It would be wrong to interpret the time it is taking to form a government in London as signaling Article 50 may not be invoked or that the referendum vote will be ignored.
EU leaders have taken a soft stance so far on the timing of the triggering, but EU institutions’ legal services are looking at ways to safeguard decision-making and apply some level of pressure on Britain to begin the process.
The UK is leaving the EU, and it will take several years to negotiate the final terms of the divorce. The main points of contention will likely be free movement of people and the “passporting” of financial services.
With markets and policymakers still reeling from the shock of Thursday’s Brexit results, policymakers on both sides of the English Channel are scrambling to slow the actual “Leave” process down.
The delay, specifically Westminster’s decision not to immediately invoke the Article 50 “divorce” proceedings with the European Union, is not, as many commentators have interpreted, a sign of a lack of will to go through with the separation.
The intent is to deflect some of the centrifugal passions across the EU, allow the United Kingdom to re-establish a domestic political mandate, give both sides room to think through a reasonable settlement, and in the process manage the financial and political fallout from last Thursday.
In Brussels, Setting a Divorce Timetable
Indeed, EU officials never expected a lame duck David Cameron to invoke Article 50 at the European Council meeting of June 28-29 (see SGH 6/20/16, “Brexit: The Polls and ‘Plans’ from Brussels”). The divorce process was supposed to begin between October and December this year, once the Conservative party had found a new leader to succeed Cameron. To that extent, even the European Council expressed the view that the UK constitutional prerogatives are to be respected, and agreed to give London the time it needs to sort out its politics.
But with all candidates to the Tory leadership pushing back on triggering Article 50 too soon after the September vote, the EU is studying legal means to put at least some level of pressure on the future British Prime Minister.
The emotional, knee-jerk reactions of Commission President Jean-Claude Juncker and Parliament President Martin Schulz the day after the vote were quickly rebuffed by the much more cautious stance of the European Council, which made it clear Brexit is ultimately an issue for member states to sort out.
The Council’s position is logical and savvy: it respects the UK’s internal political process, and at the same time allows the EU itself to sort out its own differences. Germany also hopes time will help in moving away from the harsh rhetoric of the referendum campaign, as well as in softening the French government’s quite unhelpful “punitive” stance.
Article 4 Pressure to Start Exit Negotiations
But German Chancellor Angela Merkel and other EU leaders made it also clear that there is no turning back, echoing Tory policy-makers and perhaps even going further than them in endorsing the British June 23 popular vote.
And in order to make sure the EU legislative machine isn’t blocked for too long, and the future relationship with the UK is clarified somehow soon, the legal services of the Commission, Council and Parliament have been studying possible instruments to put pressure on Cameron’s successor.
One road the EU might take to invoke Article 4 of the Treaty of the European Union, according to which member states are bound by an obligation to ensure “cooperation” and to “not jeopardize the attainment of the Union’s objectives.”
If the UK were to play too much for time, perhaps with the hope of tempting some member states into informal negotiation talks, the Council could go as far as sanctioning London by stripping the UK’s Council voting rights. That would mean Britain would not be able to vote on new EU legislation anymore, while being legally still forced to apply it.
The UK will have its own incentive to trigger Article 50, as it is clear without that, London would be unable to put an end to uncontrolled EU migration. For what it’s worth, the deal that Cameron negotiated back in February with the EU (on an “emergency brake”) is now off the table.
The Article 4 threat is a nuclear weapon, and it will by no means be triggered lightly, but these deliberations demonstrate the resolve of EU member states to get on with the Brexit process in due time.
Protecting City Interests
All indications from the legal side point to the likelihood, we believe, that Britain, once the two-year negotiation period with the EU is over, will lose the right to “passport” funds in the EU and will become – to use the terminology of EU financial legislation – a “third country.”
The British, however, might be able to negotiate new terms to mitigate damage to its financial industry. European officials point to the “Swiss model,” under the rules of the European Free Trade Association (not to be confused with the European Economic Area agreement).
According to the EFTA regime, Swiss financial service providers have to apply for a license in the EU country in which they wish to establish an office, and can then have access to clearing agencies on the same terms as EU-based companies as well as being vetted by national authorities as expeditiously as possible. But, crucially, they are not entitled to market their services directly from outside the EU.
But the City’s loss may not provide much room for celebration in France. Not only did China just after the Brexit vote reiterate it will double down its commitment to London as the center for offshore RMB trading (see SGH 6/27/16, “China: Supporting the UK after Brexit”), but it will take a very long time for any European city, be it Dublin, Frankfurt or Paris, to match the enormous financial market and regulatory expertise of the City of London. Indeed, most EU financial regulation has been literally written by British institutions.
