Brexit - Implications, what happens next and business considerations

by Inline Policy on 27 Jun 2016

Events have moved very quickly over the weekend, and the timeline for events post the UK referendum on the EU is becoming clearer, if not yet the future scope of UK-EU relations or the eventual implications for politics, economy and business.

Implications

Leadership vacuum in Westminster: a leadership contest is underway in the governing Conservative Party, expected to be resolved by the end of September with a new Prime Minister in place. The official Opposition Labour Party is also engaged in major debates on its leadership and future direction and may face its own leadership contest over the summer.

UK Conservative Party leadership: The 1922 Committee, which is in charge of the Conservative Party leadership process, has said that Leadership nominations will close this Thursday, with candidates to be narrowed down by MPs to two. Both candidates will be put to around 150,000 members in a one person one vote ballot, with the result announced on September 2nd. Several candidates are emerging, including Boris Johnson, Theresa May, Stephen Crabb, Liam Fox, and Nicky Morgan.

UK Labour Party leadership: Amid multiple frontbench resignations, a motion of no-confidence is to be discussed at meeting of Parliamentary Labour Party on Monday at 6pm. This is likely to be pressed to a secret ballot on Tuesday. A Majority of Labour MPs is likely to express no confidence. A challenger for the leadership could then emerge if the required 39 nominations are reached. There are differing legal opinions over whether Jeremy Corbyn could be on the ballot paper if he fails to secure required 39 nominations from MPs/MEPs.

Scotland: First Minister Nicola Sturgeon is seeking discussions with EU leaders and EU institution officials over Scotland’s position in the EU given support from Scottish voters to stay in the EU. She is looking to hold a second Independence referendum given changed circumstances post-Referendum. The Devolution settlement means that the founding Scotland Act may have to be amended to remove references to obligations to comply with EU Law. The Scottish Parliament can withhold consent to this change, but cannot block UK exit from EU.

Northern Ireland: Similar to Scotland in that obligations with respect to EU Law are enshrined in the Good Friday Agreement and Northern Ireland Act 1998. It may require a cross-party, Anglo-Irish set of negotiations to resolve this issue, together with the future of the open border and common travel area between the UK and the Irish Republic. Sinn Fein may seek concessions on border poll provisions in UK legislation.

EU: Relationships are altering already. UK PM Cameron will attend the first but not the second day of this week’s European Council meeting. The other 27 member states have already appointed officials to take charge of the negotiation process when it begins.

UK Commissioner Jonathan Hill has resigned and his Financial Services and Capital Markets brief has been given to Commissioner Dombrovskis, currently with responsibility for the euro, has been given this portfolio. A replacement UK Commissioner until exit is to be filled by new PM in autumn, Downing Street announced.

The European Banking Authority will relocate from London, potentially to Milan, Paris or Frankfurt. Other EU institutions and agencies will similarly move. The EU may be less likely to reach trade deal agreement with the US through TTIP.

The Visegrad group of eastern European member states are also seeking watertight protections through the negotiation process for the rights of their nationals who are living and working in the UK. The issue of the UK’s presidency of the EU in the second half of 2017 has been placed in doubt by several member states but is yet to be resolved.

Business: Several financial institutions such as HSBC have intimated their intention to move part of their operations away from London with a transfer of jobs. It is likely that the EU requires clearing house transactions denominated in euros move to the Eurozone, which will have a big impact on The City. With UK exit, rules on the financial sector will take more of a Franco-German nature, perhaps impacting any potential future passporting arrangements for UK-based financial services exported to the EU.

What’s next?

Article 50: this is official notification by the departing member state to the EU of its intention to leave the Union. Negotiations cannot begin until this has occurred, and it can only be activated by the member state (the UK). It involves a set two year procedure whereby the Commission will draw up a mandate.

Final decisions by the remaining member states can take place through qualified majority voting, so no single member state has a veto over any agreement reached. An agreement on a future relationship can be reached in parallel with exit discussions, but this is not required.

It is conceivable that the UK could depart without an agreement on the future relationship being reached. The European Parliament’s consent for deal is required – it may seek a seat at the negotiations to protect its interests. Any deal on a future relationship requires unanimity and is subject to national ratification procedures, either Parliamentary and/or affirmation through a Referendum.

Member states may change their mind at any stage of the negotiations as a matter of Treaty law, but once they have departed, any future change of heart would require a fresh membership application via Article 49 of the Treaty.

