Brexit: The view from Brussels, three months on!
We are three months on now from the referendum and the immediate political and markets’ reaction has to some extent settled down with attention turning both in London and Brussels to how to give effect to the UK leaving the EU and what it will mean at the detail level. The BDO network fortuitously located what is now its Global Office in Brussels many years ago, which has allowed us have a unique insight and vantage point into the thinking and reaction to the Brexit referendum, at the political heart of the EU. Here are some thoughts on where it has got to in mid-September, taking advantage of that chance location.
After the reaction (and the holidays), the planning started:
Across the relevant European institutions in Brussels, the initial feelings of amazement, frustration, sadness and even anger have given way to feverish planning for the process and identification of the issues that will arise if the withdrawal of the UK from the EU is to happen in an orderly fashion. Much of this has taken place since the return to school [and EU] desks in early September, ‘la rentrée’ as it is called in Belgium!
The outcome of the referendum on June 23rd is now being seen in Brussels as a ‘moment’ whereas ‘Brexit’ itself will be a process…an unprecedented, hugely complex and protracted process, involving multiple, interlinked, overlapping and difficult negotiations, potentially spread over many years! It is evident now that neither the UK or EU had any real appreciation of the scale and complexity of what a member state exiting the EU might entail and to an extent, everyone is scrambling belatedly to get their act together, including in Brussels!!
The three key European institutions have appointed ‘leads’ for the negotiating process, viz. Michel Barnier (Commission), Guy Verhoftsadt (Parliament) and Didier Seeuws (Council), being respectively, a Frenchman and two Belgians. Barnier will be the Chief Negotiator and the Deputy Chief Negotiator will be a well-respected senior official from the European Commission Trade Directorate, Sabine Weyand, who is German. Her current Directorate and nationality are interesting aspects of the team ‘make-up’, perhaps indicating a German concern that pragmatic trade and business issues need to be prioritised on the EU side.
Michel Barnier, a former European Commissioner (twice in fact) will take up his duties as of 1 October 2016. In line with the EU stance of 'no negotiation without notification', his task in the coming months will be to prepare the ground internally for the work ahead. If and when the Article 50 notification is triggered by the UK, he will only then make the necessary formal contacts with the UK authorities. He will apparently be surrounded by the Commission’s ‘brightest and best’ in the words of Commission President Juncker.
Article 50; the trigger to start the exit process:
Most experts agree that the infamous Article 50 process to leave the EU should conclude within two years of being triggered. However, the actual detailed and tortuous legal process of disentangling the UK from the EU ‘will take years and years’ to quote the previous President of the European Council, Herman van Rompuy. Some here even doubt if can be done at all in today’s interconnected and interdependent world. The general thinking is that the UK will trigger the process in 2017. German, French and other member states’ general elections in 2017 plus the European elections of 2019 will all feed into the selection of the precise timing.
Establishing what the UK will want as its detailed post-exit arrangements, much less successfully agreeing them with the EU 27, will be incredibly difficult and time-consuming. The ongoing distraction that the negotiations will pose to all parties concerned, and the endless uncertainty for businesses (notably, but not only, UK businesses) will be a huge strain in an already feeble economic situation in Europe. Unfortunately the length and complexity of the multiplicity of negotiations will result in continuing uncertainty for the business community for an extended period and this will only change when there is greater clarity as to what the UK leaving the EU will mean on a detailed level across all areas of UK life, including the economy as a whole and all affected business sectors. That cannot even begin to change until the Article 50 process is initiated.
Will they, won’t they?
While some in the UK hold out hope that the UK will not initiate the exit process, this is not a view held among any of the senior EU and Member State officials whom I have met in recent months. In fact there is no plan at all at EU level and probably little desire either at this point, to find a way for the UK to avoid exiting the EU. The view in Brussels is that this was a British political issue which gave rise to a British referendum and remains, at least until the Article 50 process is triggered, a wholly British matter. The simple fact is that it has not been and is not as high a priority for the EU as it is for the UK, surprising as that may be to those in the UK.
How will it all play out?
Certainly, the unexpected outcome took the EU by surprise and there is no ‘off the shelf’ deal ready to be offered (e.g. Norway +/-, EFTA, the Canada model etc). Astonishingly, in my view there was as little political and technical preparedness at EU level as there was at UK level for the outcome of the referendum. It is only now becoming apparent that the level of integration of the large and sophisticated UK economy into the full EU economy will demand a very detailed and bespoke exit arrangement. Unfortunately the structures and machinery to achieve that are not yet in place in London or Brussels. In a sense, the decision to leave may well prove to have been the easy part!
While much has been said and written about how it will all play out, the truth is that for now and for some time to come, no one knows where it will end up or even what the ‘landing zones’ will be to borrow a phrase used by British officials I have met. Based on BDO contacts in Brussels however, I am very confident that, political rhetoric aside, the economic realities of the deep UK/EU-27 trading [and other] relations will pervade the discussions throughout the lengthy process and a pragmatic deal will be the ultimate outcome.
Notwithstanding that, the view of the EU towards Brexit is that the post-exit arrangements, whatever they may turn out to be, will need to offer mutual benefits to the UK and EU 27. As a result, even a deal acceptable to all parties in the UK but not acceptable to all of the EU 27 member states, the European Parliament and all national (and potentially regional) parliaments will not be ratified. There is a sense in Brussels that the UK polity may not have come to appreciate this aspect of the process yet and continue to see it as a negotiation of equals. It is going to be a difficult task for the negotiators to satisfy the many and often competing demands of the multiple actors in such a process!
Pragmatism will prevail and the world will go on:
So how to see the positives in this situation? Well despite the anger and hurt in some EU quarters and ignoring initially incendiary rhetoric from individual politicians, there is a recognition that the UK is and will always be part of Europe in every sense, culturally, economically and geographically even if not politically. This will surely ensure a willingness on the part of both the UK and the EU to work together pragmatically to find solutions at every level, particularly in trade. My sense from the many meetings and briefings I have attended in Brussels is that this willingness will underpin the negotiating approach from the EU side but it is also clear that the unity and interests of the EU 27 will be the priority.
In my view, but without expressing a personal or BDO view on Brexit or the EU, the UK will not, and in fact cannot, be offered a deal by the EU that is overall better than that of a continuing EU member. To do so would undermine the whole raison d’être and future of the EU. This is very much an existential concern of those ‘in Brussels’ who will be part of the Brexit negotiations and represents a ‘red line’ for the EU in some sense, repeated at every juncture in Brussels. How that will affect the terms of post-exit trading arrangements is anyone’s guess so it seems that the British wartime slogan of ‘keep calm and carry on’ is as good a piece of advice as anyone can offer for now!
As a most turbulent political summer comes to an end in Europe, this is one story that will run and run….