Brexit and the EU: The Beginning and/or the End

November 9, 1989, will forever mark the beginning of Europe’s integration. The decision by the East German government to allow its citizens to visit West Berlin meant the end of the Berlin Wall and the beginning of the end of communism in Eastern Europe.  Within a year, Germany was reunified, and within 15 years eight Eastern European countries joined the European Union (EU). June 23, 2016, will be another day that will go down in infamy. What remains to be seen is if it’s going to be a day that marks the end of this bold European integration experiment, or a new beginning for further ‘unification.’ The Referendum After years of political maneuvering, UK Prime Minister David Cameron’s government finally held a referendum (on June 23, 2016) to determine whether or not the UK should leave the EU. It was widely expected that the people would vote to remain in the EU, the alternative uncertainty (for both the UK and the EU) being highly undesirable. However, the people of the UK defied expectation and sent a shockwave throughout Europe and the rest of the world.  With a 72.2% turnout, 51.9% voted in favor of leaving the EU.  The small margin of victory is further exacerbated by significant differences on a regional level; while the majority of voters in England and Wales opted to leave the EU, the bulk of voters in Scotland and Northern Ireland and the greater London area voted to remain in the EU.  Nonetheless, the result led to Cameron’s resignation and the appointment of a new government with the unenviable task of triggering withdrawal proceedings and negotiating terms of separation in a two-year period. Rationale for Leaving Advocates for Brexit cited that the UK would be better able to address immigration concerns, reduce burdensome regulations and improve economic growth if they were to take back sovereignty from the EU. The largest issue for voters was migration to the UK. According to the Council on Foreign Relations, due to the EU’s eastern expansion in 2004 and 2007, internal EU economic migrants to the UK increased to approximately 300,000 people a year (over three million in total). Additionally, there was fear following terrorist attacks in Paris and Brussels that the EU’s free movement of people left the UK exposed to similar future violence. Furthermore, it had been fairly easy for the ‘Vote Leave’ campaign to argue that the EU is “extraordinarily opaque, extraordinarily slow, extraordinarily bureaucratic,” and that without its cumbersome proceeding the UK would be able to become more competitive, engage in trade deals with emerging economies and reduce “oppressive” regulations. Finally, at an existential level, the country that gave birth to modern democracy and the parliamentary system, never liked seeing its parliament and courts being overturned by the EU Commission or the EU Court of Justice.  Leaving the EU would allow the UK to be legislatively and judicially independent. What Happens Next? On March 29, 2017, almost a year after the referendum, the UK government invoked Article 50 of the Lisbon Treaty and notified the other 27 member states as required to begin the process to formal withdraw from the EU.  This is the first time in history that a member state of the EU has invoked this article. Since invoking Article 50, negotiations between the EU and the UK on withdrawing from the union need to be completed within two years.  This deadline could potentially be extended only if all the other 27-member states agree to the extension.  The EU Commission has appointed a special negotiator (Michel Barnier), who gets his direction from the EU Council, while any final agreement will have to be approved by the EU Parliament and be all the EU-27 members. To that end, formal negotiation guidelines regarding UK’s departure have been adopted by the EU Council at a recent EU-27 (held on April 29^th). These guidelines detail the priorities of the remaining member states, how the negotiations will be structured, and the principles that the EU will not compromise on. On the other hand, the public proclamation of the EU’s negotiating position and guidelines led the UK Prime Minister to dissolve Parliament and call for early elections (to be held in June 8, 2017), in order to gain a fresh mandate with which to negotiate UK’s exit from the EU.  From the UK side, the biggest domestic issue is going to be the Great Repeal bill.  This bill will annul the European Communities Act of 1972 (which made EU laws and regulations automatically enforced into the UK) and allow the UK government to begin the process of amending and repealing all or some of the EU laws currently in the books (by some estimates, as many as 12,000 laws and regulations). If an agreement is not reached within the specified two years and member states do not agree to extend the deadline, then the UK would exit the EU with no agreement in place or consideration for the consequences (what is called a ‘hard exit’). The Subject of Negotiations Brexit negotiations between the UK and the EU are promising to be very difficult.  