Single Market access: This is a critical part of the future relationship negotiations. Full access to the Single Market for goods and services would likely require free movement of workers across the Single Market area. It is unclear whether a new UK Government would be prepared to negotiate on this basis given the issues arising from the Referendum campaign. So there may be a spectrum of access permitted depending upon the degree of free movement of workers the UK is prepared to accept.

The Options: It is unclear whether the UK would propose re-joining the European Free Trade Area (comprising Norway, Switzerland, Lichtenstein and Iceland), which it left on 1 Jan 1973, to formalise any Norway-style arrangement with the EU.

The Norway EEA agreement has a brake clause on migration which has not been utilised. Joining EFTA would take time and require limiting UK sovereignty by accepting jurisdiction of the EFTA court in EEA matters (itself heavily influenced by the ECJ’s jurisprudence).

A looser deal may be sought not involving formal membership of the EEA and EFTA, but the issue of acquired rights of EU nationals in the UK, and UK nationals in the EU would require formal resolution. Canada-style deal over tariffs and technical standards would not cover services, a key issue for the current UK economy.

2nd Referendum?: 3.5m signatories have been added to a UK online petition seeking a second UK referendum on EU membership given closeness of result and nature of the campaign. Precedents exist of EU member states voting again on issues if an accommodation is reached with the EU and other member states, e.g. Ireland over Treaty of Nice, Denmark over Maastricht Treaty, but there are no precedents for the UK’s situation over a vote to leave.

It is possible that a General Election prior to or even after the invocation of Article 50 won by a party expressly committed to staying in the EU would amount to repudiation by the electorate of the referendum result, but not likely that either Labour or Conservatives will have such a commitment in their manifestos for any snap UK General Election either later this year or next. The same would hold for a party with any manifesto commitment to a second in/out referendum winning a UK General Election.

The German Government is content to allow implications to be examined over period of months before starting negotiations officially under Article 50. French and Italian leaders are due to meet with Chancellor Merkel in Berlin today at which further statements over a common position may emerge.

The new UK Government would have to set out whether a General Election mandate would constitute sufficient consent from the UK electorate for any new UK-EU relationship or whether a subsequent referendum would be required to ratify the new relationship and the terms of any deal reached.

What are the considerations for businesses?

Market implications: The GBP:US Dollar has moved from above $1.50 on Friday to $1.33 at the time of writing. The pound has not traded at a rate below $1.40 for any extended period since the mid-1980s and there may be further to go before an accurate longer term equilibrium is found. Key implications are as follows:

  • UK exporters should benefit in the short term, but a lower pound will push up the price of imports and reduce domestic demand. Any boon for inward investment is unlikely to materialise given the UK’s ongoing uncertainty over single market access. This will likely lead to deferred investment and hiring decisions in the short term.
  • In the medium term, easy access to lower-cost European labour will diminish if the UK chooses or is forced to decide to close the door to free movement of EU labour. Upward wage pressure combined with a lack of inward investment may mean that there will be negative consequences for UK jobs and growth until any potential longer term benefits of EU withdrawal come to fruition.

Implications for employment and residency: It will take up to two years for a deal with the EU to be worked through. Much will depend on the terms and timing of the UK’s new trade deals. 

  • Employers will need to plan for the UK introducing potential restrictions on the free movement of workers between the UK and the European Union and the potential that this has to diminish the talent pool available to UK employers.
  • In the interim, employers will need to communicate to EU nationals that their employment and residency status remains the same until the negotiations have concluded.
  • Politically it is unlikely that the Government will seek to repeal employment rights which have now become enshrined into day-to-day business culture in the UK but much will now depend on the politics of the incoming UK Government.

What should businesses do next?

Consider and analyse the specific market implications of Brexit, specifically what it would mean for your sector. In particular, consider what lack of access to the single market would mean and what new trade and commercial arrangements for the UK’s relationship with Europe would be most beneficial to you. The implications for the free movement of labour between the UK and the EU should also be a factor in your thinking.

Consider and analyse the political and legal implications for your sector. What EU legislation might be retained in UK domestic law? What would you like to see retained? Will there be implications for your business in terms of EU funding for projects or programmes?

Consider also the implications for UK domestic policy. There may be a new government programme in the autumn and now is the time to position yourself ahead of this.

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(Photo via Flickr)

Topics: European Union, Referendum, UK politics, UK business

Inline Policy

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