UK: Squashing “Brexit”

Published on May 21, 2015

Political analysts are slowly coming around to expecting British Prime Minister David Cameron, fresh on the back of a resounding victory in the May 7 general elections, to pull the date for the long awaited referendum on British membership in the European Union forward from the promised year-end 2017 to perhaps the end of 2016. We agree, and believe it could come even earlier than that.

Where many analysts may be missing the picture is in attributing much of the momentum for pushing the election forward to defensive considerations – such as a desire to steer clear of the French and German 2017 electoral cycles. That underestimates the positive tailwinds we understand to be shaping up for a “yes” vote for the EU not just at home, but in Brussels and across the rest of the EU as well.

*** That is an important distinction for markets. It means an earlier vote will not generate negative risk for UK markets in elevating near term political uncertainty as the markets fret, but instead we believe the earlier vote is only being made possible by what is likely to be the increasing odds of a successful “yes” vote. And that, in turn, will remove the lingering overhang of the “Brexit” risk.  We suspect Bank of England Governor Mark Carney would agree. ***

*** UK Foreign Secretary Philip Hammond, a noted euro-skeptic, has wasted no time in softening calls for outright EU Treaty changes to accommodate British demands — a clear non-starter from the European perspective — now calling for Treaty change only if “technically” necessary to enshrine a political agreement that would be well within the words and spirit of existing EU laws. The reaction in Brussels and European capitals to a more limited accommodation for the UK has likewise been consistently positive. Indeed, on immigration reform, we have for some time detected a willingness if not even eagerness, by member states to work with the UK within the confines of the EU’s “Citizenship Directive” and possibly even to explore its very boundaries (see SGH 10/17/14, “Europe: Unlocking Stimulus and Tightening Immigration”). ***

*** The quick climb down from demands for Treaty Change could allow for some form of agreement on “principles” with EU partners, perhaps even as soon as at the June Council on June 25-26, that Cameron can then present back home. That, in turn, could speed up the process of passing the referendum law before December of this year, and proceed with the actual vote well before Germany and France enter their own election cycles in 2017. ***

The Plan of Attack

The new Conservative majority in the House of Commons will to some extent shield Cameron from possible surprises, and we understand he has already been negotiating with his own Tory backbenchers – between 60 and 100 euro-skeptics – to find a common position and goals for the Brussels rounds.

But it is in the House of Lords where Cameron could get an assist from, of all places, Labour and the Liberal Democrats, who could push for two key amendments that would virtually ensure the success of the vote for the pro-EU camp.

One is, just like in Scotland, to extend the referendum vote to 16 year-olds, and the other would be to also grant British ex-pats in the EU the right to vote, on the assumption that they would be likely to side with the “in” camp.

Of course the recent polling has shown the broader UK electorate consistently anywhere from 5 to 10 points in favor of retaining EU membership, a total reversal from the anti-euro sentiment peak during the depths of the 2012 crisis. But Cameron is well aware that, just like the pre-election polling underestimated the strength of the Tory party, polls on the EU may underestimate the strength of the Euro-skeptic movement as well, and so as little will be left to chance as possible.

And to achieve that Cameron will need and want to deliver solid concessions from the EU before holding the referendum vote. Looking through a Tory push in Brussels to scrap the “Ever Closer Union” clause from the preamble of the Treaty, which would send most backbenchers to the roof screaming with joy, and which simply won’t happen, it seems the Cameron government is now focused on and will settle for far more achievable goals.

Those are, namely, better regulation, the completion of the Single Market (in particular with regards to energy), a commitment to the Transatlantic Trade and Investment Partnership (TTIP),  the protection of non-Eurozone countries from certain regulations specifically tailored for the Euro area, and, of course, a significant tweak in the immigration rules.

Not a single one of these items is taboo in Brussels. Quite the contrary, the Commission has specifically pushed EU countries for most of this agenda, and would be more than happy to enlist the UK as an ally in those efforts.

The British side also appears to be pleased that the head negotiator for the Commission will be Dutch Commissioner for Better Regulation Frans Timmermans, who has shown a lot of sympathy for UK demands (the British team will be headed by Chancellor of the Exchequer George Osborne). And despite a bumpy and at times personalized and bitter start, the UK government has truth be told worked quite well with the Juncker-led Commission so far.

Ultimately, the timing of the referendum will depend on the form and shape of the June 25-26 agreement as well as on Cameron’s ability to sell it internally, especially to his own riotous backbenchers.

But, as officials in Brussels like to now say, the British EU referendum is at this point much less feared than Marine Le Pen’s numbers in French elections polls.

Specifics on Immigration

In a speech in November 2014, Cameron laid out some specific goals on immigration, namely a limit of the allowance for non-UK job seekers from the EU to 26 weeks, a tightening of the expulsion process for non-compliance, and a refusal to grant benefits before the completion of four years of work in the UK.

We believe it is likely that most if not all this could be accepted as the basis for a modification of the current so-called “Citizenship Directive”, which to date sets the framework for national rules on EU internal immigration.

Our understanding is that besides the changes at EU level, which are likely to take some time and therefore may possibly only be implemented after a referendum, similarly restrictive national legislations could be passed by other Member States – the Netherlands being one of them.

That will not be without controversy. The Court of Justice of the European Union may eventually be put to the test on the compatibility of such legislation with EU primary and secondary law. Expect OMT-style suspense and enormous political heat in the run up to that process.

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