Britain’s relationship with Europe: what might the future look like?

The UK’s negotiations with the European Council have resulted in agreement to a package of reforms requested by the UK, and the UK’s referendum on membership of the EU will therefore be held on 23 June 2016.

Lucy Fergusson, Linklaters LLP

The UK’s negotiations with the European Council (the Council) have resulted in agreement to a package of reforms requested by the UK, and the UK’s referendum on its membership of the EU will therefore be held on 23 June 2016.

The referendum will ask the question "Should the United Kingdom remain a member of the European Union or leave the European Union?" (see News brief "The possible Brexit: an uncertain path ( www.practicallaw.com/3-614-4190) ").

A vote to leave would require the unwinding of the UK’s current relations with the EU, resulting in a period of unprecedented legal and regulatory uncertainty for businesses in the UK.

Background to the referendum

The terms of the referendum are set out in the European Union Referendum Act 2015 (2015 Act), which was passed in December 2015. The 2015 Act is the result of the government’s commitment to hold a referendum by the end of 2017. Although the UK has been a member of the EU since 1973 and been allowed opt-outs from adopting the euro and joining the Schengen border-free area, as well as in the areas of justice and home affairs, deep-rooted anti-EU sentiment within the Conservative party led to the pledge to hold a referendum in the party’s 2015 general election manifesto. Prime Minister David Cameron promised that the referendum would be held after reforms of the EU had been agreed.

It is these reforms that have been the subject of negotiations over the past few months. On 3 February 2016, in response to the UK’s proposals for reforms, Donald Tusk, the Council President, published a letter and six draft documents on a new settlement for the UK within the EU (www.consilium.europa.eu/press-releases-pdf/2016/2/40802208284_en_635900896800000000.pdf).

The proposed reforms fall under four headings: economic governance; competitiveness; sovereignty; and social benefits and free movements (see box “Proposed reforms”).

Withdrawal process

If the referendum result is in favour of the UK leaving the EU, there is no formal procedure under UK law for the government to initiate the process for withdrawal. For example, there is no fixed period within which the government would be required to serve the notice which starts the process for withdrawal set out in Article 50 of the Treaty on European Union (Article 50).

Article 50 allows an EU member state to serve an irrevocable notification of its intention to leave the EU to the Council. Following a withdrawal notification, there is a two-year negotiation period to conclude a withdrawal agreement.

A withdrawal agreement must be approved by the European Parliament and a qualified majority of the Council, excluding the withdrawing member state. Withdrawal takes effect on the earlier of the date of conclusion of a withdrawal agreement or the date two years after the initial notification to the Council, unless the Council and the withdrawing member state agree an extension. It is therefore possible, at least in theory, that withdrawal could occur at the end of the two-year period without an agreement having been concluded.

The purpose of the withdrawal agreement is:

  • To set out the arrangements needed for the withdrawal of a member state, including the steps needed to unravel the huge range of budgetary, legal, political and other obligations that exist between the EU, its institutions and the UK.

  • To consider the framework required for the withdrawing member state’s future relationship with the EU.

Where rights and obligations are being terminated, transitional arrangements may be needed to avoid unnecessary disruption to existing arrangements.

Legal implications of withdrawal

The implications for the UK of leaving the EU would be considerable:

  • EU treaties, directives, directly effective decisions and regulations, and rulings of the European Court of Justice would cease to apply to the UK, unless their effect was specifically preserved by UK national law.

  • The EU courts would no longer have jurisdiction over the UK, and UK citizens would no longer have the rights of EU citizens.

  • The UK would no longer be entitled to participate in agencies such as the European Supervisory Authorities in relation to financial services (comprising the European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority). The UK might also have to leave a large number of EU technical working groups and other bodies in which it currently participates.

  • EU agencies that are based in the UK, such as the European Medicines Agency and the European Banking Authority, would presumably be relocated to an alternative EU location and the position of the many organisations and projects supported by EU funding would be uncertain.

In many areas, UK law is heavily derived from EU law and the way in which EU law provisions have been implemented into UK law is very complex, often involving a combination of amendments to existing primary legislation, new primary legislation, secondary legislation and other rules, such as the rules of the Financial Conduct Authority and the Prudential Regulation Authority in relation to financial services.

For at least a transitional period, assuming that there would not be a desire or capacity to rewrite UK law from scratch, provisions derived from EU law would probably be retained and directly effective EU regulations deemed to continue. However, it would still be necessary to ensure that these laws function properly in the new situation. For example, where EU institutions have direct administrative powers, these would need to be replaced by alternative arrangements, and the scope and meaning of legislation or rules referring to the EU may need to be clarified.

Similarly, businesses and other organisations and individuals would need to consider their own private contractual or other arrangements to ensure that they still operate as intended in the changed circumstances, or whether they need to take steps to change anything as a result of the different political climate and any consequential commercial impact on their affairs.

A new relationship?

There is no comparable example of a member state leaving the EU and the government has not given any public indication of the nature of the post-withdrawal relationship that the UK might seek to have with the EU. A number of different models of relationship with the EU could be considered (see box “Opt-out options”).

However, there are drawbacks to all of the existing models, so it seems most likely that the UK would need to form a new kind of relationship with the EU and other member states.

