Former Member of the European Parliament

EUROPEAN PARLIAMENT TO CAMPUS PROGRAMME

Mariela Baeva

Former Member of the European Parliament,

Economic and Monetary Affairs Committee

Understanding Brexit

Short Story

Scene 1

Background information:

*UK referendum on a constitutional issue relating to the European Union;

*on June 23, 2016,the UK voted 52:48 to exit the EU;

*two-year period to negotiate an withdrawal agreement;

*Malta will hold the EU presidency when the two-year period should start.

Setting of the story:

*Post-referendum developments.

Key element:

*article 50 of the TEU (the Lisbon Treaty): the legal device to officially notify the European Union of the UK's exit intention. Once triggered, the procedure is irrevocable. Some experts say differently (please see Note).

Note: Lord Kerr, however, who devised the clause, said the country "might want to think again" when the terms of exiting the EU become clearer.

Protagonists:

David Davis, UK’s Secretary of State for exiting the EU

Keir Starmer, Shadow Secretary of State for exiting the EU

Mark Carney, Bank of England governor

Didier Seeuws, Head of the Task Force on the UK in the Council

Michel Barnier, Chief Negotiator in charge of leading the Commission Taskforce for the Preparation and Conduct of the Negotiations with the UK

Guy Verhofstadt, the European Parliament’s representative on Brexit matters

Nicola Sturgeon, Scotland’s first minister

Arlene Foster, Northern Ireland’s first minister

Plot:

The Brexit, or the decision of Britain to exit the European Union, is complex in nature.

During the referendum campaign, concerns about immigration, wages, sovereignty, security, among others, came to the fore. Immigration was one of the major issues that affected people’s vote.

Remark: The Office for National Statistics for the UK labour market has recently indicated that foreign workers (non-UK nationals) in the UK have reached a record 3.45 million. The number of people from CEE countries (incl. Poland and the Czech Republic), for ex., has passed one million,as the official figures have confirmed.

Apparently, the vote disregarded the warnings - half-hearted though - of the establishment. The former British Prime Minister, British opposition leader, the Bank of England (the central bank of the UK), international organisations such as the World Bank and the IMF, or political figures, for instance, President Obama, tried to walk in the shoesof the Leave voters. The unemployed, the deprived of private housing, the state pensiondependents, and those over 45 years of age backed Leave. The 48 percent that backed Remain were reported in different research as the ones who had gained most from the EU membership and globalisation (Legatum Institute and Centre for Social Justice study).

A paradox loomed, however.

The Remain areas are heavily populated with immigrants, and hypothetically, with growing pressure on jobs, healthcare, education, etc. In contrast,the most solid pro-Brexit areas enjoy the fewest numbers of immigrants.

Another striking characteristic of the referendum is the turnout compared with last year’s general election. At that point, almost three million men and women didnotfind a reason to choosebetween parties. A year later,they embarked on rejecting the establishment as a whole. So, immigration may be the symptom only for a deeper rationale of the voters.

Let’s put first, however, data inchronologicalorder.

in July, immediately after the referendum outcome:

*Inflation in Great Britain increased by 0.6%. That was due in part to import prices which increased significantly.

*Sterlingfell in value by 13% to the US dollar. That was the markets’ reaction after the vote. As a general rule, the lower value of a currencyis supporting export and economic growth. And, next, it is in the nature of currencies, of course, to have their value fluctuating.

*The impact on real estate and/orfoodwas unclear yet.

*A British think tank advised that hopes of a rise ofwages due to a lower number of migrants might not be exactly the case. In fact, immigration in the past decade did not put much pressure on British wages.

Remark:

**the hotel industry:it employs 30% of foreign workers. The low-paid jobs are unlikely to attract British workers, even unemployed.
**seasonalwork:some employers at UK farms even fear a labour shortage.Eastern Europeans are among the seasonal and casual workers in agriculture.

*Some of the largest investment banks have their European headquarters in London.They started considering moving jobs from the UK within weeks of the Government triggering Article 50.

*British companiesmight face takeover proposals from foreign competitors, as “the lower value of the pound made UK firms cheaper for overseas bidders.”A number of British businesses could pass into foreign ownership.

*The shock of the Brexit vote on markets was short-lived thanks to Bank of Englandpolicies of injecting liquidity into the economy. ‘On the stock markets, Brexit vote wasn’t the tsunami yet that all feared.’

In August,

*The pound stabilised, but remained below pre-referendum levels. Itindeed helped boost the exports. But, it pushed up the cost of fuel and raw materials (for manufacturing). That played a role of an early indicator of inflationary pressure.

*Surveys of the sectors of services, construction and manufacturing suggested that all three enjoyed a rise. Increased demand might be one of the reasons.

*A slowdown inthe growth of wages indicated, according to some, the employers’ nervousness over uncertainty and the country’s economic outlook.

*Employment rose, however, and the unemployment rate remained at its 11-year low level of 4.9%.

*Confidence to the housing marketstarted to return. There were signs that prices and sales would rise in the months that followed.

