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Tuesday, April 01, 2014

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.


Anonymous said...

What has free trade to do with being ruled over by unelected bureaucrats with such an appalling track record?

Let's remember that we (hopefully) live in a democracy and that it is run by the individual and NOT big business.

I do think that this article is scaremongering somewhat with comments like "It is likely to put the UK on the back foot in any negotiation".

It won't put us on the back foot at all if we adopt an approach with more confidence. The EU has far more to lose than us.

Let's just do it.


Anonymous said...

Clearly you either do not understand the way the Norway option works or are deliberately trying to mislead us. The top table is NOT the E.U.
Check out eureferendum.com and R.North's Flexit paper.

Jesper said...

Some claim that the EU-level regulations and directives are few and non-intrusive.
The same people claim that any country who'd leave would be subject to extensive and intrusive regulations and directives without any influence.

Might need some clarification:
Is a say on EU regulations and directives incredibly important? If so, why is that if the directives and regulations are so few and non-intrusive?

Denis Cooper said...

So what you're saying is that our "friends" in the rest of the EU would be happy to continue trading with us when it was profitable to them, but reluctant to agree to continue trading with us when it was profitable for us.

That says it all, really; they are not our "friends" at all, and so we should not be allowing them to have any hand in running our country through the EU.

Meanwhile, as this is all a matter of the legal details of the treaties, we should be looking to see where we still have vetoes which we could use to block any proposals that they may want to bring forward while we were still full members of the EU but were negotiating our exit, just in case they do as you suggest they might and refuse to negotiate in good faith.

Denis Cooper said...

Jesper -

A very good point. which the likes of Mr "7 Per cent" Clegg should be made to answer.

jon livesey said...

I think you points against renegotiation are unnecessarily pessimistic. If we can't trade a L56bn deficit in goods against a L11bn surplus in services then we should not be trading anything.

And your worrying about the City ignores history. The City has been in competition with Paris and Frankfurt since the 19th Century, and the City always wins because the City is politically transparent and the continentals have never been able to resist the temptation to meddle politically with financial markets.

It's not really a question of what the Eu will "allow" the City to do as what the City's clients demand. US and other clients of UK financial services will not willingly put themselves at the mercy of meddling Continental regulators with their obsessions with the evils of short selling, nominal ownership and so on. At worst, some City business will go to New York, but it will not go to Europe, so they will just be cutting their nose off to spite their face if the try to harm the City.

I think the real secret to all this is in your handy chart. If the UK leaves or is forced out of the EU, then the balance of QMV power changes. That is consistent with current German efforts to form alliances with the UK.

We have to stop being so afraid of our own shadow where the EU is concerned. We have nothing to lose here, and a lot to gain if we play our cards right. The worst that can happen is that we stay in and have to revisit the issue in ten years time. The possible win if we are bold is to redraw the map of Europe for a century.

Rik said...

1. Seems to me that the mandate to go the art 50 way is simply lacking. Art 50 means exit. Seeing the polls Cameron has a popular mandate for a reneg (within say 4 years) but not for an exit.
Might change over time, and the voter might get other views, but at the moment there simply looks to be no clear and certainly no sustainable mandate for art 50.

There would likely be an art 50 mandate when the reneg ends in a failure or is certain/nearly certain/very likely to do so (would be my calculated guess at least).
Mandate looks reneg and depending of the result start from there.

2. It is usually possible to move from friendly to nasty or even hostile in negotiations. Basically as it is one party that decides on that and on its own. If the UK would go confrontational the only things the other side can do is accept it or walk away.
The otherway around however is very difficult if not impossible.
Therefor in a negotiation with still so many unknowns it is much better to start friendly. Start with being confrontational/hostile simply means the friendly option is no longer on the table. Which might limit the options you might need lateron.
Anyway as lead negotiator basically Cameron should decide on this. Negotiations are complicated enough already donot make that even worse by limiting the options he has.

3. Some of the mistakes people like OE make in this:
3.1. This a sort of chessgame. With alot of moves and with each move the whole playing field changes or can change at least. Nearly impossible to predict a row of say 5 or 10 moves. In chess with all the history to refer to it is already extremely difficult. Here with basically no or very little history it is nearly impossible.
Keep an eye on the end result you want to achive the road to it will considerably depend on what the other side does in the whole process.
This is a simply a (very) dynamic model.