Overall, the UK wants a simultaneous negotiation of untangling current association, while forming a new trade agreement. The EU, on the other hand, is unwilling to negotiate any new trade agreement until the UK is officially out of the union.  Each of the EU-27 have their own priorities and ‘hard lines’ regarding UK leaving the EU.  Most of the member-states are all in agreement that the UK’s withdrawal need be costly, that the four fundamental freedoms (free movement of goods, services, capital and people) are “red lines”, and the resulting trade agreement must be inferior to EU membership. Therefore, it is likely that the EU will insist upon discussing the UK’s share of the Union’s financial liabilities first and foremost.  Germany, France and Austria are expected to be especially unrelenting in asking the UK to cover their existing EU financial commitments as well as future commitments. Furthermore, eastern European countries who receive EU development funds and net contributions will not look kindly on the UK attempting to lower their aforementioned financial commitments.  According to the most recent ‘unofficial’ EU demand, the bill stands at €110 billion! Another issue of major concern is the EU citizens’ status in the UK and vice versa.  EU citizens from throughout the Union have been working on the financial sector of London, and UK has been a ‘net-importer’ of college students.  On the other hand, UK nationals have made southern EU countries their retirement homes. Finally, a major concern of many EU-27 members has to do with security.  The Nordic and Baltic States, as well as Poland, have expressed worries that a looser relationship between the EU and the UK could threaten security guarantees. Estonia, Latvia, Lithuania, and Poland are concerned about a lack of UK involvement in EU security policy, especially considering recent aggressive moves by Russia in the region. France also has an interest in ensuring close ties with the UK on defense as following the exit France will be the only nuclear power and standing member within the UN Security Council. This need for UK participation in EU security issues is the only real leverage the UK has in negotiating a favorable deal. Overall, the EU-27 are not at all happy with the UK decision to leave the union, and they are willing to play hard-ball to get as much concessions as they can, knowing full well that the UK will do anything it can to maintain market access to the EU. And in the long run… The next couple of years are promising to be incredibly significant for both the UK and the EU. However, the final Brexit deal on financial liabilities, citizen movement rights, or even a UK-EU trade agreement, are nowhere near as significant as the long-term implications for both. For the UK, it’s all about securing a favorable Brexit deal (a ‘soft exit’ that includes some kind of preferential trade agreement), in order to discourage the break-up of its union.  Although the possibility of a break-up is not eminent, it’s very likely once the economic consequences of losing access to the EU market become obvious. Scotland will certainly hold another referendum, and this time it will be very hard for its people to vote no to leaving the UK when it will definitely be portrayed as joining the EU—especially if the Brexit deal is heavily in favor of the EU. On the other hand, Irish reunification might be even easier, considering how hard the Irish people have worked to reconcile their two religious communities only to see Brexit divide the country again. For the EU, Brexit could turn out to be a blessing in disguise—the ultimate moment of truth for the currently apathetic Europeans who see the union as irrelevant. If the UK is going to leave the EU, because of the kind of union it is, then what kind of union do the Europeans want to have—in order to discourage others from doing the same, or to attract new members?  (For more, see also:  The Future of the European Union.) The EU-27 need to decide once and for all what kind of union they want to be: a ‘United States of Europe’ moving towards an ever-closer federal union, or a ‘multispeed association’ with core countries sharing common currency, economic policy and maybe even defense, and others just being part of the common market through a trade agreement.  For the EU-27 this could very much depend on the outcome of the Brexit negotiations, but the next two years certainly represent an excellent opportunity to figure this out. About the Authors:  Nasos Mihalakas is an Assistant Professor of International Business, at SUNY Brockport’s School of Business Administration and Economics. Kayla Szczepanski is an International Business Major at SUNY Brockport, class of 2017.