BERLIN — It’s a question that strikes fear in the heart of the Brussels Eurocracy: What if the Brexit camp wins?
Officially, Brussels is convinced the Brits will choose to remain the EU. The European Commission hasn’t even begun to contemplate a negative outcome, it insists. “For us there is just one plan: That is Plan A. There is no Plan B, no contingency plans and no speculation on possible outcomes,” European Commission spokesman Alexander Winterstein said Tuesday.
While there may not be a secret Brexit war room in the basement of the Commission’s cavernous headquarters, senior officials have been giving plenty of thought to what until recently they referred to as “the unthinkable.”
The tenor so far? “There’s no question it would be a huge disaster,” one official said.
The oft-cited fear of a broader EU collapse, though real, isn’t the only thing that keeps Brussels up at night. Another big worry is that dealing with Brexit would preoccupy, and likely paralyze, the EU for years. At a time when Europe should be focused on how to retool the eurozone and revive the bloc’s stagnant economy amid chronic unemployment in many countries, the EU would be sidetracked by the U.K. question.
The roadmap ahead should Britain vote to leave the Union in the June 23 referendum suggests they’re right to be concerned. The process would entail an exhaustive two-year negotiation to discontinue the U.K.’s EU membership.
Though complicated, the task might be manageable were it not for the politics involved on both sides. If the Out wins, the EU and the U.K. are in for a “long, costly and messy divorce,” as George Osborne, the British chancellor of the exchequer, told MPs on Tuesday.
Many in the Out camp argue that in the event of a vote to leave, the U.K. could either pursue a major renegotiation of its membership or an outright withdrawal from the EU.
The first option, however, appears to be little more than wishful thinking. There is simply no political will within the EU, which just last month agreed to a package of reforms aimed at convincing the U.K. to remain. “I think the mood in Brussels would be very clear: The Brits have played with us for a long time,” said Andrew Duff, a former British MEP and constitutional specialist.
The divorce clause
That leaves Article 50, the EU’s divorce clause. In a report published this week, the U.K. government said it would be obliged by an Out vote to invoke the article because it presents “the only lawful route available to withdraw from the EU.”
Exercising Article 50 would trigger the two-year negotiation phase.
No country has ever taken that step, meaning there is no blueprint to rely on. Brussels has a clear path for countries seeking to join the EU. It presents them with a detailed catalogue of measures to adopt and goals to meet. In this case, however, it would be up to the U.K., not Brussels, to lay out what it wants.
The hope in the Brexit camp is that cooler heads and economic self-interest would prevail on the EU side. Following this narrative, Brussels would be open to negotiating new free-trade arrangements and revising rules on the movement of people between the U.K. and the EU for the simple reason that it makes economic sense.
Don’t bet on it.
For one, Article 50 does not stipulate the process include negotiations with the exiting member over new trade deals or other agreements with the EU. The rule simply states negotiators should “take account of the framework for its future relationship with the Union.” The negotiators’ priority should be to “conclude an agreement with that state, setting out the arrangements for its withdrawal.”
The trouble for the U.K. is that it would have little leverage. The negotiation phase lasts two years. An extension is possible but would require unanimous agreement by the remaining 27 members. If there’s no agreement within that timeframe, the U.K. could be left in the cold.
“This would lead to the U.K. leaving the EU with no immediate replacement agreed, without any protection under EU law for the rights of U.K. business to trade on a preferential basis with Europe or the EU’s free-trade agreement partners, U.K. citizens to live and work in Europe, or U.K. travelers to move about freely in Europe,” the government report warned.
Even if the Commission technocrats at the negotiating table agreed to a more rational approach, a number of member states might not. Eastern European countries that have been on the receiving end of the Out camp’s attacks, such as Romania and Bulgaria, whose citizens have been caricatured as freeloaders milking the British state, might welcome the chance to see the U.K. squirm, Brussels officials say.
Proponents of Brexit argue that the U.K. market – Europe’s second-largest after Germany – is simply too attractive for the EU to turn its back on. The U.K. buys about 10 percent of the exports coming from the rest of the EU, accounting for about 3.1 percent of their collective gross domestic product. Of that, Germany is the largest contributor, with about €90 billion in exports, or roughly a quarter of the EU total.
While Berlin might be open to a quick deal, the U.K. is not an essential trading partner for most of the remaining EU members.