Derailed EU Financial Reforms
Ironically, President Juncker’s signature initiative, the Capital Markets Union (CMU), will fare the worst.
With Britain out of the picture, CMU legislation will most likely envisage a higher level of integration, but the project will lose the enormous firepower, breadth, and credibility provided by the City of London.
At the same time, a more traditionally supra-national initiative as the European Deposit Insurance Scheme (EDIS), the third pillar of the banking union, will wither on the vine in the coming months, and Germany will not soften its opposition to it (see SGH 6/20/16, “Brexit: The Polls and ‘Plans’ from Brussels”).
If anything, the risks posed by a Brexit on the Eurozone countries’ banking systems will make Berlin even more suspicious of pooling resources with financially weaker member states – even as the Italian government attempts to capitalize on the crisis and ram through another 40 billion Euros of public funds into its battered banking sector.
“Ever Closer Union” on Hold
In the big picture, on the matter of whether the EU moves towards badly needed closer integration as a response to the Brexit crisis or not, the answer is a short one: not any time soon.
The clear post-Brexit winners within the EU decision-making structure will be EU national governments, who have made it clear in the immediate aftermath of the vote that the lesson they took out of all this is “less Europe,” and will be insisting in regaining control of the most relevant aspects of EU decision making.
The movement will not be so much towards stopping shared decision making altogether, but rather towards forms of consensus building between nations that keep Brussels out of the picture on most crucial issues, relegating the Commission to a technical advisory role and the European Parliament to a rubber stamp notary of previously agreed upon Council (i.e., member state) decisions.
And even in the issue of who negotiates with Britain on its disentanglement and future EU relationship, which should typically be the Commission once the Council has outlined its political priorities, member states are demanding control over Juncker’s operations.
His early confrontational stance towards the UK, and his pledge to defend “Europe” at all costs (i.e., make an example out of Britain) has frightened the much more cautious Council. Historically, the Commission’s strategy during negotiations is to manipulate member states’ positions to suit its own needs and advance its own agenda, so Council President Donald Tusk decided to move by appointing its own chief negotiator, the Belgian Didier Seeuws, a former head of Cabinet of Herman Van Rompuy, Tusk’s predecessor.
Eventually, the Commission will conduct the talks, but the Council will keep it on a tight leash because it is very concerned that member states’ interests would not otherwise be sufficiently taken into account, and it considers the future relationship with the UK a crucial matter that it does not trust Brussels to manage.
Limiting Other “In or Out” Referendums
The dramatic British popular vote to leave the EU has emboldened populist movements across continental Europe, some of them now pressing for similar referendum votes on whether to remain or join the UK in leaving the EU. And really the most significant effect of the Brexit vote has been to push anti-EU leaders to think that the “unthinkable” might actually happen.
The most interesting countries to keep an eye on right now are none less than two of the founding members, Netherlands and France, ironically the two countries that rejected the European Constitutional Treaty in 2005 in the first wave of popular backlash against further EU integration.
Both these countries have elections scheduled for the first half of 2017 (before March 15 in the Netherlands, May 27 in France), and both have very strong anti-establishment parties led by Geert Wilders (the Dutch PVV) and Marine Le Pen (the French Front National).
And while France is slightly better protected by the two-round voting system, and has in Alain Juppe’ a pro-EU candidate that can attract votes from both sides of the aisle, the Netherlands is exposed to a slightly higher referendum “risk.”
Wilders might only get a minority stake in the next Dutch Parliament even if he wins the elections (37 out of 150, according to the most recent polls), yet a splinter group from his party, the VNL (Voor Nederland, for Netherlands) has already requested approval of the election commission for a proposed referendum on EU membership.
The rule on this type of referendum, however, unlike the one held on April 5 on the EU-Ukraine Association Agreement, is that if the question is too complex or insufficiently defined, the Parliament has the right to shoot it down. And this is likely to be the case with future blunt referendum questions on EU membership.
On a slightly more positive note for EU supporters, Italy’s main opposition party, the 5-Star Movement, seems to have abandoned its anti-EU and anti-euro stance, and is now aiming at mainstream voters and advocating “reforming the EU” – Prime Minister Renzi’s way, not Cameron’s way, which means through more fiscal spending and further budgetary flexibility.
And good news is also coming from Spain, where not only the Partido Popular of Prime Minister Mariano Rajoy has outperformed in the polls, but the Socialist PSOE Party has also been able to keep the far-left Podemos Party at bay, and is now poised to allow the formation of a Rajoy-led government, even if only a minority one, through its own abstention.