Fourteenth MEETING of the EEA Efta Forum

-1-

Ref: 16-5982

Ref: 16-5982

Fourteenth MEETING of the EEA efta forum

Brussels

14-15November 2016

Background paper IIIfor discussion under Agenda Item 7: Brexit and long-term trends for Europe

Introduction

A referendum was held on 23 June 2016 to decide whether the United Kingdom should leave or remain in the European Union. Leave won by 52% to 48%. The referendum turnout was 71.8%, with more than 30 million people voting.

British Prime MinisterTheresa Mayhas set up a new government department, to be headed by David Davis, to take responsibility for Brexit. Liam Fox, Secretary of State for International Trade,and Boris Johnson, Foreign Secretary, will play a central role in negotiations with the EU. The government did not foresee Brexit ahead of the referendum and is now rushing to compose a team of skilled negotiators to manage the complex business of negotiating withdrawal and new agreements on relations with the EU and other partners.

In order to leave the EU, the UK must invoke Article 50 of the Lisbon Treaty, which gives both sides two years to agree on the terms of the exit. Theresa May plans to trigger Article 50 by the end of March 2017, meaning that the UK is scheduled to leave by March 2019, depending on the precise timetable agreed during the negotiations.

On the day of Brexit, the Great Repeal Bill will come into force, ending the primacy of EU law over national legislation. The bill will incorporate EU legislation into UK law, after which the government will decide which acts to keep, change or retain.

Brexit entails unpicking 43 years of treaties and agreements covering thousands of different subjects. It is complicated by the fact that it has never been done before and negotiators will, to some extent, be making it up as they go along. No nation state has ever left the EU, but Greenland voted 52% to 48% to leave in a 1982 referendum held after the country gained a greater degree of self-government from Denmark.

It is unclear what kind of deal the UK will seek from the EU – especially on trade and immigration – until formal negotiations begin. What is clear is that the post-Brexit trade deal will likely be the most complex part of the negotiationsas the unanimous approval of more than 30 national and regional parliaments across Europe is needed; some of whom may want to hold referendums.

Brexit became even more complicated on 3 November 2016, when the UK High Court ruled that the British Government cannot begin the process of formally withdrawing from the EU without approval from parliament. In a landmark judgment, three senior judges upheld a legal challenge brought by a group of citizens who opposed the Brexit vote. In an unusual step that signals the importance of the case, it will leapfrog the usual next stage of the appeals process and go directly to the Supreme Court, which will hear the case in early December, with all 11 Supreme Court judges expected to sit together duringa case for the first time ever.

regional disparities in the BREXIT votE

There were clear regional disparities in the voting on Brexit. England voted strongly for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%. Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave.

Key

Blue: Majority leave

Yellow: Majority remain

Source: BBC

The Leave vote has been partly explained by the socio-economic and geographical divides that characterise the UK. A recent report by the University of Strathclyde addresses the various dimensions of the phenomena.[1]

First, there is a longstanding and growing economic polarisation between the global city of London, together with its hinterland in southeast England, versus the rest of the UK. The latest Eurostat data show London having a regional gross domestic product (GDP) per head (PPS, EU28-100) of 186 against a national average of 109.

Second, in England, political and policy-making power is centralised in London. Over the 2008 to 2012 period, all regional governance structures were abolished. The exception is London, which has its own mayor and London Assembly. Local authority powers have also been progressively weakened and subject to more central control over the past 30 to 40 years. In recent years, the UK Government has initiated a new phase of devolution, notably through the 2016 Cities and Local Government Devolution Act.

Third, regional development policies in the UK are limited, with only small-scale instruments for structurally weaker regions and areas facing socio-economic deprivation, compared to other European countries.

Fourth, EU cohesion policy has been unable to redress economic divides or lead to most positive perceptions of the EU in England and Wales. A 2015 Eurobarometer survey found that fewer than 10% of UK respondents were aware of EU co-financed projects in areas where they lived, by far the lowest levels of awareness of EU funding of any Member State.

IMPLICATIONS FOR Local And regional authorities in the uk

-1-

Ref: 16-5982

As it stands, one does not know what the UK’s future relationship with the EU will be. Many scenarios exist, entailing different degrees of access to the EU market and movement of people, in some cases changing or removing the rules and regulations applying to British local and regional authorities. All options are being discussed by the British Government and the EU.