The EU, however, is by far the U.K.’s biggest market. EU countries account for nearly half of U.K. exports, the equivalent of about 12.6 percent of its GDP. The U.K.’s economic dependence on the EU would give it even less leverage in exit talks.
Trading places
It’s not just the U.K.’s trade relationship with the EU that would be at stake. The EU has negotiated dozens of free-trade agreements across the world. Leaving the EU would mean the U.K. would no longer be party to those agreements. It could negotiate new ones, of course, but such deals usually take several years to conclude. The U.K.’s lack of expertise in this area (as an EU member it has had no need for trade negotiators for over 40 years) could lead to further delays.
While the U.K.’s status as a member of the World Trade Organization would give its goods more favorable treatment than many countries enjoy, exporters would be at a disadvantage compared to EU countries.
“Losing the EU’s preferential trading benefits in foreign markets could mean new tariffs of 10, 20 percent, or sometimes even more, on key U.K. exports such as cars, machine goods, whisky and textiles,” Peter Mandelson, a former EU trade commissioner who now sits in the House of Lords, said this week.
Brexit supporters dismiss such forecasts as fear-mongering and note that Mandelson years ago predicted it would be “a disaster” if the U.K. stayed out of the euro.
Even so, it’s difficult to see the economic upside of Brexit in the short- to medium-term.
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The pound has been walloped against the dollar and euro in recent days amid growing fears amongst investors that the Brexit camp may prevail. Ratings agency officials say privately that a Yes vote would lead to downgrades of the U.K.’s creditworthiness amid worries its economy would go into a tailspin.
“The main point for the markets is the uncertainty,” Alfonso Ricciardelli, director at SGH Macro Advisors, a firm that analyzes macro-economic risk. “If there was a clear agreement on what would happen in the case of Brexit, it would be less dangerous.”
A new Norway?
Despite those jitters, the likelihood remains that the U.K. would come to some kind of understanding with the EU. A drawn-out conflict would be disruptive to both sides. There are various models at hand. Those most often cited are the Swiss and Norwegian ones. Though outside the EU, both have very close ties to the Union, Norway as a member of the European Economic Area and Switzerland through a web of bilateral agreements with the EU.
Yet for the U.K. either course, even if the EU were willing to accept such a solution, raises a basic question: Why leave in the first place?
In other words, following the Swiss or Norwegian examples would require the U.K. to accept just the kind of commitment and EU interference in its affairs the Brexit campaigners reject, from contributions to the Brussels budget to adherence to the EU’s legal strictures.
“If the U.K. wants access to the single market when it has left the EU, it will have to accept three things: continued budget contributions, continued free movement of labor, and continued supremacy of EU law over British law in the single market,” Jean-Claude Piris, a former senior legal official with the European Council, wrote in a recent analysis for the Centre for European Reform.
The prospect for any deal will depend on how the U.K. itself reacts to an Out vote. The U.K. government would come under immense pressure from the Brexit camp to suspend the freedom of movement rules immediately. If it does, that would inflame passions among the more than two million non-British EU citizens residing there. What would happen to them? Experts in EU law say it’s unclear.
Any move by the U.K. to encroach on freedom of movement rules would lead to calls from other EU capitals for retaliation. The more than two million U.K. citizens living in the EU could also find themselves in limbo.
France could also revoke its agreement with the U.K. that allows Britain to control its frontiers from French territory, said Jacques Lafitte, a consultant with Avisa and former senior Commission official.
In short, the situation could quickly spin out of control, further complicating the withdrawal negotiations.
A dangerous precedent
Even without such an escalation, some European officials argue it would be in the EU’s self-interest to play hardball with the U.K. Many in Brussels — even those who have long chafed at British obstructionism over the years — worry a U.K. departure would set a dangerous precedent.
By making Brexit as painful as possible, Brussels would set a clear signal to other potential secessionists. The worse Britain fared economically, the better.
Some would also see Brexit as an opportunity. France and Germany have long resented the City of London’s status as the eurozone’s financial center, for example. Should the U.K. vote to leave, they would have no reason not to take steps to bring that business to the Continent.
“France’s financial elites enjoy working in London but think Paris has just as much civilization and culture,” Lafitte said. “Post-Brexit some would move heaven and earth to go to Paris.”