Edelman Briefing Article 50 by Edelman

March 2017

After months of speculation, this is it. The biggest divorce ever attempted is underway. The Prime Minister’s letter was delivered to an awaiting and emotional EU Council President Donald Tusk in Brussels, noting it as a “sad day” for the EU. There were few new details of substance, but as ever, it is the tone – and what is implied that is so important. Constructive, respectful talks Both in the letter and the Commons, Theresa May was at pains to make clear that Britain’s approach would be conducted “constructively and respectfully”, and she admitted that there would be consequences for Britain outside of Europe. That included a rare admission that the UK and businesses here would have to abide by rules and regulations we will no longer shape, and that “we accept that.” Both the Prime Minister and Chancellor were clear to say that the UK knows it cannot “cherry-pick.” Security is our weapon There were 11 mentions of ‘security’, seen by many as the UK’s strongest bargaining chip, and a surprisingly overt link made between a failure to reach a trade deal, to a corresponding weakening of the UK’s role in the helping secure the region as a leader in the fight against crime and terrorism. This has already been seen by some on the continent as a less-than-subtle threat that the UK knows it has security clout and isn’t afraid to use it. Divorce and future deal – side-by-side or one-by-one? If there’s to be any chance of agreeing both divorce terms and future arrangements in the two year Art 50 talks, these could have to be negotiated in parallel. The letter repeated the Government’s phrase on that sequencing: “we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU.” But from the EU’s side, there is reluctance to agree to this – a European Parliament leaked memo was categorical that this was a non-starter and comments from Angela Merkel implied the same.

Brexit timeline - What happens now? • 30th March – UK Government publishes the Great Repeal Bill – transposing all EU legislation directly into UK law in order to gradually scrap or amend it bit by bit • 31st March – EU’s official initial response to May’s Article 50 letter in the form of draft guidelines issued by European Council President Donald Tusk • 4th April – European Parliament’s declaration on Brexit • 23rd April – First round of French Presidential election • 27th April – EU27 European Affairs Ministers meeting to prep ahead of EU leaders’ meeting • 29th April – EU27 leaders meet in Brussels to discuss their position in greater detail and to formally adopt the negotiation guidelines • Early May – Negotiations to formally get underway • 7th May – Second round of French Presidential election • 17th May – Queen’s speech – the government ought to flesh out its legislative agenda across wide range of policy areas where Brexit will have material impact, e.g. agriculture • 24th September - German parliament election possible change of government • 1st October – Conservative Party Conference • 23rd May 2018 (at the latest) – Italian parliamentary election • October 2018 – Soft deadline to have terms finalised in order for ratification across EU member states and by European Parliament • End March 2019 – End of Article 50 process (unless extended by mutual consent) • May/June 2019 - European Parliament election

EU unites – it’s our interests that count From the EU’s side, Tusk’s sense of sadness was quickly replaced by a circling of the wagons and an insistence that the unity of the 27 members was now the main priority. The leader of the centre right EPP group in the European Parliament went even further, saying “EU has done everything to keep the British. From now on, only the interests of the remaining 440 million Europeans count for us.” Lucy was the Deputy Director of Britain Stronger In Europe, the campaign to remain in the EU Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK

Angela Merkel, German Chancellor "My wish is the Great Britain and the European remain close partners. Because for me the United Kingdom is and remains a part of Europe with which we have a lot in common, not least our common values. On the basis of these values, and with the help of fair rules we will strive for a balance of obligations and rights. “The negotiations must first clarify how we will disentangle our interlinked relationship... and only when this question is dealt with, can we, hopefully soon after, begin talking about our future relationship.

President François Hollande, Outgoing French

assessment is that this must be resolved at the start of the negotiations. Britain’s continued participation in financing the EU budget. We operate on the assumption the UK ought to co-finance commitments it took part in setting. We would also like to maintain close trade co-operation between the EU and Britain.”

President Dieter Kempf, Federation of German Industries, BDI “There is a need for “maximum damage limitation… The UK is predominantly responsible for the extent of this damage limitation. It will be extraordinarily difficult to avoid negative consequences, particularly for businesses in the UK. The risk of a long-term breakdown in trust is clearly evident. For politicians in Brussels and Berlin there can only be one guiding principle: keeping Europe united and strong.”

