July 1, 2016
A week on, the UK’s referendum vote to leave the European Union (EU) has raised more questions than answers and has the makings of a Shakespearean play with its multiple twists and turns. Uncertainty rules the roost. While the UK’s political class debates who could potentially lead the country, Brexit has come to Brussels with competing interests starting to emerge as to how the remaining 27 Member States (EU 27) and the EU’s various institutions should respond. In this analysis we assess what has been clarified this week and where things could potentially go. What is the impact on the UK’s clout and what are the commercial implications for business in the EU’s decision-making process? What is known is that there remains a significant number of “unknowns” with little prospect of any definitive answers anytime soon.
In an unprecedented week, Brussels has had to manage its own shock in managing a result for which it too was perhaps less than prepared. Sentiment was very much respectful of the democratic choice of the British people but resentful in some quarters about the tone of the UK’s domestic debate. Cantankerous scenes in the European Parliament and strong words from some Commission officials were balanced with a standing ovation for Lord Hill – the UK’s outgoing Commissioner – and a call for ‘cool heads’ as all parties start to map out their positions ahead of any negotiations.
Despite pressure from some quarters – including the European Commission and European Parliament – it is largely accepted that it will be a decision for the UK to invoke Article 50 of the EU Treaty in order to begin the process of exit. But this won’t happen immediately; it will be for Prime Minister David Cameron’s successor to trigger it. In parallel, the EU 27 as well as the European Commission have made very clear that no informal negotiations or talks can begin until notification. The European Parliament has voiced its displeasure at the UK’s failure to act swiftly on this issue – but the EU Treaties are clear the power rests with the UK.
The delay does matter, as it prolongs the uncertainty. Business will not know the impact that the negotiation will have on their business operations and investments. Already, some private investors have invoked ‘Brexit’ clauses in their contracts to withdraw planned funding. The political climate in the United Kingdom is not helping matters, with a Conservative Party leadership election having essentially frozen the decision-making process. It may take until early September for a new Prime Minister to be in place. Even after the new Prime Minister is in place, it will take some time for a domestic consensus on precisely what Brexit looks like to emerge.
“Article 50 should be invoked as quickly as possible”
The Brussels lexicon has been further expanded with this week’s meeting of the “EU 27” without the UK. Having met with Prime Minister Cameron to discuss the UK referendum on Tuesday during a European Council meeting, all EU leaders, this time apart from Mr Cameron, met again on Wednesday morning to determine their collective response to Brexit. They concluded EU law continues to apply to the UK, and that while it is up to the UK to invoke Article 50, this should be done “as quickly as possible”. While the UK remains at the table for the majority of EU activity, meetings at EU 27 to discuss Brexit will become increasingly frequent. The EU 27 will convene again on 16 September in Bratislava.
While Prime Minister Cameron talked of the importance of achieving a close relationship between the UK and EU, he also hinted at the need for the outcome of the negotiations to address concerns about freedom of movement. This issue, in particular, has become a key dividing line in the Conservative Party leadership election with candidates such as Stephen Crabb adopting a conciliatory tone on the matter, while Michael Gove has demanded an end to free movement accords. Leaders from the EU 27 hit back – and in a formal statement were clear that access to the single market requires application of all four freedoms, including freedom of movement. In other words, there will be no single market ‘a la carte’. This is likely to become the crux of the future negotiation. French Finance Minister Michel Sapin, did offer a sliver of hope in a BBC interview when he said everything – including freedom of movement – would be on the table in any negotiation. And EU Trade Commissioner Malmstrom also warned that no negotiations could take place concerning the UK’s future trading relationships with the EU until after the UK formally exits.
The Council (representing the Member States) were fast out of the blocks in appointing the senior Belgian diplomat Didier Seeuws as the lead Council negotiator for the forthcoming Brexit talks, effectively pre-empting the European Commission from taking up that role. Seeuws is an accomplished EU negotiator, and has been closely involved in a number of high- profile EU negotiations involving the UK over several years. All recognise, however, the Commission’s expertise and knowledge will be indispensable. The European Parliament has also attempted to be involved as much as possible; they will have to give consent to the exit agreement. On a UK level, a special Cabinet Office unit has been established to examine the terms and implications of Brexit. Oliver Robbins, the former Deputy Permanent Secretary at the Home Office, has been appointed to lead the team.