*There was a prompt action by the Bank of England to cut interest rates. Some argued that the Bank was wrong to cut interest rates so soon; others supported the decision of the Monetary Policy Committee (MPC) of the Bank of England not “to wait for any ‘hard data’. Apparently, the Bank had learnt the lessons of 2008 when the collapse of business and consumer confidence sent the early signals of the start of the GreatRecession.Statisticians, however, warned against reading too much into any one month’s data. The swift action to lower borrowing costs probably helped settle the nervous financial markets.

*One major worry took hold. Young people would bear the impact of any downturn. Some early signs started with the graduate job schemes. It was presumed that firms would hire 5,500 graduates in 2016. Yet, the perspective started to be gloomy as with the Brexit vote different sectors headed to recruitment cuts and downsizing. Some of those sectors were law, banking and finance, media, technology, etc. IT and telecoms was the only sector in which vacancies were still available. Concerns about a new apprenticeship levy to be paid by all big employers from April next year were also brought to light.

Referring to graduates, a(The Guardian) survey of a university senior staff has foundBritish universities were considering plans to open branches inside the EU. EU academics also warned that not maintaining their free movement might lead to losing up to 15% of staff at British universities. Evidence showed that European researchers and lecturers startedto leave or reject UK higher education posts because of expected Brexit consequences.

In September,

*The Bank of England and analysts still feared a gradual degradation of the British economy. Their comments came as figures suggested the economy grew by around 0.4% in the third quarter of the year - compared with the 0.1% predicted by the Bank. Warnings about a downturn, however, could spread.

*OECD revised up its UK growth forecast for this year, but warned, too, the downturn would come later and would be harder.

*One of the latest IMF forecasts could also reveal that the UK's GDP growth was one of the fastest among the G7 countries (Canada, France, Germany, Great Britain, Italy,Japan, and theUnited States).The IMF noted in its overview, however,that Brexit is an event that has its effects revealed over time.

*The Treasury select committee (of the British Parliament) advisedthat almost 5,500 firmsin the City which rely on EU passporting rights (definition: to sell their services across the EU would be affected,if Brexit would mean Britain leaves not only the EU, but the single market as well. That could amount to a significant loss of business. Xavier Rolet, the CEO of theLondon Stock Exchange, mentioned at least 100,000 jobsmight go across the UK.

Further info:

**According to a study by the financial industry federation - TheCityUK - the British finance industry could suffer £38bn in lost sales. £10bn less in taxes to be paid might add to the fear about Brexit consequences.

**The future of London as Europe's financial centre will be a major negotiating point in Brexit talks with the EU. It is Britain's largest export sector and biggest source of tax revenue.

*Leading business figures (financial PR man, Roland Rudd, Ryanair’s CEO Michael O’Leary, Sir Martin Sorrell of advertising giant WPP)demanded government clarity about the “Brexit means Brexit” mantra.They warned that investment was being postponed.

In this vein, you should also know that:

*The vote to exit the EU has left 76% of company CEOs –who voted 72% to remain– saying they would consider moving their headquarters or operations outside Britain. The data were obtainedfrom a survey of KPMG, an accountancy firm. The firm could base its survey on 100 business leaders.

In October,

British Prime Minister Theresa May introduced the idea of the EU repeal (cancel) bill. It is a new bill that would enable Britain to repeal any EU law it does not wish to keep upon leaving the bloc.This refers to the European Communities Act 1972 that drove the UK into the then European Economic Community in 1973. Repealing it, Britain will no longer be bound by European law, which governs free movement, or by rulings of the Court of Justice of the European Union

Remark: Many admit, however, EU law and regulation have filled many gaps in UK law since its accession in 1973.

The PM also mentioned she envisaged to introduce the EU repeal bill in Queen's Speech. Using the royal prerogative powers to trigger article 50 might mean avoiding consultations with theparliament. Even some of the PM’sTory (Conservative) MPs accused May of lack of respect for democracy over the government’s refusal to give parliament a say on the terms of exiting the EU.

An unprecedented cross-party alliance formed, comprisingdifferent MPs– Tory, Liberal Democrats, Labour, SNP and Greens. It demanded May should give parliament a vote before negotiations start - a “Brexit blueprint.” It also required certainty parliament can amend UK’s future relationship plan with the EU. “Britain does 44% of its trade with the EU, and parliament cannot legitimately be bypassed on such a momentous decision,” stated the MPs.

A reference was also made to the Conservatives’ 2015 general election manifestopointing out their commitment to maintain Britain’s membership of the single market.

Some other arguments circulated around the idea that the British people did not vote for a hard version of Brexit.

Remark: A new pressure groupof leading Conservative Eurosceptics, Leave Means Leave, called for Britain to end free movement and quit the single market whatever the trade deal could be on offer by the EU.

In the meanwhile, the UK's High Courtheard a legal challenge to May’s plan to triggerarticle 50 without a vote in parliament.

Remark: In Parliament, there is no majority in favour of Brexit and its opponents stick to legal procedures.