“I think it will be painful for the British ... [Brexit] will force Europe to move forward – doubtless at different speeds.”

Sigmar Gabriel, German Vice-Chancellor “The negotiations certainly won’t be easy for either side. Ill feelings may be understandable… But all this must not be the basis for the creation of our future relationship. The phrase ‘Let’s stay friends’ may sound hollow when uttered in private after a break-up but it is exactly the right one now… We should do everything to make sure we maintain a good and friendly with London in the future.”

Beata Szydło, Polish Prime Minister “We are confident the UK will remain our important partner… we attach great importance to our co-operation in the area of security.”

Donald Tusk, European Council President

“There is no reason to pretend that this is a happy day, neither in Brussels nor in London… but paradoxically there is also something positive in Brexit. [It] has made the community of 27 more determined and united… In essence this is about damage control. Our goal is clear – to minimise costs for EU citizens, businesses and member states.” Manfred Weber MEP, the leader of the centre-right EPP group in the European Parliament “The EU has done everything to keep the British. From now on, only the interests of the remaining 440 million Europeans count for us… We want a partnership with the UK. But if you leave the EU, you lose the associated benefits.”

“We respect the sovereign decision taken by British citizens to leave the EU, we accept this decision with regret.” “Securing the rights of Poles in the UK in to the fullest extent possible is the priority of the Polish government – our

BUSINESS

POLITICS

Josh Hardie, CBI Deputy Director-General “Business has three suggestions to help set a constructive tone for the talks – after all it’s in everyone’s interests to get the best deal. Firstly, we want to see certainty for EU workers here and UK citizens overseas. Secondly, discussing new trading arrangements should go hand-in-hand with negotiating the UK’s exit from the EU. And we need both sides to commit to interim arrangements if a deal is not possible inside two years.” Adam Marshall, Director General of the British Chambers of Commerce (BCC) "In the early weeks of the negotiation process, businesses would like to see an effort to secure simultaneous exit and trade talks. Concluding exit and trade negotiations at the same time would moderate adjustment costs for UK businesses, and enable trade between UK and EU firms to continue with less disruption.” Stephen Martin, Director General of the Institute of Directors “Business leaders are optimists by nature, but they are now facing substantial change, with the UK leaving both the EU Single Market and the Customs Union. Maintaining confidence over the next few years will be key, and that means the Government must prioritise a smooth Brexit, with the terms of the withdrawal deal and our new trading arrangement both agreed before we walk through the exit door.” Mike Cherry, National Chairman at the Federation of Small Businesses (FSB) “On the day Article 50 is triggered small businesses are calling out for clarity on how this will impact how they run their business. FSB members that export and import now need confidence that they will still be able to trade on the same terms. Those that employ non-UK EU citizens in their workforce will want early assurance they will remain, and that hiring new staff will not mean a new system with extra costs and burdens.” Miles Celic, Chief Executive of TheCityUK “There is no question that getting Brexit right is a once in a generation challenge. If there is anywhere in the world which has the necessary knowledge and expertise to get this done, it is here in the world’s leading financial and related professional services hub.”

Jeremy Corbyn, Leader of the Labour Party “The Conservatives want to use Brexit to turn our country into a low wage tax haven. Labour is determined to ensure we can rebuild and transform Britain, so no one and no community is left behind. “It will be a national failure of historic proportions if the Prime Minister comes back from Brussels without having secured protection for jobs and living standards.” “That’s why Labour has set the clear priorities of full access to the European market, rights at work and environmental protection. And we will hold the Government to account every step of the way.” Tim Farron, Leader of the Liberal Democrats “Theresa May has chosen the hardest and most divisive form of Brexit, choosing to take us out of the Single Market before she has even tried to negotiate. “Membership of the Single Market was not on the ballot paper last June, yet without a mandate she has chosen to rip Britain, our businesses and our people out of the world’s biggest market.” Paul Nuttall, Leader of UKIP “While negotiations continue we will continue to be the 'guard dogs of Brexit', holding the Government's feet to the fire at home and our MEPs will be working to ensure our friends on the continent do not pull any fast ones. “We will provide the political threat to ensure no backsliding takes place and ensure that Brexit does indeed mean Exit.” Caroline Lucas, Co-Leader of the Green Party “Anyone care to guess how many mentions of climate change there are in @theresa_may's letter to Tusk?” “The fight has started, but what happens next *is* down to all of us. I'm fighting for free movement, our environment & workers. #Article50”. “Today's #Article50 triggering, with no amendments to the Bill, a result of toxic combo of hardline Tories and capitulating Labour.” Angus Robertson, Deputy Leader of the SNP, speaking in the chamber “The PM made a commitment to a UK-wide approach, an agreement with the governments of Scotland, of Wales and of Northern Ireland.” “They don’t like to hear it but listen they must. The PM promised an agreement. There is no agreement. She has broken her word... We have been sent here as a mandate to stand up for the people of Scotland; a mandate that the PM does not enjoy... “The PM says she thinks Brexit will bring unity to the UK. It will not. On this issue, it is not a United Kingdom and the PM needs to respect the differences. If she does not, if she remains intransigent and if she denies Scotland a choice on our future, she will make Scottish independence inevitable.”

