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.

New Open Europe/ComRes poll: British voters want changed relationship with EU rather than outright withdrawal

There has been a lot of debate recently about what the UK public really want in terms of the UK’s relationship with the EU. In an attempt to shed some further light on this Open Europe has today released a new poll conducted by ComRes.

The results show that among those certain to vote in next year’s European elections, UKIP would come first overall with 27%, closely followed by Labour on 23%. The Conservatives would come third with 21%. Two-fifths (39%) of Conservative voters from 2010 would vote UKIP in a European election if it were held tomorrow – this remains a major problem for the Conservatives.

However, paradoxically, there’s substantial support for David Cameron’s EU policy. If a referendum on Britain’s membership of the EU were held now, 37% say that they would vote to remain in the EU compared to 41% that say they would vote to leave. But, if there was a significant return of powers to Westminster followed by a referendum, 47% would vote to stay in the European Union, including one in five (20%) voters who say that they would vote UKIP in a UK General Election. Only one third of all voters (32%) would still vote to leave.

Of the individual party leaders, the public still has the most faith in David Cameron to negotiate a better deal for the UK in EU – though it’s clear that there’s a high degree of scepticism about whether a new deal can be delivered by anyone. In order address this 'credibility deficit', Cameron must start to press ahead with substantial reforms now.

 

In general, one thing is clear. That is the desire for a wider choice between simply In or Out. When asked to choose between different possible relationships that Britain could have with the EU, the public’s preferred option is to remain a member of the EU, without the Euro as their currency, but with the significant return of EU powers to the UK (38%). Surprisingly for an anti-EU party, “only” 61% of UKIP voters said they favoured completely withdrawing from the EU, with 30% saying they would be content with “significant return of EU powers”. For every other main party, a slimmed down EU was the single most popular option, suggesting that Ed Millband and Nick Clegg risk ending up out of step with their own voters if they continue to sit on their hands.

Here are some other interesting findings from the poll:

- In a General Election, Labour would win 37% of votes, followed by the Conservatives on 26%, UKIP on 20% and the Liberal Democrats on 9%. Under current constituency boundaries, Labour would win a majority of 110 seats with the Conservatives losing 102 seats. UKIP would not win any seats.

- More than half (55%) of the British public think that the Government should prioritise allowing the UK to have its own immigration policy when seeking to reform Britain’s relationship with the EU. Other areas of priority include giving the UK Parliament more powers to block un-wanted EU laws (42%), reducing Britain’s contribution to the EU budget (36%) and allowing the UK to have control over police and criminal justice laws (32%).

- 38% support the Prime Minister’s policy of negotiating new EU membership terms for the UK and then having an in/out referendum versus 32% who oppose it because they think meaningful renegotiation is impossible or want to withdraw altogether. Only one in ten voters (11%) say they favour the status quo and fear Cameron’s strategy creates “uncertainty”. 68% of Conservative voters, a surprising half of Lib Dem voters (52%), 32% of Labour voters and 21% of UKIP voters support Cameron’s strategy.

- However, when asked the question differently, six in ten (60%) think that it is unlikely that the Government will be able to deliver the changes it wants in the UK’s relationship with the EU – showing that whilst there’s support for Cameron’s strategy in principle, there remains a ‘credibility deficit’ which he must seek to close by pressing ahead with substantial reforms now.

See here for our full briefing on the poll results.