Third-party arrangements

As well as negotiating a new relationship with the EU, in the event of withdrawal, the UK would simultaneously need to put in place trade arrangements with other non-EU countries with whom it currently deals on EU negotiated terms. Since the EU has exclusive competence in the area of trade policy, the EU’s existing trade agreements with third countries are entered into by the EU as a block rather than by the individual member states, and so the UK would not, unless otherwise agreed, continue to participate in them on withdrawing from the EU.

Any new trade agreements would require separate negotiations with the relevant countries. The UK alone may not have the same negotiating power as the EU, which represents a much larger market, so both the timing and terms of what future arrangements might be achieved are difficult to predict.

Key issues for businesses

Withdrawal from the EU would be a complex, lengthy and uncertain process. In developing a new relationship, much would depend on the attitude that the EU and other countries take to a post-withdrawal UK and how co-operative all parties choose to be.

Disentangling the UK from EU law and regulation would raise many detailed technical issues. Businesses that are affected by the UK’s membership of the EU would need to consider the implications of uncertainty and potential change on their operations and strategy.

Key issues include:

  • Product sales or supply chains that span the EU or other countries with which the EU has trade agreements.

  • The provision of services in reliance on EU passporting regimes or other forms of mutual recognition of qualifications or standards.

  • The employment of workers from the EU in the UK, or vice versa.

Businesses will also need to consider the impact of the UK’s withdrawal on a range of other areas, including free movement of capital, data protection rules, competition and consumer policy, research and development, energy policy, environmental laws, agriculture and fisheries, and regional aid.

Of less direct impact on businesses, but also of importance, will be the implications for criminal and civil judicial co-operation, and foreign and defence policy.

Lucy Fergusson is a partner at Linklaters LLP.

Proposed reforms

In summary, the proposed reforms cover the following areas:

Economic governance. These measures seek to ensure that there can be further eurozone integration without prejudicing the rights of non-eurozone EU member states. There should be no discrimination based on the official currency of a member state and non-eurozone member states will not have to contribute to eurozone bailouts.

Competitiveness. The EU’s commitments to the internal market and free movement of goods, persons, services and capital are affirmed, along with a commitment to boost competitiveness and to reduce the burden of regulation on business. Unnecessary legislation should be repealed.

Sovereignty. The UK‘s special position under the EU treaties is recognised and it is confirmed that the references in the treaties to "ever closer union among the peoples of Europe" do not mean that there is an aim of political integration. A new red-card process is proposed under which a draft EU legislative act will not be proceeded with if 55% of member states’ national parliaments object to it on subsidiarity grounds. It is also confirmed that national security remains the sole responsibility of member states.

Social benefits and free movement. A key UK demand to be allowed to restrict access to benefits to EU migrants is to be met by proposals to:

  • Allow restrictions where, as a result of the attractiveness of a member state’s in-work benefits system, there is immigration of an exceptional magnitude. This can only be invoked with prior approval from the European Commission and the European Council and will only permit benefits to be restricted to the extent necessary.

  • Limit access to benefits by new immigrants for a period of up to four years.

  • Allow child benefits sent to another member state to be indexed to the standard of living in the state where the child resides.

 

Opt-out options

If the UK voted to leave the EU, it could look to a number of other models on which to develop a new relationship with the EU.

EEA membership

The EEA, which encompasses the EU, Norway, Iceland and Liechtenstein, enables Norway, Iceland and Liechtenstein to enjoy the benefits of the EU’s single market and free movement of goods, services, people and capital without the full privileges and responsibilities of EU membership. The non-EU EEA member states are required to adopt much of EU law and contribute to the EU budget but do not have voting power or formal access to the decision-making process.

The Swiss model

Switzerland has concluded a large number of bilateral agreements with the EU to give it access to the single market. The agreements provide for the free movement of goods and people but not services. Swiss goods must meet EU regulatory requirements and Swiss law must be considered equivalent to corresponding relevant EU legislation.

The Swiss financial contribution to the EU is much lower than that of the non-EU EEA member states. The EU has concluded that the Swiss model is not viable in the longer term and has stated that a framework agreement along the lines of the EEA agreement will need to be agreed in the future with Switzerland.

Customs union

Turkey is part of a customs union with the EU which allows for tariff-free access without quotas to the internal market for goods but not services. It has, to a large extent, control of its own trade policy and does not have to allow for the free movement of EU persons. It is required, however, to adopt a common tariff with the rest of the EU for third-country goods and is restricted in its ability to conclude agreements with other countries without EU consent. Turkey is required to harmonise its laws with those of the EU in relation to, among other things, competition, intellectual property and consumer protection.

Free trade agreement

A number of countries, for example, Singapore and Canada, have standalone free trade agreements with the EU. The ability to export services, in particular financial services, may not be easily achieved through a free trade arrangement, as these tend to be designed for trade in goods not services. This would be a disadvantage for the UK, which is a significant exporter of services, particularly financial services.

World Trade Organization

The UK is already a member of the World Trade Organization (WTO), although as with all the member states, the EU currently acts on its behalf at WTO level.

If the UK were to trade with the EU as a WTO member but not as an EU member state, it would control its own trade policy, it would not have to allow for free movement of persons and would not need to contribute to the EU budget. EU law would not apply in the UK. UK exports to the EU would, however, face tariffs and exporters would continue to need to meet EU product standards. The WTO offers little protection to exporters on an individual basis as there is limited ability to enforce its rules.

The WTO arrangements are of less benefit in the area of services so this would be a disadvantage for the UK.


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