Comprehensive free trade deal finalised Likelihood: 3/10 - highly unlikely that something so complex could be agreed in two years. The average time for FTAs with the EU has been seven years, and none have been as comprehensive as what the UK will need. The European Parliament has stated this will not be possible in two years – thought to be reflective of chief negotiator Michel Barnier’s views too. UK crashes out with no deal Likelihood: 4/10 – possible the talks end in failure and the UK follows through “no deal better than a bad deal”, but given the potential economic damage for both sides, will want to be avoided by both Divorce agreed, progress on free trade agreement, but transitional deal needed as details finalised Likelihood: 8/10 – for both political and practical reasons, this seems the most likely outcome. Agreeing the divorce proceedings (under the now-famous Article 50) and making progress on future arrangements (under Art 218 of the Lisbon Treaty), but without a comprehensive free trade agreement to cover replacement for the thousands of complex rules and regulations that have been constructed over the four decades of Britain’s EU membership. The European Parliament has voted against allowing this being any longer than three years. Article 50 process extended by mutual consent of UK and EU Likelihood: 4/10 – given the complexities of all the issues to agree even under the divorce, there’s a possibility that the initial negotiating period could be extended with the mutual consent of the UK and the EU. Given the imperative for the UK to get a deal done, it seems highly unlikely politically, but is legally possible. The UK government has insisted Art 50 is “irrevocable”, but the author of the clause, Lord Kerr, is adamant that it could be paused or reversed, and that the ultimate arbiter, the European Court of Justice, would come to that conclusion, if asked. CRASHING OUT: WHAT IF THERE’S NO DEAL? The UK Government has repeatedly said that “no deal is better than a bad deal”, leading many to think they would be happy to leave the table with nothing. What would this mean in practice? WTO rules - The UK would revert to existing trade rules under its membership of the World Trade Organisation – although some of these would need negotiation. Tariffs? The average WTO tariffs amount to around 4% under its so called most-favoured nation (MFN) rates, but some products are much higher, cars 10%, wine 31% and some agricultural products up to 90%.

There are complications here – it would only cover goods, not services, and there could be some expectations from the EU in return. It also remains legally unclear whether adopting this option would restrict the ability of the UK to negotiate new bilateral trade deals with other global economies – a key objective of the government. FIRST ISSUES TO SETTLE Clarifying the status and rights of over 3 million EU nationals in the UK and over 1 million UK nationals in the EU: In theory, easy to agree – neither side wants to be seen to keep millions of ordinary people uncertain and anxious over their futures. As a negotiating tactic to secure Britons’ rights abroad, the UK govt is reportedly planning to freeze the rights EU nationals currently enjoy under EU law – even at the cost of breaking a manifesto pledge. Still to be worked out: Process: Will this be subject to a stand-alone agreement or will it be subsumed into the wider exit deal, thus made a hostage to fortune and tied to the success or otherwise of overall talks? Practicalities: Will the UK issue a blanket right of residence to all EU nationals in the UK or will it exclude certain categories – such as students? Also, how will the process work in practice? Cut-off date: The Government appears to have backed off making Article 50 day, 29th March, the cut off for EU migrants under free movement. This is prudent as it would mean breaching EU law while still a full member, in turn putting the Brexit negotiations under considerable strain from the outset. The political pressure on Theresa May to deliver on immigration is real, though, and she’ll see the risk of many thousands of EU nationals taking advantage of free movement before Brexit formally takes effect. Settling the UK’s financial commitments, i.e. the size of the ‘Brexit bill’: Undoubtedly one of the most contentious and symbolic issues for both sides – an early show of strength over who is willing to give ground. The media will scrutinise this carefully given the significance of EU payments in the referendum campaign, as well as the obvious comparisons to Margaret Thatcher wielding her handbag over Britain’s rebate and “getting our money back.” Phillip Hammond said this morning he “does not recognise the very large numbers that have been bandiedabout” by some in the EU, but has repeatedly said the UK will meet any legal obligations. The Government has the rather helpful recent House of Lords report making clear that leaving without a deal would mean the UK had no legal obligation to make these contributions.

