The exit of Britain from the European Union (hereinafter, ‘Brexit’) has marked an uptick in the debate about the financial and legal implications of the same on the European Union and the entire world. With the people voting to leave having won by a narrow margin, there have been concerns in the past 2 weeks about an impending financial crisis and a possible loss of jobs in Britain, with fears in the financial markets leading to the GBP falling to its lowest since 1976 levels. This write-up essentially tries to look at the new trade agreement that Britain will have to enter into with the new European Union, as a part of the two year long withdrawal process. The researcher shall be analyzing the three possible alternatives to the financial and trade agreements, arguing in favor of the Norwegian model. Before analyzing the financial implications, it is imperative that Article 50 of the Lisbon treaty is looked into.
With Britain voting to sever ties with Brussels, the complex task of forming the new trade agreement has to be carried out under a deadline of two-years. To understand the need of a new trade policy in the first place, it is important to keep in mind that upon a formal notification to the European Council, under Article 50 of the Lisbon treaty, a new legal basis has to be decided for Britain’s relationship with the European Union. As argued, this discussion will consider the framework for exporting and importing goods, and the basis for continued service trade, both to and from the European union.
Article 50, the two hundred fifty-word long provision has instantly become the “defining clause” in a war of words between Britain and the European Union. In simpler words, Article 50 of the Lisbon treaty sets out the procedure using which an European Union country will voluntarily leave the European Union. It has been argued that the wording of the Article seems to be vague, for the drafters of the provision could not reasonably foresee the article being invoked in the near future.
Article 50 states that: “Any member state may decide to withdraw from the union in accordance with its own constitutional requirements.” The requirements set out in Article 50 state that the leaver should notify the European Council of its intention, negotiate a deal on its withdrawal, and establish legal grounds for a future relationship with the European Union. Similarly, on the other side, the agreement would require a qualified majority of the member states of the European Union in addition to the consent of the European parliament. Further, a time period of two years has been set out by Article 50, within which all the agreements should be concluded. Upon a failure to do the same, the exiting state would fall out of the union with no new provisions in place, unless every other remaining member of the union agrees to extend the negotiations.
With the outcome of the referendum politically not binding on the UK parliament, there could be a delay in triggering the said provision of Lisbon Treaty. Article 50 will essentially serve as the untested procedure that governs the exit of an EU member state from the bloc. Irrespective of the referendum result, it must be noted that there is no legal compulsion on the state to withdraw and trigger the Article 50 “button”. Although it might be politically undesirable, there have been speculations on this delay putting off the “recession, breakup and years of pain” UK shall suffer in the years to come.
It must also be noted that the European Union can invoke Article 7 of the Lisbon treaty, originally introduced in the treaty of Amsterdam, to suspend a member state that does not comply with the foundational values of the European Union. However, the foundational values that need to be violated are on the lines of democracy, rule of law and so on. With neither of the two provisions being used in the past, it would be interesting to see how the battle of these provisions plays out in the future. However, the scope of this paper is limited to the trade related implications.
Having to agree on the terms of divorce, essentially a set of instructions and red lines for the European Commission, Article 50 is said to give the upper hand to the states that decide to stay within the union. Renegotiating 80,000 pages of agreements, one of the most important provisions would be the trade law agreement. The next section shall focus on this trade deals, and the possibility of an EFTA/Norway style trade agreements with the European union.
Post the referendum results, it was apparent that the leave side preferred a new treaty that was not based on the model of previous treaties with non-EU countries. It is believed that negotiating for a new model will take up more time than using an existing model. The three possible models that UK could base its relationship with the European Union could be on the lines of first, EU-Turkey, second, EU-Switzerland, and the third, the “Norway-option”. The researcher argues that the first two models would not be suitable for the UK.
It is argued that the arrangement, as it exists between the European Union and Turkey today, remains largely a customs union, which implies that the UK cannot negotiate its own trade deals with third parties/other countries. As a second option, UK could focus on Switzerland-European Union type agreement. This would mean that the UK joins European Free Trade Agreement (hereinafter, ‘EFTA’) but not European Economic Area, (hereinafter, ‘EEA’), with relations with the EU being governed by a framework of bilateral agreements, and some limited access to the single market. It is argued that this type of arrangement would not be possible for UK because it does not give full access to the European Union services, including the financial markets, which form one of the key components of the UK exports. Similarly, the other free trade agreement with the European Union do not give such an access either.
The third option, termed as the “Norway-plan”, sets out as the most attractive option for the United Kingdom, even if it were to serve as a temporary measure. The Norway option would essentially mean that the United Kingdom remains a part of the EFTA and EEA the association agreement between the EU, Norway, Iceland and Liechtenstein, without being a part of the European Union. This will ensure that UK retains access to the single largest market in the world.
This model was adopted by Norway following its exit in 1994. It must be noted that there is no automatic right for the UK to become a member of the EFTA, provided the existing members veto on the UK joining the group. In a very broad sense, EU policies that do not form a part of the EEA agreement would no longer apply to the UK. It is noteworthy that the EEA agreement does not cover the areas of freedom, security and justice. There are multiple reasons for UK to follow this approach.
First, the legal security for exports of most goods and all services from the United Kingdom to the European Union (and vice-versa) shall be ensured. Given the high legal security of such an agreement, coupled with the expedited procedure to carry out the same, the damaging effects of uncertainty about the economies of the UK and the EU could be reduced.
Second, EEA membership would keep the options open for the United Kingdom to sign its own trade deals with other countries. This process could be achieved in a short period of time as the UK is already a part of the EEA. Further, this allows the UK to change its laws in the areas of agriculture and/or VAT policy. Additionally, the EEA restricts itself only to economic concerns, implying that no foreign policy or criminal law or policing issues could be covered under the same, with UK being free to negotiate separate deals with the EU on pertinent issues like these.
Third, the EEA covers most of the rights/laws of the European Union on areas such as the environment and the workers’ rights. This essentially means that signing EEA would guarantee the unrestricted application of those laws in the UK.
Fourth, to continue the benefits from access to the single market, it would be imperative that the UK still contributes financially to the operations of the EU, through a separate EEA grant. Another benefit emerging out of the EEA agreement/Norwegian model is that this would reduce the UK’s financial contribution to the EU, as compared to what is was “pre-Brexit”.
Although the UK no longer remains a member of the European Union, as a member of the EEA, the United Kingdom will be required to retain a wide range of EU legislations, primarily the legislations “relating to the EU’s four fundamental freedoms, such as the free movement of people”. An overwhelming 11,500 EU legal acts have been incorporated into the EEA agreement as of 2015.
One of the key characteristics of this model is that, while the UK would be subjected to the bulk of European Union legislations, it loses all formal voting rights and ability to influence such legislations. Even in the presence of “soft influence” that the existing EEA members are able to exert, they do not find a seat around the negotiating table. Further, the “Swiss-EU” model loses out to the “Norway-EU” model in terms of the fact that there are lesser institutions in the Swiss model to exert that soft influence on, given the limited access to the single market. Even though the UK would continue to benefit from access to the single largest market, EEA would entail free movement of people, which defeats the right wing propaganda of Brexit voters amidst immigration concerns.
While arguing in favor of the UK adopting the Norwegian style model of trade agreement with the European Union, it has been highlighted that the UK stands to gain in a lot more respects than the pre-Brexit scenario. In other words, this could be termed as “single-market access without political union (being) secured under the EEA”. However, this does not rule out the possibility of the UK negotiating an entirely different deal, not in line with any of the three different models described above. This researcher concludes that given the three different models, the Norwegian model should be adopted, for the benefits accrued under this model far outweigh the potential loses.
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