After May’s announcementthat Britain's withdrawal from the EU would be put in motion before the end of March 2017, the British poundfell to its lowest level in 31 yearsagainst the dollar and a six-year low against the euro. By mid-Octoberreports on the pound’s drop indicatedthe currency hit its lowest level since the middle of the 19th century. The financial information service Bloomberg ranked the pound in a list of the 10 worst-performing currencies of the year. Currencies such as the Argentinian peso, or the Yemeni rial had a better year than the pound.

The reports were based on the Bank of England’s index. Chief economists advised that much of the damage would come later from falling trade levels and lower consumer confidence. “A negative spill over into sectors,” they say, “may be faced if multinationals depart from the UK.”

Traders and investorswere worried by May’s preference to focus on immigration and British sovereignty rather than on the economic impact of the Brexit. Forging a relationship with the EU as a fully independent, sovereign countryindicated that UKwas indeed heading for a hard form of Brexit. That meant itwould quit the European Union's customs union and single market.

Britain’s biggest banks started to preparetheir relocation out of the UK in the first few months of 2017. Smaller banks made plans to get out before Christmas.

In a fresh move, several of thebusiness leaders’ organisations, including the Confederation of British Industry, wrote an open letter to the PM to highlight the dangers of a hard Brexit (“hard Brexit” is a “linguistic pirouette”, as experts call it). They insisted on the worst options to be excluded:

*working under WTO rules. It would mean that 90% of goods could be subject to customs duties;

*stripping of passporting rights for the financial services sector;

*failure to consider the demands of UK-based banks could have repercussions on the continent, too. The banks would not necessarily move their business from Britain to mainland Europe. They could opt for New York or Singapore.

In November,

The British High Court ruledon 4 Novemberthat the government must receive permission from the British Parliament before officially notifying the European Union of the UK's wish to exit.

The UK government has filed an appeal, and the UK Supreme Court (SC)will address the issue at the beginning of December.

It will deliver a verdict in early January. It is expected to be the most constitutionally significant case ever heard by the Supreme Court.

During a lecture on constitutional law for law students, a SC judge has recently presented argumentsfor a possible comprehensive replacement of the existing EU legislation before the government triggers Article 50.

It has also become clear Britain will probably seek a sector-by-sector approach during the negotiations with the EU. Will the EU be open for the approach?

The Bank of England governor has also intervened this month with demands “for the government not to pursue a sweetheart deal for the City at the expense of manufacturers and small businesses.”

The number ofEU students applying for places on some of the most prestigious courses in the UK’s leading universitieshas dropped by 9%. This relates to applications for all courses at Oxford and Cambridge universities, beginning in September 2017, as well as applications for medicine, dentistry and other courses elsewhere. The full picture, however,of the damaging impact of theBrexitvote on theUK’s universitieswould only become clear after the main January deadline. It usually makes up 90% of total applications by that time.

You should also know that:

*Legal experts told a panel of members of the British Parliament thatthe chances of EU citizens settled in Britain retaining all their rights to live, work and retirein the UK after Brexit are zero.

Against the entire background, what is the view of the European Union?

In a nutshell, “No negotiation before notification.”

Any deal on Britain's new relationship with the EU has to be ratified by the European Parliament. Its president,Martin Schulz, was in London in September.He reminded everyone that the parliament “will play a key role in setting a new relationship between the EU and the UK.”

The consent procedure of the EP is valid for any “withdrawal treaty and subsequent treaty setting out the full relationship”.

Schulz reiterated European Commission President’s statement that Britain would not be allowed to pick from an “à la carte menu” of EU privileges after Brexit. No deal would be possible on enhanced single market access without free movement of people and labour. “No negotiation before notification” is what say the European leaders. Only after UK notifies it triggers Article 50, may the negotiations start.

Guy Verhofstadtalso indicated no compromise possible that could allow the United Kingdom to restrict migration of European Union citizens and retain access to the common market. The legislature would set limits on what deal Britain can strike over Brexit. The European Parliament is overwhelmingly opposed to Britain retaining its trade freedoms with the EU if it goes ahead with plans to limit immigration from the bloc.

Donald Tusk, President of the European Council, wants the EU to take a hard line against the UK.

Britain’s future trade agreement with the EU must be ratified by all 27 member states. The CETAsaga (reference: the EU’s first trade pact with a G7 economy signed on 30 October 2016 – may generate some lessons for Brexit. A crucial one in this respect is that on a continent and in a bloc that grows increasingly sceptical about the value and essence of trade deals, 38 national and regional assemblies will have a final say on the future UK-EU agreement.

In this context, back in September, the prime minister of Slovakia, Robert Fico, warned that the Visegrad group* -the Czech Republic, Hungary, Poland and Slovakia–might veto any pactrestricting their citizens’ rights to live and work in Britain.

*Note: theVisegrad Group, also known as the "VisegradFour" or V4 was first established in 1991 by the leaders of Hungary (József Antall),Poland(Lech Wałęsa), and Czechoslovakia (Václav Havel).

Other MSs such as Belgium and France have made clear the two-year period to negotiate an withdrawal agreement has to be finalised before the European elections in the spring of 2019.