3.2. When a large country like the UK (but could have been France or German as well or even an big outsider like the US, China or Russia) moves the playingfield can change as well.
The UK is no Norway.
Therefor the present relations with countries like Switzerland can be an indication or give ideas but that is about it.
Partly the UK can create its own playingfield a thing nearly impossible for small countries.
Especially now when the EU simply looks very weak hard to see that any major country would want to jeopardize 100Ks of their jobs when the economy is already rubbish at best. look at the Swiss thing now.

Rik said...

3.3. In this respect the UK could look at how to deal with relations between EZ and Non-EZ; EU vs non-EU; EU vs Big neighbours. In other words when actively involved the UK can partly shape the enviroment this is happening in.
Would require a more active role of Cameron. Now he is going for a plan A with not really a plan B in sight not even to mention a plan C.
Plan B could be something like organise non-EZ members and teaming up with the folks around it. EFTA and Cos but also big neighbours like Russia and Turkey (not now of course but very likely things will blow over in a couple of months). And the US, let them realise that sustainable Europe means having a sustainable popular platform in the major countries at least. And this platform is eroding rapidly and when the problem is not adressed this could end very nasty.
Plan C being have (wait till) the populist movements turn up the heat in several countries. They will very likely go for broke.
Which makes the situation so volatile that the EU almost certainly will accept huge reforms or it will be game over. Totally unlikely that basically uncertain and scared for their jobs and pensions civilservants and burocrats will have the balls to go confrontational. They go only confrontational when they are sure to win or are too stupid the understand the game.

3.4 On the other hand limiting beforehand the options you have. effectively what Cameron and especially Hague are doing is of course simply plain stupid. He has the opportunity 'to hide' behind his people (via the referendum) why not use it to the max. It would considerably increase the pressure on the EU to move. As said at the end of the day they look burocrats scared for their jobs and pensions.

Rik said...

Another more technical point. Art 50 has a 2 year term. Seen the complicated negotiations that seems much too short.
In other words art 50 seems simply not fit for purpose.

There might be a way around that but like with Scotland when legal is pretty clear you need politically unanimity to bypass it. Either via a legally funny interpretation or simply politics overruling laws.
Which totally unlikely you will have in the Scottish case. But hard to see 28 countries agreeing on this and not wanting things in return for that as well.

Anonymous said...

Jon Livesey

Great post. You have hit the nail on the head.

We need to adopt a more confident and aggressive approach with the EU. We have nothing to lose as whatever happens cannot possibly be worse than what we have currently.

The UK leaving impacts the EU in many ways from adversely changing QMV (to beyond acceptability for existing members), leaving the EU with GBP20Bn p.a. less to prop up its bizarre budget and giving MananaZone economic refugees nowhere to go (thereby reducing political risk and associated cost from Euro member states which we currently carry), removing a safety valve from the whole European continent (as proven during WW1 and WW2) and removing a political counterbalance to more failed left wing political and economic policies (as pushed by France).

The City of London will continue to prosper as the EU has broken money and market convention in the MananaZone and is too willing to interfere in finance due to overriding political drivers.

The fact is that most MananaZone sovereign states can now only issue government bonds based on London jurisdiction and law as investors do not trust the EU to do the right thing. Breaking bank depositors before equity and bond holders means that international investors are reluctant to hold Euro cash in the EU in case some seismic event forces the EU to steal their cash too. The EU needs to be very careful with the City of London as it provides many continental EU citizens with highly-skilled and well-paid jobs.

The EU and MananaZone needs to get a grip and start to grow and not destroy the continent. We need jobs and not wars/trade wars with countries like Russia.

Free trade. No sovereignty.


Anonymous said...

Question to Open Europe

How does this affect Scotland if this is the only formal way to leave the EU - does this mean that if no one invokes this clause then Scotland doesn't leave the EU?

Freedom Lover said...