Special zero-rate transitional deal? Another little-known clause which may find fame is Article 24 of the WTO’s General Agreement on Tariffs and Trade. This opens the door to a transitional period of up to ten years where there would be zero tariffs for both sides. Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK

What is the bill? This has three main components: o Projects already undertaken: estimated to reach €241bn by 2018, with Britain’s share coming in somewhere between €29bn and €36bn. o UK’s remaining financial commitments under the EU’s long-term budget: The EU anticipates new spending commitments totalling around €330bn in 2019 and 2020. The UK’s share will be somewhere in the region of 11%14% after its rebate. o The UK’s share of EU liabilities minus its share of EU assets: The UK’s liabilities towards the EU cover several areas, the most notable of which is the cost of EU officials’ pensions. The UK’s share of the total liability amounts to between €7bn and €11bn. Against this the UK will be able to offset its share of EU assets – for example, the EU’s €41bn in cash, property and other financial assets. Maintaining peace and dialogue in Northern Ireland and upholding the integrity of the Good Friday Agreement – i.e. preventing a ‘hard border’ between North and South: o One of the thorniest issues to resolve with no simple, or easy solution. The choice is between a hard border for goods and people – and all of the historical political connotations that come with that – or a soft border – meaning that the UK is not able to control the flow of free movement of people, nor is the EU able to control the flow of goods without checks, any customs or tariffs that may arise post-Brexit. Future trade arrangements to agree: o Frictionless trade – customs checks and tariffs o Inevitable friction will occur, but the question is how best to mitigate it o Global precedents show it is possible to enjoy free trade and a high degree of economic integration (such as sophisticated cross-border supply chains) without a customs union, e.g. between the US and Canada. o The UK Government has made clear it is open to negotiation on this, with potential options including a bespoke UK-EU customs agreement, the UK becoming an associate member of the customs union or remaining a signatory to some elements of it. The red line is no longer being bound by the Common External Tariff which would preclude the UK from negotiating trade deals with other global economies. o The EU has agreements on customs facilitation with nonmembers, most notably with Switzerland and

o In order avoid businesses having to comply with burdensome rules of origin, the FTA ought to include a liberal cumulation agreement so more products assembled in either the UK or EU can be considered as originating anywhere else in the UK or EU. o Beyond the purely economic implications the customs issue also has hugely important political ramifications for the Irish border issue. Frictionless migration – permits, quotas, controls? o The status quo is clearly not-viable, although there could be some middle ground between full free movement and treating EU nationals exactly the same as migrants from the rest of the world post-Brexit. o Potential options could include: o in-built advantages for EU nationals under a new pointsbased system o guaranteed access for skilled EU migrants with job offers o dedicated labour mobility schemes (particularly in lowskilled sectors) reserved for EU-nationals o Highly skilled migrants: The UK will want to continue to be able to attract highly skilled migrants. Currently, the UK issues 20,700 visas for such workers from non-EU countries but Brexit might necessitate expanding this considerably. In addition, the current rule whereby these visas are pooled across the economy could be scrapped making them sector-specific, thereby not chocking off the flow of talent to certain areas of the economy. o Flexibility: A flexible labour supply is the main priority for many UK businesses - in particular in sectors like construction, agriculture, catering and social care – as well as the NHS. Brexit Secretary David Davis recently emphasised the need for flexibility, conceding that in some years the level of migration into the UK might even be higher than at present. o Points-based system, plus temporary flows: Changing demands will require the mixing of a points-based system with a degree of flexibility to allow for temporary migration to fill labour shortages. Under the Australian system, widely cited by Leave supporters as a desirable post-Brexit model, in 2013-14 only 35% of migrants were points-based system while 59% arrived on a range of temporary schemes such as working holidaymakers. o Seasonal labour: Environment Secretary Andrea Leadsom and other ministers have pledged to ensure the agriculture sector will continue to have access to necessary workforce. o Given these are in general short-stays, this area should prove relatively uncontentious – most public objections to immigration are focused on long-term migration.

