. However, they prepared for what was to come and now hope the promise of that brighter future is not too far away.

As recognised by most of those who debate on the merits of each possible solution for a Brexit outcome the Norway and Swiss models are not viable and focus their speech on a “Free” trade agreement, that in my eyes, is not too likely in the short term either.

The most realistic scenario seems to be the WTO structure, to start with. In the medium term a Trade agreement with the EU is possible but the content may well fall short from the optimistic views of those who believe in a brighter UK future in the outer circle of the EU. Indeed, there will be a strong deterrent for EU migrants to come to the UK coupled with important restrictions due to visa requirements being reinstated, but the price to pay to control that aspect may well be too high in terms of economic growth.

Whether the UK remains in or leaves the EU, EU legislation on the single market will still apply in one form or another. The “Leave” campaign fails to recognise that there will be no trade agreement that will not require UK adherence to, at the very least, EU standards, rules, regulation or however you choose to call them as there is no EU single market without them.

Work and Pensions Secretary Iain Duncan Smith said to the BBC last week “The truth is, we won’t copy any other country’s deal. We will have a settlement on our own terms – and one that will return control of our borders, and money to Britain.” What money will return that will not leave in the form of tariffs or replacement for EU subsidies that various UK economic sectors receive today eg farmers, structural funds for impoverished regions, etc., I fail to see. However, the possibility of a bespoke trade deal UK-EU, with no tariffs or trade barriers seems unrealistic considering the lack of goodwill of the EU-27 that the UK is likely to face in the negotiations.

“Leave” campaigners must be honest with voters and tell them to prepare to sacrifice jobs and growth in order to control EU immigration and stop paying into the EU budget. But they must also clarify that stop paying at all is not only far-fetched but not plausible in a globalised world, unless they expect no future relationship UK-EU altogether.

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