This makes planning for Brexit difficult for all concerned, across all sectors and at different levels of government. Each option has a different set of opportunities and challenges. It is therefore difficult to be too prescriptive orformulate clear strategies.

The Local Government Association of England(LGA) has identified five broad areas whereBrexit affects municipalities and regions:

1. EU funding: GBP 5.3billion of EU funding is committed to local regeneration schemes until 2020. It is a priority for LGA is to push for the full amount of EU structural funding to continue to be dispensed to local areas until 2020.This funding promotes, e.g. business, jobs and skills, research and environmental projects.
2. EU laws: Hundreds of EU decisions, regulations and directives affect local and regional authorities. These include legislation in the field of environment, employment, trading standards/licensing, public health and safety, public procurement and state aid, as well as rules affecting municipalities and regions’ financial and investment activities.Brexit provides an opportunity to broaden the scope of decisionmaking in the UK.
3. Devolution: Repatriated powers from Brussels should not be centralised to London as municipalities and regions are best placed to deliver on a range of agendas. Thus, replacement laws or regulations should be based on a devolved approach where appropriate.
4. Community cohesion: Tools to help local authorities tackle hate crimes are needed. Possible impacts on the public sector workforce.
5. Place-based impact: It is likely that the consequences ofBrexit and changes in access to the Single Market will impact diverse areas in the country differently.

In a speech at the Conservative Party Conference, Chancellor Philip Hammond pledged that local areas with existing EU funding agreements signed off at the time of Brexit would receive replacement funding.

Prime Minister Theresa May has also pledged to consult with municipal leaders across the country to ensure Brexit works for everyone.

Permanent Secretary Melanie Dawes of the Department for Communities and Local Government has also suggested that some powers could be “devolved” from the EU to local government. However, as yet there are no clear indications that the Government intends to change its policy as regards devolution to local areas, according to a briefing paper by the House of Commons on Brexit and local government.

Implications for scotland and northern ireland

-1-

Ref: 16-2972

Scotland’s First Minister Nicola Sturgeon said in the wake of the Leave result that it was“democratically unacceptable” that Scotland faces being taken out of the EU when it voted to remain. A second independence referendum for the country is now “highly likely”, she has said.

An analysis published by the Scottish Government in August 2016 showsthat the projected cost of leaving the EU is up to GBP 11.2 billion per year for the Scottish economy and up to GBP 3.7 billion per year for Scottish public finances.

The office of the Prime Minister of Ireland has adopted a Contingency Framework, identifying key policy issues arising from the referendum to be managed by government departments.Priority issues identified include UK-EU negotiations, British-Irish relations, Northern Ireland, trade, investment, North-South border impacts, competitiveness and macro–economic issues, research/innovation funding and energy.

Implications for the efta states

-1-

Ref: 16-5982

The Norwegian Government aims to continueits relationship with the UK at the same level as today and thus wishes to regulate the relationship in the areas covered by the EEA Agreement. M. Elisabeth Vik Aspaker, Minister of EU and EEA Affairs, speaking at a dialogue meeting on Brexit in August, said she aimed tohave well-functioning arrangements with the UK in place as soon as possible after the UK leaves the EU.

A Ministerial expert group is charged with mapping the impacts and consequences of Brexit on Norwegian interests and to propose measures to protect these in the best way possible. The Ministry of Foreign Affairs is providing regular updates on Norway and Brexit on its website.

The Icelandic Government is preparing for Brexit and is strengthening its UK Embassy in order to safeguard Icelandic interests related to the issue. The UK is Iceland’s largest export market; 12%of Icelandic products and services are exported to the UK and 19% of tourists coming to Iceland are British.So far, three scenarios have been contemplated: a Bilateral Iceland-UK Free Trade Agreement (FTA), an EFTA FTA with the UK and an Annex to the UK-EU Exit Agreement whereby the EEAcountries could follow suit. In a recent conference on the issue,Foreign Minister, Lilja D. Alfreðsdóttir, discussed the opportunities and challenges arising from Brexit. She mentioned in particular the significant legal uncertainty as regards the free movement of persons, trade and the Single Market, and the devaluation of the Pound. She said the effects on Icelandic relations with the EU were unclear as well as the impact on the EEA Agreement. On the other hand, some interesting opportunities could be in store for Iceland as a result of the UK no longer adhering to the EU Fisheries Policy. Also, some Icelandic products are subject to customs when imported to the EU, but with Brexit, the UK would have the powers to waive these.

long-term trends for europe

-1-

Ref: 16-5982

In 2010, aEuropean Strategy and Policy Analysis System (ESPAS) was launched to help the EU identify the main global trends, access their implications for the Union and review the resulting challenges and policy options confronting decisionmakers. A recent ESPAS report “Global trends to 2030: Can the EU meet the challenges ahead?” identifiesfive global trends and three structural “revolutions”that these trends may bring about.