Three points:
1. Here is the link to the excellently-written & astonishly informative article by EUReferendum.com on the Brexit issue: http://www.eureferendum.com/documents/BrexitPamphlet001.pdf
It also explains why the Norway Option & Article 50 are such good solutions for a Britain dis-satisfied to the max by the EU, despite whatever British pro-EU organisations may say.
2. As the Convention of Vienna on the Law of Treaties (1969), & which came into force in late Jnuary 1980, says: if a country has been megotiating a treaty for two years, & feels that it has not achieved satisfaction from the other parties in the negotiations for the proposed treaty, it is free to unilaterally withdraw permanently from the negotiations - leaving without prejudice, & without incurring any penalties or obligations for having done so. So if the EU proves troublesome in the negotiations, then the UK would be free under international law to say 'bye bye', & take such measures against the EU that it might then wish to - subject only to what limitations there are according WTO rules.
3. From OpenEurope's QMV graph it looks as if there would be little further point for the Northern Bloc in remaining in the EU after a Brexit - ie for Germany, the Netherlands, Denmark, Sweden, Finland etc. So what Cameron, his European allies, & & all those who don't want the UK to leave the EU are therefore doing, is desparately trying to save the worthless EU. Clearly that's their agenda. Because once Britain goes, the EU is likely to collapse like a pack of playing cards - which is all it really is!

Anonymous said...

If Scotland Secede than they don't have t lead the eussr they will have done so by leaving the UK, there is no country called Scotland in it.

Swedish newspaper Vasabladet reports on a poll by TNS/Gallup, commissioned by the EUDemocrats, which found that 49% of Swedish respondents would prefer to be part of a wide and deep Nordic Alliance (involving Denmark, Finland, Iceland, Norway and Sweden) than the EU. 23% of respondents said they did not know, while 28% said they would still prefer the EU. Similar polls in Finland and Denmark also found a majority would rather be part of a hypothetical Nordic Alliance than the EU

Seems like it is not just us that wants to leave.

Anonymous said...

What a dishonest bunch of twaddle produced by Eurofascists masquerading as euroskeptics.

Open Europe really is panicking, isn't it?

Rik said...

'I think you points against renegotiation are unnecessarily pessimistic. If we can't trade a L56bn deficit in goods against a L11bn surplus in services then we should not be trading anything.'

The problem is you donot seem to have a strong negotiating team. Hague (and Cameron as well, but Hague in particular) simply seem to have problems overseeing the playing field. Hague looks mainly from what seems possible in the current context with the other side of the table (and that is not a lot). Simply seems not nearly enough for the voters at home (which would make it if that is how it will further develop a rather useless excercise).

So has the other side btw. But with very complicated technical stuff that is largely a disadvantage. Two sides with having difficulties overseeing the playingfield often leads to nowhere. Negotiations split into a large number of parts, people being unconclusive etc.
If non of the sides is able to manage the process, this has in it to become a dossier like immigration. 1 or 2 decades further and effectively nothing has happened (but talk) and two sides heavily irritated with each other. Simply not a 'solution before a 2017 referendum' scenario.

I fully agree that the UK should be much bolder, but that can be done without art 50 at least to start with. They probably have to anyway. At the end of the day not so very much more is done than come up with parts of a report that is useless as it seems anyhow. And Cameron's to do list which somebody like yourself could have drafted in an hour or so.
There are somethings done on the ally front. But tbo 90% of the move in Holland seems Wilders and other Eurosceptics in the polls induced.
And with Germany being tougher (could be an indirect one via its electorate) likely would have established more. In this game the stick (Brexit) works likely much better than the carrot (reform stuff).
Nevertheless even then I donot see the advantage of using at this stage art 50 for that. You can have the same result at this stage at least by simply hiding behind a very tough electorate that will go for an exit.
All brought in a general reform for all sense (to keep it friendly at least at first).

Fully agree with your assessment of the City. Hollande's Paris is a complete joke. People who come up with that as a potential competitor should have their brain checked.
This Merky regime as well with a large SPD influence looks hardly stuff foreign investors will like (one anti-investor discussion after another). And nobody would like to be liable for dodgy PIIGSy banks via that bankunion thingy. Tests will never show all the skeletons there as no way those can be filled up again with new capital. So the fall out of a Southern bankcollapse will come on the shoulders of the healthy banks up North.
And TBTF is by far the softest in the EZ, they simply cannot sell that to the homecrowd anymore. Only way to keep the taxpayer out in case of a Southern bankcollapse is bail ins combined with Norther banks paying the bills.
And most important at the end of the day investors decide.

Rollo said...

The real world is growing. The EU is a sinking ship. Why is anyone keen to remain tied to it?

Denis Cooper said...

Rik - the two years is not an absolute limit for the negotiations, Article 50 says:

"3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period."

It is conceivable that the EU would try to drag out the negotiations in the hope that there would be a change of government in the UK and the new government would say that it wanted to rescind the notice of withdrawal. There is no provision in Article 50 for a government to do that, so then there would have to be an ad hoc decision by the other member states how they would respond, which they could do in a variety of ways some of which would be very bad for the UK.

It is also conceivable that the ECJ would intervene by agreeing with various trumped up claims, for example that when the UK put in its notice of withdrawal that was not done "in accordance with its own constitutional requirements" as required by the first paragraph of Article 50 because the decision needed to be approved in a referendum before the notice was put in. That may seem far-fetched but it is necessary to remember that we are dealing with people (like Clegg) who are fanatical eurofederalists and who are totally unscrupulous in the pursuit of their aims, and they would seize on any possible device to keep the UK in the EU.

It has always been an obvious defect of Article 50 that it does not exclude the ECJ from interfering in the process of withdrawal, and so in theory it could simply put the process on hold on some specious pretext.

Denis Cooper said...

Freedom Lover -

On your point 2., on a quick scan I don't immediately see any provision of that kind in the 1969 Convention:


So perhaps you could specify which Article you mean.

Denis Cooper said...

On the matter of Scotland, the present EU treaties only extend to Scotland because it is part of the UK - the word "Scotland" does not even appear anywhere in those treaties - and if it left the UK without the EU treaties being changed to accommodate that new reality then it would no longer be in the EU.

However it is often forgotten that there would be a period of negotiations between a "yes" vote in September and the final legal separation of Scotland from the rest of the UK - Salmond is trying to lay down that it would be 18 months, but it would not be under his sole control - and this would be perhaps the most important of all the things which Cameron would have to try to sort out during that period.

Why? Because at present free trade between Scotland and the rest of the UK is internal trade based upon the Treaty of Union, but if that 1707 treaty was terminated it would become international trade and there would need to be a new legal basis, and that would mean Cameron running off to Brussels with Salmond in tow pleading for EU treaty changes so that trade could continue uninterrupted and unimpeded.

As far as Scotland is concerned about a third of its GDP is accounted for exports to the rest of the UK - other chunks involve exports to other EU member states and to third countries under EU trade agreements, all of which would also need new legal bases if Scotland was no longer in the EU - and while the damaging effect on the economy of the rest of the UK would be diluted because it is an order of magnitude bigger than the economy of Scotland obviously even a 3% loss of GDP is not something that Cameron would want.

It seems not to have dawned on most of those in England who are rooting for the Scots to leave that a "yes" vote would instantly turn Cameron from someone who was boldly demanding EU treaty changes to repatriate powers to the UK (allegedly) into someone who was a supplicant, begging the other EU member state governments for EU treaty changes just to cope with the effects of the UK breaking up.

Denis Cooper said...

What's this nonsense?


"Six EU commissioners will officially hit the campaign trail later this month as part of their candidacies for May's European elections."

Remember how we've been told that the Commission is nothing more than the EU's civil service?

So isn't this as if six heads of department in the UK's civil service decided that they'd like to become MPs, and they are even given special leave for their election campaigns, but should they fail to get elected on one party platform or another they can still carry on being supposedly impartial civil servants?

Sue said...

Open Europe, another propaganda tool for the EU, doesn't have decency to reply to any of the comments. Why have a comment section if you are not going to answer the plethora of questions and statements that people have taken the trouble to write?

The fact remains that the EU comprises unelected bureaucrats which in any sane person's mind, is not democracy!

Democracy before Corporate interests!

Anonymous said...

I would still like to see a table of EU Directives and where the UK is positioned on it in terms of those Directives implemented and those not.

