02

Life in the Exit Lane

If the British people vote on 23rd June to leave the European Union, we will still be a member of the EU on the morning of 24th June 2016 and, very probably, still members on 24th June 2018. Britain is bound by treaty obligations to her partners in the 27 other Member States of the EU and those obligations (and rights) only cease when the existing network of mutual obligations has been unwound. The initial shockwaves of a vote to leave would be felt in financial markets (Britain’s in particular, but probably right across Europe) and in British politics. The future of David Cameron as Prime Minister would be on the line.

The referendum result is not, constitutionally, binding on Parliament but even a narrow vote to leave would, in political reality, have to be honoured by the Government.

Under the terms of the EU Treaty, the British Government would notify the European Council (the collective of EU Heads of Government) of Britain’s intention to withdraw from the EU. How quickly that notification would be made would depend in part on how much domestic political turmoil had been unleashed by the result.

Under Article 50, the European Council would meet but without the British being present. The 27 other EU Heads of Government would decide on the terms of the negotiation with the UK about its departure and would mandate the European Commission to open those negotiations with the UK on their behalf. Article 50 is about the arrangements for a Member State’s withdrawal from the EU, not about its future relationship with its former partners, though the negotiations are, the Article says, to be conducted “taking account of the framework for [the departing Member State’s] future relationship with the Union”.

Two years are allowed for the negotiations, though if all 27 member Governments agree, the period can be extended. At the end of the negotiating period, the 27 decide by a qualified majority vote on the terms of the future relationship. The UK Government would have no vote.

Thus, if no agreement had been reached, the 27 could make a ‘take it or leave it’ offer to the UK.

If the UK declined whatever terms were on oer, she would leave and become viz-à-viz the EU a third country whose trading relationship with the EU would be governed by WTO rules, which would immediately mean that, where tariffs on EU trade with third countries apply, such as vehicle exports, prices would rise on both UK exports and imports.

In practice, both sides would have an interest in reaching an agreement though it would probably take longer than two years to negotiate. As far as trade in goods is concerned, the UK has a trade deficit with much of the EU and an agreement covering trade in goods would be in everyone’s interest. But Britain has a large surplus in its trade in services which account for some 75% of the UK economy and securing continued access to financial services, in particular, on the same favourable basis as now would be problematic. A vote to leave the EU would be interpreted as, at least in part, a vote against the freedom of movement of people which, alongside freedom of movement for goods, services and capital, is one of the four freedoms which make up the EU single market. It is likely therefore that the British Government would be obliged to seek terms which giving the UK continued open access to the single market while excluding freedom of movement. Such a deal would be unnegotiable. Even if other Member States saw economic advantage in making such a concession, their domestic politics would almost certainly make it impossible for them to do so. The same applies to legislation on workers’ rights. Successive British Governments have argued that issues such as the working hours of employees should be determined at national, not EU, level. Other EU Governments disagree.

No French Government, for whom ‘social Europe’ is an article of faith, would be able to make such a concession.

It is for this reason that the so-called Norway model of a future UK/EU relationship may not be practicable. Norway (along with Lichtenstein and Iceland) is a member of the European Free Trade Area (EFTA) which in turn is part of the European Economic Area (EEA) which gives those three countries access to the EU single market in goods and services. But the EEA members are obliged, in return for that access, to allow freedom of movement for EU citizens. There is a higher proportion of the Norwegian population from EU countries than the proportion of other EU citizens living in the UK. The EEA countries also have to implement social legislation such as the EU Working Time Directive. They also pay an annual financial contribution to the EU which, proportionately, is similar to the per capita net contribution made by the UK. The EEA countries have a right to be consulted on new EU laws affecting the single market. But they do not attend the Council meetings of EU Ministers (where the UK, as a large Member State, presently has 13% of the voting weight), have no representation in the European Parliament (which co-decides EU legislation with the Council and where the UK, as a large Member State, has 10% of the membership) and therefore have no role at all in decisions on the new EU measures which they are obliged to implement.

It therefore seems probable that the UK would, instead, aim for a bilateral free trade agreement with the EU. The new EU/ Canada Free Trade Agreement is often given as an example.

That 1500 page agreement has been concluded after seven years of negotiation

but remains to be signed and ratified by the Canadian Parliament and the Parliaments of the EU countries. From a UK perspective, its principal disadvantage is that it does not give complete freedom of trade in services, especially financial services and specifically excludes passporting of financial services, a sector worth around 8% of UK GDP. Passporting enables any financial institution established in the UK to oer its services freely in other Member States. Given the UK’s dominance of the sector, it is questionable whether the 27 would be willing to concede continued passporting to the UK if we left the EU.

In summary, a British Government that was willing to accept the single market rules (including freedom of movement of people) as they are at present could negotiate continued access to that market from outside the EU but as the price of making a continued financial contribution to the EU budget and having no say in any EU decisions on single market rules which it would be obliged to implement. A British Government that was not willing to accept the rules of the single market would have to negotiate a free trade agreement which could take a long time and would almost certainly not include the advantages in services (where the UK runs a healthy surplus in its trade with the rest of the EU) which the UK enjoys at present. Much of the EU single market as it now exists has come about because of British influence in the Council of Ministers, the European Commission and the European Parliament. Concrete plans for the future of the single market e.g. to encompass digital trade, have been proposed by the European Commission on the basis of British expertise and influence. Outside the EU, Britain would no longer have membership of the European Commission (nor would there be any British officials working in the Commission).

She would have no members in the European Parliament and no participation in meetings of EU Ministers at any level.

Any future access to EU policy making for officials, Ministers and the Prime Minister would be as external lobbyists, not as partners, participants and decision makers.

Apart from the single market, there are other EU policy areas where Britain has played a significant role and in which she would have no further part, such as Environment Policy (including Climate Change), energy and transport policy, foreign and security policy and cooperation against crime through e.g. Europol and the European Arrest Warrant. Present arrangements – for example those whereby UK citizens enjoy access to free health care in other EU countries – would all have to be renegotiated. Britain now benefits from the 35 free trade agreements between the EU and third countries. Britain’s part in those agreements would end with the end of our EU membership and they would have to be re-negotiated by the UK on its own.

In short, life in the exit lane, the outside lane, might give us British an initial buzz of excitement but we would soon find the negotiations that follow both deeply problematic and extremely psychologically tiring. It might make us want to return to the inside track. But once we had left, there will be no reentry for a very long time.

By Sir Stephen Wall 

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