Brexit: The Painful Divorce

What a No-Deal Exit Might Mean

The European Union is a 28-member bloc that was formally established in 1993 after the signature of the Maastricht Treaty. Most of its members are on continental Europe. There are two that are not — the Republic of Ireland and the UK. However, this is soon to change as the UK will cease to be a member as of March 2019, because of the so-called ‘Brexit’ or British Exit.

Brexit became a reality after British voters voted in a referendum in 2016 with 51.9% of voters wishing to leave the EU. Neither the referendum nor the decision to leave happened by accident, both had contributing factors and have led to complications arising from the decision to trigger a departure from the EU.

UK’s disagreement with 3 fundamental EU pillars

David Cameron, the former Conservative British PM, promised to reform and improve Britain’s relationship with the EU with respect to three pillars — financial contributions, immigration, and sovereignty. To start off, the EU has a certain expectation about how these pillars are viewed and accepted. Any contradiction or refusal of these pillars could lead to difficulties based on the EU principle of being the highest law of the land.

The three key pillars to EU membership are as follows: (1) every member state has to make annual contributions towards the EU budget, (2) EU member states’ citizens have the right to free movement within the EU and receive the same benefits as residents, and (3) the decision is made at an EU level and implemented at member state level with the option to ratify further. As mentioned, all member states should accept these pillars as part of their EU membership. The British were not completely satisfied with these conditions in part due to a rise in populism. Before we talk about populism’s influence, let’s first look at the British stance on these three pillars.

Long have the British complained that they are contributing too much. In late 2014, David Cameron refused to pay the €2.1 million tax bill for which the EU demanded payment on 1 December. This refusal soured relations between Downing Street and Brussels. In addition to the financial contributions, there is also an issue of sovereignty.

Some British believe that they should have the right to make their own decisions. In other words, a UK decision should be made in the UK. This naturally contradicts the principle of the EU where decisions are made in Brussels. Further, some may view immigration as an attack on sovereignty.

The EU permits citizens of its member states to move freely within the EU. As a result, Britain has seen an influx of immigrants namely from EU countries like Romania and Poland. Of course, other so-called ‘third country’ nationals from countries outside of the EU have also immigrated to the UK. The freedom to move about the EU and migrants receiving the same benefits as UK citizens brought fear to some and set the stage for populism to take hold.

Populism’s Influence

Populism tends to buck the trend on many liberal or conservative trends. For many, it’s widely accepted that immigration and globalisation are fundamental musts and the way our society has shaped over the last few years. On the contrary, populism tends to rebuke globalisation and favours a more nationalistic approach. Take the rise of Victor Orbán as Hungary’s PM that has become the leader of the far right. While Orbán’s policies may be extreme, Nigel Farage in the UK was the biggest proponent of Brexit.

Nigel’s influence from UKIP (UK Independence Party) had greatly ramped up over the time leading up to the referendum. His efforts and campaigning for Brexit led to an increase in UKIP’s influence. In doing so, Nigel Farage’s UKIP party gained a significant majority in the European Parliament during the 2014 parliamentary elections. While UKIP gained representation in the European Parliament in Strasbourg, the UKIP still had little influence in Westminster. The party performed modestly in the 2015 elections with only 1 returning MP despite gaining 13% of the national vote. Still, Nigel Farage continued and managed to influence the British public to vote for Brexit despite not considering two key factors — the Irish border and trade.

Irish border

The Irish border remains one of the most contentious aspects of Brexit. After all, the Irish Republic to the South remains in the EU and wishes to do so while their neighbour to the North will leave with the rest of the UK. The challenge obviously becomes that people have land on either side of the border, roads lie on both sides of the border, and people drive back and forth between the two countries every day. This is not to mention Northern Ireland exports £4 billion worth of goods to the Republic of Ireland while the Republic of Ireland exports £1.6 billion worth of goods to Northern Ireland. These goods pass the border without any customs checks as both countries are member states of the EU.

For this moment, the focus has been on trade across the Irish border. But, the issue of the Irish border goes much deeper dating back to the 1960s and the so-called ‘Troubles.’ The ‘Troubles’ should not be forgotten and the political and social challenges that it caused. In fact, it was so horrific that the near 30-year dispute ended with the Good Friday agreement deciding how the Unionists, who were mainly Protestants and wanted to remain part of the UK, and the Irish Republicans, who were mainly Catholics and wanted to have a united Ireland, should settle their dispute.

In the end, there should be no hard border between the Republic of Ireland and Northern Ireland. Without a further agreement, this becomes impossible if the UK leaves the EU and customs union while the Republic of Ireland remains in the EU and the customs union. Finally, the question remains how to manage land, buildings, businesses, and trade that sit on both sides of what is almost an imaginary border.

