Article 50: a trump card or joker?

We have today published the full report assessing the implications of our EU ‘wargame’ which simulated the negotiating dynamic under two scenarios: first, a UK-EU renegotiation from within and, second, under ‘Brexit’. As we’ve stressed before, the fact is that unless the UK wants to simply fall back on WTO trading rules and unilateral free trade, renegotiation and withdrawal will both require a negotiation with other EU states and the EU institutions.

The only formal way to the leave the EU is via the so-called “Article 50” exit clause of the EU Treaties, which stipulates a two-year timeframe within which to potentially conclude a continuity deal. In our simulation, after their initial hostility, all other member states recognised the need to strike a new trade deal with the UK with economic incentives trumping political rhetoric. Britain is unlikely to face the ‘worst case scenario’ of having to fall back on World Trade Organisation rules.

However, as our simulation showed, the initial new deal would likely fail to replicate the full access to the EU single market currently offered by full membership:

• A Norway-style deal – effectively single market membership but with no formal political influence – is likely to be rejected by EU partners and is in any case a bad deal for the UK as it amounts to “regulation without representation”.
• While a reciprocal trade agreement for goods, where the UK has a sizeable trade deficit of £56.2 billion (2012) with the EU, would be relatively easy to strike, access to the EU’s services market – where the UK has a trade surplus of £11.8 billion (2012) – will be far more difficult.
• Access for UK financial services would be a particular concern since a third of the UK’s trade surplus in financial and insurance services in 2012 came from trade with other EU member states – of the total £46.3 billion UK financial and insurance services trade surplus, £15.2 billion was with the EU and £14.5 billion with the US. Perhaps over time, further bilateral deals on market access could rectify this but the political resistance from France and some others could be high.

While Article 50 of the EU treaties has the benefit of definitely triggering negotiations – which isn’t guaranteed under Cameron’s renegotiation plan – it comes with several drawbacks:

• Article 50 is a one way street – once it is triggered, and even if the deal available at the end of the process proves unsatisfactory to the UK, there is no way back into the EU except with the unanimous consent of all other member states.
• It is likely to put the UK on the back foot in any negotiation. The remaining EU member states would be in charge of the timetable and the European Parliament would have a veto over any new agreement. Therefore, while having to fall back on WTO rules entirely is unlikely, it would remain a possibility.
• As the UK will not take part in the final qualified majority vote on whether to accept the new deal, protectionist-minded member states could have greater influence on the degree of market access the UK could secure post-exit – particularly on services (see graph below).

Compared to renegotiation from within, Article 50 therefore cedes more control than what is often thought.

Ultimately, though, while a high transaction cost is undeniable, the big question is if there is a point – and if so when – at which the high one-off cost of Brexit would be outweighed by the long-term benefits of more economic and political independence over areas such as financial regulation, agricultural policy or criminal justice, particularly if the eurozone comes to dominate the wider EU and the necessary reform proves unattainable.

Jumping from headline to headline isn't a Europe strategy

Our #EUwargames exercise has already received extensive coverage, but today we'll publish our own, widely anticipated, analysis of the simulation (within the next hour or so).

In the Times, Open Europe's Director Mats Persson trails the analysis. Bringing the simulation back to reality, he argues:

David Cameron heads to another EU summit today. The focus will be on the eurozone’s stuttering “banking union” but the PM will be stalking the corridors seeking support for EU reform. The good news is the appetite for change across Europe is growing. The bad news: Mr Cameron risks wasting the opportunity.  

In a unique exercise, Open Europe has just “war-gamed” UK-EU negotiations and the results were instructive. Once the posturing is over, there’s scope for a range of reforms, including cutting the cost of Brussels and veto rights for national parliaments. Mr Cameron has achieved an EU budget cut and financial services safeguards but the exceptional statesmanship required forsweeping reform is lacking.  

First, he’s fallen behind the curve. In January, he gave a good Europe speech but there was no follow-up plan. Mr Cameron had years to change the rules on benefit entitlements prior to Romanians and Bulgarians gaining full free movement rights but only now are changes being rushed through. Last-minute panic action will never deliver substantial reform.  

Second, there are government malfunctions. On EU migration the Home Office, the Department for Work and Pensions and No10 have pulled in different directions. All governments suffer from internal tensions, but multi-party coalitions such as the Dutch or Finnish are far more joined up on Europe.  

Finally, there’s a failure to understand EU partners’ interests. In our simulation, presented with evidence that France has the most to gain from limiting EU regional spending, Paris was open to budget reform. The UK must identify the reforms that could allow others to buy anygrand bargain. The deals are there to be done.  

Mr Cameron should appoint a lead negotiator or an EU reform task force to co-ordinate work across all departments and tour national capitals testing ideas. France has successfully defended agricultural subsidies for decades using this technique. Jumping from headline to headline may work for domestic issues but on Europe, it’s a sure way to end up pleasing no one.