There is acceptance that reform to the EU is needed, yet change to the EU Treaty seems unlikely in the short term. Both the Commission and Chancellor Merkel have ruled out a Treaty change although some Member States are pushing for a more fundamental reflection/discussion on the future of the EU, and would not rule out Treaty change. For example, the ‘Visegrad’ group (comprising Poland, the Czech Republic, Slovakia and Hungary) has spoken out, calling for a re- think of the future of the EU and making clear that swift and deeper integration is not the answer. The Belgian Prime Minister asked for a ‘convention’ to reflect on what the EU should and should not do. The focus, he said, should be on key issues only: safety and security, growth and jobs, and the environment.
Scotland’s future relationship with the EU has also featured in Brussels this week, with the First Minister of the Scottish Government, Nicola Sturgeon, following Prime Minister Cameron to Brussels to meet the European Parliament and Commission President; however, the Council President, Donald Tusk, did not accept a meeting. While First Minister Sturgeon pressed for Scotland’s case to be heard at an EU level, Spanish Prime Minister Mariano Rajoy, with Catalonia at the forefront of his mind, insisted that Scotland could not hold separate negotiations with the EU; these could only be held with the UK Government.
Next year’s symbolic 60th Anniversary of the Treaty of Rome – which founded the present day EU – is providing some with a useful marker to define their outlook on the implications of Brexit for the long-term future of the EU.
The outcome of the vote will have significant impact on the way the EU functions. We have already witnessed the start of a power play between the various EU institutions – representatives of Member State governments in the Council, the elected members of the European Parliament, as well as the administration run by Jean- Claude Juncker in the Commission.
Below we look at the short term impact of the prospect of the UK leaving the EU, from the perspective of the decision making processes in each institution.
The immediate impact on the Commission was the decision of Lord Hill, the UK European Commissioner, to resign as of 16 July 2016. Unless a replacement is nominated – who would have to go through a tortuous hearing in the European Parliament – the UK will lose its seat in the College of Commissioners.
On the one hand, the College rarely votes. During the 2010-2014 Barroso II Commission, it happened only three to four times. Furthermore, it is rare to see a single Commissioner take a determined (or even maverick) stance within the College to change a decision. UK Commissioners are not known to have played such a role. Therefore, for formal decision making in the College, the exit of the UK Commissioner is unlikely to change that much.
On the other hand, when it comes to the backroom work of the Commission, the impacts are likely to be significant. Firstly, Vice- President Valdis Dombrovskis will take charge of Lord Hill’s portfolio, with policy decisions and proposals on financial services issues potentially changing. Secondly, and more widely, there will be an obvious loss (and resulting impact) of the political influence of Lord Hill in providing a check and balance on a wide range of policies that were sensitive to a UK audience, for example on better regulation, trade, or protectionist policies.
The overall impact of these effects will however depend on the volume of College decision-making during the next few months.
During the initial UK renegotiation and subsequent referendum, the Commission became extremely sensitive to anything that would play negatively in the UK, holding various policy announcements back so as not to produce an adverse reaction; that approach will now have ended.
One of the most important medium- to long-term impacts will be the consequences for UK officials working for the European Commission. While the formal impact on UK officials will be subject to the exit negotiation, current UK officials will see their careers severely limited because senior appointments often require strong backing from their own Member State. The same applies to the Commissioners’ Cabinets where UK nationals are the third most numerous nationality. With the UK on the side-lines, or gone, the appeal for hiring staff from the UK will be greatly reduced, leading in turn to less opportunities for positions in line with UK policy to be voiced and pushed for inside the Commission services. Thus, before dossiers even reach the College of Commissioners, they may end up looking substantially different from what they would have been before the referendum result.
Finally, there have also been some calls – in particular from politicians in Central and Eastern Europe – for President Juncker to take greater accountability for the present situation.
As it currently stands, the European Parliament is working under the assumption of ‘business as usual’. For instance, reports that all trilogues (final negotiations on draft laws) would be suspended have not been realised. Trilogues scheduled for July are still on the agenda.
There is also the assumption that aside from the immediate resignation of his rapporteurship by UK Conservative MEP Ian
Duncan (Rapporteur on Emissions Trading System), all other UK MEPs will retain their seats and maintain their current roles in steering legislation forward. Nevertheless, UK MEPs’ positions might come under pressure from within their own political groups. Of particular importance will be the position of the UK chair of the European Parliament’s Single Market (IMCO) committee, Conservative MEP Vicky Ford.
The European Parliament will meet in Strasbourg next week for its first full plenary session following the UK referendum; FTI Consulting will be on the ground to gauge reactions.
In the longer-term, the European Parliament’s mid-term review is due in November 2016, which could prompt wider changes in the Parliament.
On 1 July, the Slovak Government assumed the Presidency of the EU Council; its planned programme of activity and priorities will clearly be hit. While Brexit is likely to overshadow all other activities, not all ongoing work will be stopped and the Slovakian Presidency will continue to progress as much of their programme as they can.
More widely, it is clear that the balance of power in the Council has been fundamentally shaken up. The EU has for long functioned in a (sometimes volatile) equilibrium between the French, UK and German positions. Each of these Member States are often supported by another group of smaller countries. With the removal of the UK from this equation the decision making will be greatly impacted.
Poland – which will become the EU’s fourth-biggest Member State once Brexit happens – is particularly concerned by the prospect of a strengthened Franco-German alliance, and is building up its own network through the ‘Visegrad’ alliance of central and eastern European countries.
For Ireland, its diplomats talk of the significant implications at a national, bilateral and international level. It therefore wants to be closely engaged in the Brexit negotiations to ensure they take account of its own special concerns, such as relations with Northern Ireland.
The reality of Council negotiations is that often only a dozen Member States actively engage and express their positions; the UK has certainly been one of these to date. A more restrained (or silent) UK means the content of the debates will radically change. Council decision-making is in fact defined not by majorities but by blocking minorities. A blocking minority will be more difficult to obtain if one of the large member states will no longer engage. Add to this the fact that the UK is an active organiser of a subgroup of
Member States which are ‘like-minded’, it is clear that the dynamics of decision-making will tilt towards the French and German position.
This is particularly impactful for those Member States that often align with the UK such as Ireland, Sweden, the Netherlands, Poland, Finland and the Czech Republic. Unless these economically liberal countries start speaking up and fill the void left by the UK, the balance of power will fundamentally shift. This means that the economic outlook of the EU will worsen as policies become more intrusive and less open to third countries.
While the UK retains its position as a full member of the EU until it leaves, and could therefore continue to be as involved in negotiations as before, the reality is that with the UK engaged in highly contentious exit negotiations, it will have to pick its battles very carefully.
Up until last Friday, for many UK civil servants the referendum was seen as more of a hurdle to overcome ahead of the UK’s planned Presidency of the EU in 2017. That has now changed. The UK Presidency of the EU – though not yet cancelled – is certain to not take place
For those diplomats working in Brussels day in day out negotiating on behalf of the UK Government, the referendum result invariably mixes the personal and professional. Reactions from colleagues from EU institutions and other countries have been sympathetic; but tense and prolonged exit negotiations could change that atmosphere.
The UK system is facing up to the consequences of not having done any formal contingency planning for a Brexit; a new Brexit unit has been set up in London, which will now be playing frantic catch up to map out the future scenarios and implications – from foreign policy, to bank regulation, and to agriculture. Policy papers and legal analysis will be piling up, ready to present to the new UK Prime Minister.
The overall approach to UK engagement in the EU will await a new Prime Minister, and has therefore created uncertainty for UK participation in EU negotiations. While there is no ‘empty seat’ policy, there is as yet, no formal position as to how to engage in ongoing negotiations.
While some may point to a ‘business as usual’ approach, the reality is that the UK has immediately lost its influence and clout. That points to a much more reticent UK in working groups and Councils, perhaps focusing interventions and political capital only on those areas with immediate financial and policy implications – and working to encourage ‘likeminded’ allies to lead the charge. An interesting area which will need to be considered is how to engage in legislation that could impact the UK post-Brexit; for example if the UK wants to retain access to the internal market.
The changeover from the Dutch to the Slovak Presidency has however provided a short respite with a slowdown in negotiations, with the August break also providing further breathing space.
Political and institutional discussions in the EU are set to continue over the coming weeks and months. Next week, the European Parliament will hold its first full plenary sessions post-Brexit in Strasbourg 4-7 July where Brexit will dominate talk in the corridors and the official meetings; Commission President Jean-Claude Juncker will address the Parliament on the outcomes of the Brexit summit of EU leaders on Tuesday 5 July. Brexit is also likely to be a topic of conversation at the NATO Warsaw summit on 8-9 July, where in the margins of the meeting, EU Presidents Tusk and Juncker will meet with President Obama.