Trade

In general, trade remains another contentious topic. The UK’s departure from the EU means its departure from the single market. In other words, it no longer remains part of the customs union that the rest of the member states enjoy and can trade freely amongst each other. For the UK, this means that it would need to negotiate a separate agreement between the EU and the UK to discuss how their trade relationship should function in the future.

Some in the UK wanted access to the single market without paying the financial contributions to which the EU has disagreed. In fact, French President Macron said that such positioning is not following the rules. If a member or country wants to have access to the single market, then that nation has to contribute towards the EU budget. It seems like a fair trade off with a cost and a benefit.

As a substitute to this all or nothing model of paying to receive access or not paying and not having access, some suggested that the UK could follow a Norway model. Norway is not part of the EU, but it is part of the EEA (European Economic Area) according to the EEA Agreement that was signed in 1992 and later enforced in 1994. In this Norway-style arrangement, the EEA joint committee consisting of EU members and the EEA members decide how to incorporate EU directives into law.

No deal

There is a possibility that the EU & UK won’t agree on a deal that governs the UK’s future relationship with EU before the exit deadline on March 2019. Several negotiations have gone on with some progress, but not enough to claim that there will be a deal. In fact, the current UK PM, Theresa May, drafted an agreement in July at Chequers, the Prime Ministerial country house, that has not proved as a solution or possible deal. The Chequers agreement is an attempt at establishing policy for movement of goods between the EU and the UK. The agreement also tries to access the EU fish market while taking controlling of its waters, thus limiting the bloc’s access to those fishing grounds. Finally, the agreement also aims to take control of the EU’s common agricultural policy while still applying the EU agrifood rule book. This proposal has met opposition both in Westminster and in Brussels.

Michel Barnier, the chief EU negotiator, believes the Chequers agreement would destroy the EU project. Furthermore, the Chequers proposal doesn’t solve the Irish border issue. Finally, the Chequers proposal has not dealt with the question of how to manage services and capital, since it only discusses the passing of goods between the EU and UK.

As a rebuttal to the Chequers agreement, Michel Barnier offered to the UK either a Norway-style agreement or a Canada-style agreement. A Canada-style agreement would be like CETA that removes 99% of customs duties for trade between the EU and Canada, but has some exceptions. While Canada doesn’t have to abide by the European Court of Justice rulings or abide by the EU’s four freedoms, Canadians don’t have a guaranteed access to the free market in Europe. In addition, this would mean for Britain that it would not enjoy the same level of access that it currently has as part of the single market and customs union. This applies in particular to the services sector.

The prospect of the Chequers agreement not surviving remains quite high. It has not answered open questions about trade and the border. It may so happen that the UK departs the EU in March 2019 with no deal in place. At present, there is no progress on either of these two topics. But, there were two things agreed on during 2017 and early 2018 namely the UK’s financial contribution so-called the “UK Divorce Bill” and the transition period.

UK Divorce Bill and Transition Period

The UK Divorce bill is the amount that the UK pays for breaking its long-term relationship with the EU. Recall, the UK currently makes financial contributions to the EU budget, so this needs to be somehow compensated with a UK departure. So far, no hard figure was agreed in December 2017. Rough estimates of £35-£39 million fall in the likely range that the UK should pay to Brussels.

The departure from the EU doesn’t happen in a cold turkey manner. Rather, there is a transition in place with several terms and conditions. The transition means that the UK will remain part of the EU for a period of 21 months with limited powers as of March 2019. In addition, EU laws will apply to the UK during this period. The UK has the freedom and power to negotiate its own bilateral trade agreements and still remains part of the EU’s existing trade agreements. Finally, the UK will also remain part of the EU’s fisheries policy until the end of 2020.

Example for Frexit or Nexit?

Some say that the rise in populism and Brexit could lead to the rise of Frexit or French Exit and Nexit or Netherlands Exit. Populism may fuel such a debate, the current French and Dutch Governments favour EU membership. Future elections may prove to be more challenging for pro-EU advocates as the nationalist rise continues across Europe with the likes of AfD in Germany (Alternative for Germany), RN in France (National Rally, formerly known as the National Front), and FVD in the Netherlands (Forum for Democracy) having gained significant influence and parliamentary representation at member state level. These gains in representation and influence may tip the balance to a more fractured Europe in the wake of Brexit as an example of Do’s and Don’ts.

Final Thoughts

The issue of Britain’s divorce from the EU remains a hotly contested topic with two main issues at the heart of the debate. The willingness of both parties to reach an agreement remains an open question as both sides have their own interests.

The UK’s decision to leave was based on a misalignment of the British view and the European view of 3 fundamental pillars together with a rise in populism. The outcome of the negotiations so far has disappointed some and raised certain doubts about Britain’s ability to get a leg up over their European counterparts once they are out of the union.