Can anyone point me to it?


christhai said...

Let us first refresh the fact that Open Europe would suffer greatly in money and prestige, when the UK leaves the EU.

Secondly, Article 50 is most definitely NOT the only way to "leave the EU."

UKIP makes clear, that if elected as the Government of the UK, one of its first priorities would be to Hold a Referendum which if the electorate's vote was conclusive to LEAVE the EU, it would invoke Article 50 very swiftly.

Britain has MANY enemies in the EU. Just questioning the wisdom of the EU Commission is considered "enemy action" by the EU's High Princes.

Accordingly, UKIP has said that IF there was foot dragging or double dealing or underhand activity, then with fair warning, a UKIP Government would repeal the UK Communities Act - which would be INSTANT severance of all ties and responsibilities with the EU.

What scares, no - TERRIFIES - the Commissioners and the tens of thousands of quangos and hangers on is Open Democracy.

Even the word Referendum is banned from the Chambers of the EU.

OK Cameron will keep bleating from the long grass about Referendum Tomorrow or the year after tomorrow.
He knows he cannot reform.

He knows any reforms made by the EU will be petty cash.

Alas for the EU (thank God) the horrible genie of "Europa" is well and truly out of the bottle in England.

When Farage exposed Clegg as a serial Liar on Europe, he included Cameron and Miliband.

Nearly 70% of people including Liberal supporters believed Farage was right.

Translate this into the May EU Elections which are being viewed as the Referendum which was forbidden by the EU and UKIP will romp home.

There IS no debate with the EU. There never can be with fanatics who depend on their fortune making activities to remain in office.

Yes to Article 50 as the Gentlemen's Agreement on EUexit.

But if they play nasty - then all negotiations are OFF and they have the OPTION of the Communities Act repeal.

Open Europe blog team said...

Dear Sue,

Many thanks for your post – we do read comments and contributions carefully and value all of them.

Regarding Scotland, Dennis Cooper has already made the point on the thread that Scotland’s secession from the UK would mean leaving the EU and a subsequent negotiation about its EU accession in its own right. We have discussed this previously here:

On John Livesey’s point about the trade deficit/surplus, QMV weight and negotiating dynamic, we would agree that Germany is aware of the implications for the power balance within the EU if the UK leaves and is therefore keen to reach a solution in the interests of both countries. However, we argue that, once Article 50 is actually invoked, this goodwill will no longer exist and the southern block (and the European Parliament) will have a greater say in determining the nature of any free trade deal. This is likely to cost the UK in terms of the market access it can secure, particularly for services.

On your point about democracy, we agree that the current setup is unsatisfactory and that decentralisation of power to the member states and mechanisms such as a red card would inject greater democratic accountability.

Denis Cooper said...

Open Europe blog team -

More accurately my point is that an independent Scotland would automatically be outside the EU UNDER THE PRESENT EU TREATIES, and that legal problem could not be fudged through secondary legislation in the same way that secondary legislation could be used to accommodate the changed, that is to say diminished, circumstances of the continuing UK, with just one minor exception as far as I can see.

And because the economic consequences of that would be catastrophic for Scotland and damaging for the rest of the UK Cameron would have no choice but to plead either for EU treaty changes so that Scotland was fast-tracked into the EU as a new member state at the same instant that it ceased to be part of the UK, or for some kind of agreement allowing Scotland access to the EU Single Market, including the continuing UK, as well as participation in all the EU trade agreements with other countries around the world.

Therefore at a stroke our bold Prime Minister would be reduced to a supplicant in negotiations with the other EU countries, and while they might agree to give him what he needed it's very unlikely that there would be no price to pay for their agreement.

christhai said...

When one considers the incredibly high cost of being a member of the EU coupled with the corrosive levels of corrupt mismanagement and incompetence it cannot be any other decision than to leave this fetid organisation.

Forced to fall back on the WTO rules?

The REST of the WORLD manages very well with them.

Unilateral Trade Agreements?

Name just ONE whereby the rights of a trading partner's people are dissolved.

You must be joking. Just being shorn of the COST - the Incredible Cost of being an EU Member will pay for the tariffs.


Tariffs work in two directions - and the EU has a massive problem there doesn't it?