The worldis changing more rapidly than ever, becoming steadily more complex, more challenging and more insecure. The five global trends ESPAS has identified are the following:

“1. The human race is growing older and richer with a growing middle class and widening inequalities.

2. Economic weight and political power is shifting to Asia. Sustained development of the world economy is becoming more vulnerable to challenges and to weaknesses in the globalisation process.

3. A revolution in technologies and their applications is transforming societies in almost every aspect. Digitalisation is the invader and radical, disruptive change the consequence.

4. Managing scarcity of resources becomes an increasing challenge, with rising energy consumption and shifting patterns of production.

5. The interdependence of countries, now a face of global life, is not matched by strengthening global governance. The world becomes more fragile and unpredictable.”

The above trends contribute to three structural revolutions forging a more complex and insecure world:

i) An economic and technological revolution: the convergence of digital, biological and industrial technologies and the proliferation of affordable digital tools available to almost everyone will fundamentally change the way economies and societies function. The “Knowledge Society” brings vast opportunities in terms of productivity and welfare gains and individual agency, but it can also contribute to social disparities, e.g. rise in unemployment in low-skill jobs; growing inequalities within societies (more than across countries); and a relative impoverishment of the middle classes in developed countries, including in Europe.

ii) Asocial and democratic revolution: people will be better connected and more empowered, which will result in a more creative and dynamic labour market with more demanding and critical employees. This may well engender rejuvenation of the social contract and new forms of governance, but also prove a challenge for the traditional collective agreement and trade union structure. Furthermore, anti-establishment feeling may grow and people will resort to local, less traditional initiatives. Demands for increased accountability and transparency at all levels of government will grow steadily.

iii) A geopolitical revolution: Europe and the United Statesare losing their global dominance with the rise of Asia and the emergence of powers in LatinAmerica and possibly Africa. Polarisation will increase and globalisation will no longer be driven by the West with the respective demands for democracy, more open markets and peaceful international cooperation. The current multilateral framework will be weakened, East-West relations may become more confrontational, undermining the ability of the international community to address increasing interdependence and common challenges, e.g. in the form of extremist non-state actors and the growing number of weak and failed states.

In this context, five main and interlinked policy challenges for the EUare identified:

1. Reshaping the economy: There is an urgent need for a new platform for sustainable, durable economic growth. Mobilisation of public and private investment to help to boost the economy and stimulated jobcreation is needed. The Single Marketmust be completed. Governance of the euro area must be enhanced. A genuine “Energy Union” and the combating of climate change must be developed.
2. Promoting a society of change and innovation: Enable a true digital revolution, building a European research and innovation area and rethinking of education.
3. Combating the rise in inequality and growing exclusion: Focus on less rigid labour markets, more inclusive educational systems, the reduction of barriers to initiatives and competition and greater investment in healthcare. Reshaping the migration debate with a view to a more economically sustainable, humane and carefully managed migration strategy.
4. Enabling individual empowerment and democracy: Reforms are needed in the interaction of the EU with states and citizens. These could include: a clearer setting of priorities; systematic respect for subsidiarity; functional transparency; clearer communication systems; and modernised governance systems, including better alignment between institutions and a clearer division of tasks between them.
5. Enhancing the international role of theEU.The EU will face major external challenges from a more insecure world, in the form of the “return” of geo-politics, reduced US engagement and increasingly turbulent neighbourhoods. Europeans will need to take greater collective responsibility for their security and defence, strengthen their alliances and engage with rising powers. The EU will have to foster stability and development in its wider strategic neighbourhood, reinforce the global system by efficiently promoting a multilateral framework that is adapted to the newly multi-polar world but remains based on universal values.

[1]University of Strathclyde, EoRPA Policy Briefing; Brexit and regional disparities in the UK, August 2016.