Newsletter Brexit July 2016
Brexit – what does it involve and when could it happen?
In a referendum, held in the United Kingdom on June 23, 2016, a majority of voters decided in favor of the United Kingdom of Great Britain and Northern Ireland (UK) leaving the European Union (EU) (this exit from the EU by the UK is the so-called Brexit). The referendum is not binding. Before the UK could leave the EU, the government would have to submit a corresponding withdrawal ap-plication to the European Council. It is uncertain whether the government will take the decision for such application in its own discretion or whether it will consult or otherwise involve the parliament in its decision-making.
The new British Prime Minister Theresa May has confirmed that she will respect the Brexit vote and start withdrawal negotiations with the EU. It is therefore to be expected that the new British government will notify the European Council in the foreseeable future of the intention to withdraw in accordance with Art. 50 Subsection 2 of the EU Treaty, and will start negotiations concerning a corresponding agreement, even if comments thus far by Mrs. May indicate that this could take until the end of the year. The time-limit on the duration of the negotiations concerning the terms of the exit and the rules applicable to the subsequent relationship between the UK and the EU, is two years from receipt of the notification. This period can be extended by mutual agreement. The UK's withdrawal from the EU would not take effect until following the expiry of this period and approval of the results of the negotiations by the European Parliament and, probably, also by the lower house.
In the interim, the UK would remain a member of the EU, and there would be no changes in the UK's relationship with the EU compared to applicable law. Nevertheless, the impending exit is causing major legal uncertainty and all parties involved in business dealings with the UK must adjust to this now.
During the public debate on EU policy, sight was to a major extent lost of the fact that the EU is primarily an economic and legal community that has established uniform rules for an economic area of approx. 500 million consumers. Products approved in a member state under these rules apply as approved in every member state of the EU, and can be sold there. This is the case for example with pharmaceutical products, motor vehicles, electronic products and similarly in dealings with corresponding packaging, with the identification of ingredients in food products etc. If no successor agreement is reached with the UK in which the UK commits to maintaining uniform product standards, manufacturers and dealers outside the UK will face major burdens. They would then have to design their products to British standards and possibly have them certified accordingly. The reverse sales channel from the UK to the EU would also face new bureaucratic hurdles if future agreements do not ensure continued free movement of goods.
The same would apply as regards the other basic freedoms under the European Treaties - free movement of services and freedom of establishment. In this respect, the previous British government under David Cameron had already indicated that it wished to see restrictions, in particular as regards the influx of European workers into the UK. This will undoubtedly be a difficult aspect of negotiations concerning the future agreement between the EU and the UK, particularly as the EU is adopting the position that free movement of goods and services is not possible without free movement of labor and freedom of establishment.
The participants on both sides now have the task of negotiating an agreement regulating the future trading and economic relations between the EU on the one hand and the UK on the other hand. In addition to regulating the basic freedoms, this will in particular be a matter of the framework conditions, for example the continued application of uniform EU rules on environmental protection, competition law, capital-market law, data protection, consumer protection, as well as regulations concerning customs duties and value added tax.
The following models are currently being discussed for the post-Brexit relationship between the UK and the EU.
- The "Norwegian" model
The UK could remain a member of the European Economic Area (EEA). This would guarantee the UK continued access to the EU Single Market.
Apart from the EU member states only the contracting states of the European Free Trade Association (EFTA) have access to the EEA. The UK would therefore first have to join EFTA. This would require negotiations with all EFTA states (Norway, Iceland, Switzerland and Liechtenstein).
Given continued membership of the EEA, the UK would still be required to pay financial contributions without being able to influence the decision-making process of the EU. A further problem would be free movement of people, a basic freedom of the EEA and one which proponents of Brexit wish to restrict.
- The "Swiss" model
Like Switzerland (which is a member of EFTA but has not ratified the EEA Treaty), the UK could enter into a number of bilateral agreements with the EU, so as to maintain direct access to important sectors of the EU Single Market (e.g. free movement of goods and capital). However, as with the "Norwegian" model, the UK would still be required to make a financial contribution without being able to influence the decision-making process of the EU. The question of free movement of people would also automatically arise in the same way as with the "Norwegian" model.
The EU has also made it clear in the "Council Conclusions on EU Relations with EFTA Countries" dated December 20, 2012 that the Swiss model has reached the limits of its possibilities and should not be expanded further. The willingness to accept a further special case of this nature in addition to Switzerland is likely to be low.
It should also be noted that the sectoral cooperation with Switzerland does not create complete access to all parts of the EU Single Market. In particular, restrictions apply to the financial services that are important for the London City. In contrast to companies from EEA states, Swiss service providers cannot utilize the "Passporting" instrument.
- The "Canadian" model
The UK could conclude a free trade agreement with the EU or the individual member states, similar to the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. This would above all enable free trade in goods with the EU. Nevertheless, neither free movement of people nor free movement of services would apply to the UK. In contrast to the above models, this option would not require the UK to make financial contributions.
- The "WTO" model
If the EU and the UK are unable to agree on any other model, future trade would be conducted under the rules of the World Trade Organization (WTO). UK access to the EU Single Market would be as restricted as for example in the case of a country like New Zealand.
Companies involved in economic dealings with the UK will have to adjust to the coming changes at an early stage. This is also the case if only indirect relationships exist, for example if financing or insurance cover is provided by a British consortium or from London. In particular, there will be a need for caution when choosing English law or English places of jurisdiction until such time as the matter is clarified in the envisaged withdrawal agreement.
The following list illustrates the many areas in which market players in economic dealings with the UK will face changes.
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