Canada. A comprehensive UK-EU FTA preserving tariff-free trade in as many areas as possible would naturally minimise customs delays.

Germany: Given its commitment to maintaining EU unity, Berlin perceives Brexit primarily as a political challenge than an economic one. Although it will want to keep trade as free-flowing as possible given its considerable trade deficit with the UK, Germany will oppose any arrangement in which the UK is seen to continue to enjoy the benefits of the EU but without many of its costs and obligations; a principle stressed even by German business and industry representatives. This broad strategic imperative will not be affected by the outcome of September’s elections although if she remains as Chancellor, Merkel will be relatively more accommodating than Martin Schulz, an ardent believer in EU integration. Finally, given the recent pushback to its perceived domination of EU and Eurozone affairs, Germany may take a relatively backseat role and defer to the European Commission on most day-to-day issues. France: A distinct French position on Brexit will not emerge until after the second round of the country’s Presidential elections in May. The election of Front National’s Marine Le Pen would pose an existential challenge to the EU and so neither France nor the EU will be too accommodating towards the UK until after she has been seen off – polling suggests she will almost certainly lose to the centrist/liberal Emmanuel Macron in the second round. Macron has said he wants to maintain positive relations with the UK – both at the bilateral and EU levels – although he is also keen to attract any businesses dislocated by Brexit to France. Ireland: Ireland has more at stake in the Brexit negotiations than any other member state. As a small and open economy with significant volumes of trade with the UK (over €1bn per week in goods and services), it could be hit even harder by a messy Brexit than the UK itself which is better placed to absorb the costs. Therefore Ireland will be extraordinary keen to maintain close economic ties between the UK and EU especially in the area of customs co-operation. This in turn would enable the Irish border to remain as open as possible, thereby mitigating the risk of the peace process unravelling – something identified by the rest of the EU as a key priority.

has been more accommodating of a flexible arrangement for the UK within the EU, it is likely it will continue to adhere to this principle in defining the new UK-EU relationship providing the UK is also willing to compromise. Netherlands: As an outward looking and free-trading nation closely economically integrated with the UK the Netherlands will prioritise the preservation of these links – a recent report by the Dutch Parliament warned that “any restriction on free trade with Britain would inevitably be at the cost of Dutch exports, prosperity and employment” and that a no deal scenario would be “very undesirable”. However, the report also stressed that “There’s no reason at all to allow Britain to cherry pick” and the anticipated new government coalition will include a couple of strongly proEU parties who could check Prime Minister Mark Rutte’s instinctive pragmatism. Spain: Given that Spain and the UK have regularly been at odds when it came to EU issues, the mood music coming out of Madrid since the referendum has been surprisingly positive; Spain’s Foreign Minister Alfonso Dastis stressed the objective was not to punish the UK and suggested negotiations over a new trade deal could overlap with the initial Brexit talks – a key UK demand. Given its desire to keep the drive for Catalan independence in check, Spain is unlikely to push for a damaging Brexit which would exacerbate the risks of Scottish independence, although Prime Minister Mariano Rajoy has also said that any new relationship between Gibraltar and the EU must take into account Spain’s opinion and have its backing.

Poland: Poland’s Brussels-sceptic government will be a key ally for the UK in some areas but a tough opponent in others. A priority for Warsaw will be to secure the status and rights of the million or so Polish nationals in the UK. In the wake of Russia’s aggression in Ukraine, Poland will also be keen to bind the UK into a new pan-European security association, but at the same time, as the largest net recipient of EU funds, it will fight tooth and nail to preserve the billions in EU funding it is due to receive up until 2020. Italy: Italy’s economy remains fragile and the country faces a tricky election next year with parties officially sceptical about its membership of the euro consistently polling at around 60%. As such, Italy will prioritise a stable and orderly Brexit in order to avoid any blowback. In recent years Italy Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK