EU, UK Leaders Attempt to Chart Path Forward in Wake of Referendum Result

30 June 2016

Leaders from the EU’s 28 member states met on Tuesday in an attempt to clarify next steps in the EU-UK relationship, following last week’s vote by UK citizens to leave the European Union. However, the road ahead remains highly uncertain, as does the expected level of the fallout for all sides, with the story evolving by the hour.

The 28 June meeting of the European Council, held in Brussels, Belgium, marked the last such summit for UK Prime Minister David Cameron, whose resignation following the referendum results is due to take effect by October at latest.

While the Council meeting was devoted primarily to the so-called “Brexit” vote and included Cameron, the following day involved an informal meeting among the other 27 EU member states – without the UK – on the direction of the bloc’s future.

“Respecting the will of the British people, we all recognised that a process of orderly exit was in everyone’s, and especially, in the UK’s interest,” said European Council President Donald Tusk on the evening of 28 June.

Cameron reaffirmed on Tuesday that a decision on when to invoke Article 50 of the Treaty of Lisbon – specifically, the provisions outlining how an EU member state can withdraw from the bloc – will be the task of his successor, despite earlier calls from various other EU leaders to begin the process immediately.

“We can examine all the different options and possibilities in a neutral way, and look at the costs and the benefits, but it will be for the next British Prime Minister to determine – and the next British cabinet to determine – exactly the right approach to take and the right outcome to negotiate,” said the outgoing premier after the meeting.

On the subject, Tusk said that “leaders understand that some time is now needed to allow the dust to settle in the UK,” while at the same time noting that they also want specific details from London over its intentions and next steps.

EU leaders: no informal negotiations

Under Article 50, withdrawing from the bloc requires first a notification to the European Council, which kicks off a series of exit negotiations with that country. The final version of a deal would be concluded by the Council, operating under a “qualified majority,” with the European Parliament’s approval. Invoking that article kicks off a two-year window for conducting such talks, though this can be extended if all parties agree.

Between now and then, EU institutional and national leaders have categorically ruled out any informal negotiations with the UK government, insisting that any such talks will only occur in formal settings under the Article 50 framework.

Furthermore, they insist that since the majority of the British people voted to leave, their wishes should be respected – a statement apparently meant to address speculation that the UK government could later host another referendum on the subject or otherwise find a way around the result, given that it was an advisory vote and therefore not legally binding.

“I am saddened by this British vote and I make no secret of it. This isn’t sentimentality, it is my profound conviction. I would have liked the United Kingdom to stay forever by our side, with us. It has decided otherwise. We must accept the consequences,” said European Commission President Jean-Claude Juncker on Tuesday to the European Parliament.

Meanwhile, the terms of the February deal modifying the UK’s relationship with the EU have been rendered null and void, with leaders of the bloc’s institutions affirming that no renegotiation would be possible. The agreement had been reached in a bid by Cameron to ensure that UK citizens would vote to remain, with the understanding that the deal would only stay in place in those circumstances. (See Bridges Weekly, 25 February 2016)

At the same time, the economic and financial backlash from the vote has been swift, with the British pound plunging to lows not seen in three decades, sparking fears that the UK could face a recession and job losses. The lack of clarity across the board in how the country’s politicians intend to proceed has also fuelled both concern and criticism, as fears build over the longer-term ramifications not just for the global economy, but for international politics and policymaking processes as well.

High-level finance officials have, in turn, called for all steps to be taken to limit the market fallout as quickly as possible.

Questions on trade

One of the biggest outstanding concerns – if and when Article 50 is invoked – will be how the UK negotiates its future relationship with the EU single market, along with the implications for its WTO membership terms, its current participation in EU trade deals with third countries, and its ongoing or planned involvement in future arrangements.

“At this stage, there are more questions than answers,” said one Geneva-based trade official in comments to Bridges. Another was more critical, saying that the current situation is “all a big mess.”

Regarding the single market, enabling the free movement of goods, capital, people, and services across the EU’s internal borders, German Chancellor Angela Merkel has already warned that should the UK wish to maintain access, it will not be able to “cherry-pick” which elements to keep.

The statement came amid suggestions from high-ranking “Leave” campaign politicians in the UK, such as Boris Johnson, that access could still be possible with immigration curbs.

Merkel’s remarks were affirmed on Wednesday by the informal meeting of EU member states – without the UK – which stressed that should the UK wish access to the single market, it will need to sign onto “all four freedoms.”

Analysts have overwhelmingly said that losing the single market could be one of the largest costs that the UK would face depending on how withdrawal negotiations proceed.

“In order to prevent a downward economic spiral and popular disappointment, the UK will need to negotiate an exit from the EU that preserves for its economy as favourable terms of access to the EU single market as possible,” said Chatham House Director Robin Niblett in a blog post, adding that whatever outcome emerges will be far less beneficial than the current framework.

On the WTO front, all EU nations are members of the Geneva-based organisation in their own right, along with the EU itself as an additional member which negotiates on behalf of the bloc. Analysts say that the process could prove tricky for a host of technical reasons relating to how to navigate the separation of the UK’s commitments from those of the EU.

Shortly after the vote’s results were confirmed, WTO Director-General Roberto Azevêdo said that the Geneva-based organisation “stands ready to work with the UK and the EU to assist them in any way we can.”

Meanwhile, trade officials from various EU partners have also issued their own comments attempting to give clarity on how they might proceed in negotiations with the UK as a non-EU member in the future.

One key question in trade circles, for example, will be the ramifications for the Transatlantic Trade and Investment Partnership (TTIP), a proposed deal between the EU and US that has been under negotiation since 2013.

Prior to the “Brexit” vote, US trade officials had said that they would not be immediately interested in a bilateral deal with individual countries, given that the current approach prioritises deals with country groups. (See Bridges Weekly, 28 April 2016)

After the vote, US Trade Representative Michael Froman stressed that trade and investment play key roles in Washington’s ties both with the EU overall, as well as with the UK individually.

However, the US trade chief did not elaborate on how a “Brexit” will affect the ongoing TTIP negotiations, affirming only that “the economic and strategic rationale” in favour of the deal is key and that Washington is considering what comes next.

“We are evaluating the impact of the United Kingdom’s decision on TTIP and look forward to continuing our engagement with the European Union and our relations with the United Kingdom,” said Froman.

Froman met with EU Trade Commissioner Cecilia Malmström this week to discuss the TTIP talks. The EU trade official said on 27 June that while the current situation is “unprecedented,” the bloc remains “united” on its trade policy going forward, while pledging to make progress on a series of fronts, ranging from the TTIP talks to the ratification of a trade and investment deal with Canada.

The day after in a speech to the Atlantic Council, Malmström clarified that the UK will participate in the TTIP talks with the rest of the EU member states, with that involvement to cease only when its withdrawal from the EU is finalised.

“The formal exit  negotiations – highly  technical – have to  be  sorted  out  before  the  EU  can  even  begin thinking about the future of the EU-UK relationship,” she noted.

EU and Canadian officials also say that ratification of their Comprehensive Economic and Trade Agreement (CETA) will go ahead as planned, even with the upcoming UK exit talks. What role the UK would play in that process, given that it was involved in the negotiations to clinch the deal, remains unclear at this stage.

"It seems quite possible to me that CETA will be ... certainly signed, and very likely ratified, even before Article 50 is invoked. And very, very likely to go into force while Britain is still part of Europe," said Canadian Trade Minister Chrystia Freeland in remarks to CBC News.

Some officials, including Werner Wnendt, Germany’s ambassador to Canada, have told reporters that the UK would likely need to clinch its own agreement with Canada, though how that would take shape also remains unclear. At least part of it will depend on how the UK negotiates its exit deal with the rest of the EU, including with regards to the single market.

How third countries will respond in practice to efforts by the UK to negotiate bilateral deals on its own is another question being raised among experts, with Niblett of Chatham House suggesting that the UK would have less leverage than it had previously as a demandeur for such agreements.

There would also be implications for existing trade deals, given that the EU has FTAs and Economic Partnership Agreements either in place, in the signing/ratification process, or under negotiation with countries spanning across Asia, Africa, and the Americas.

For example, South Korea’s Ministry of Trade, Industry, and Energy has already released a statement about possible next steps with the EU, given the existing bilateral deal between them. Seoul has suggested that the current arrangement will remain pending the result of the UK exit negotiations, and that it will consult with the bloc as to what changes may be necessary after the UK’s withdrawal.

The ministry also suggested that it could aim to clinch a bilateral pact with the UK further down the road.

Climate policy ramifications?

Among the many policy-related questions being raised over the past week has been what leaving the EU would mean for the UK’s participation in the bloc’s Emissions Trading System (ETS), along with the implementation of the Paris Agreement on climate change, given that the EU’s intended nationally determined contribution (INDC) set targets and commitments for the bloc has a whole.

The EU’s ETS, established in 2005, has long been deemed the pinnacle of the bloc’s climate policy, even with its struggles amid persistently low carbon prices in recent years. The EU institutions have been working to address the oversupply of carbon allowances and boost these prices, including by negotiating terms that would reform “Phase IV” of the ETS for the years 2021-2030. (See Bridges Weekly, 23 June 2016)

The ETS does have non-EU members, specifically Iceland, Liechtenstein, and Norway. Whether the UK would seek to remain in has not yet been clarified by the country’s government.

Ian Duncan, the Conservative Party lawmaker steering the EU Parliament legislation for reforming the ETS for its next phase, resigned his post of “rapporteur” almost immediately after the vote results were confirmed last week.

Duncan is an EU parliamentarian from Scotland, part of the United Kingdom. In his resignation letter, he explained that “it would be sensible for the dossier to be taken forward by a member who can steer the important reforms to their conclusion,” and that whoever takes over the role should be given the space to revise his proposals on ETS reform.

“It is with quite some regret that I take this step. I believe passionately in the need to address climate change and I also believe that the Emissions Trading System, when working well, will make a real difference reducing carbon emissions and ushering in a new era of low carbon industries in Europe,” he added.

Meanwhile, the EU still needs to ratify the Paris Agreement on climate change, adopted in Paris last December. The bloc, including the UK, committed to meeting a binding target of cutting domestic greenhouse gas emissions by 40 percent by the year 2030, relative to 1990 levels.

Whether leaving the EU will require revisions to that INDC and entail a separate submission from the UK is also being discussed in policy circles. Christiana Figueres, the outgoing Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), suggested prior to the referendum that some changes would be needed on the EU side.

“From the point of view of the Paris agreement, the UK is part of the EU and has put in its effort as part of the EU, so anything that would change that would require then a recalibration,” she said in comments reported by Politico.

EU leaders look to future

The weeks, months, and years ahead are slated to see a much longer debate over the future of all parties involved, particularly in an international landscape where anti-globalisation arguments are having increasing sway on voters.

The implications could span far beyond trade and climate, with questions remaining on how a post-EU United Kingdom will extricate itself from a major body of laws and regulations that apply to the bloc’s member states – or if it will seek to maintain these somehow.

The outcome, in turn, could have ramifications for environmental and agricultural policy, financial services, and a host of other subjects.

In the meantime, the remaining member states – now beginning to refer to themselves as the “EU 27” – are working to quell speculation that other referendums could follow suit, particularly as “Eurosceptic” party leaders in France and elsewhere claim that the UK vote sets a precedent they could use.

After the informal morning meeting of the “EU 27” on Wednesday morning, those leaders reiterated recent expressions of regret at the UK vote’s result – while also trying to reinject faith into the remaining bloc.

“The European Union is a historic achievement of peace, prosperity, and security on the European continent and remains our common framework. At the same time many people express dissatisfaction with the current state of affairs, be it at the European or national level,” they said in a joint statement.

The document was issued on their behalf, as well as on the part of Juncker and Tusk in their respective roles.

“Europeans expect us to do better when it comes to providing security, jobs, and growth, as well as hope for a better future. We need to deliver on this, in a way that unites us, not least in the interest of the young,” the EU national leaders continued.

The words echoed comments made by Juncker individually at the European Parliament just a day before, where he pledged that the European project must go on.

“The European dream still exists. And we will have to work with determination and persistence, with renewed energy and with a revival of continental ambition,” he said, urging that people remember that the birth behind that dream was peace after the continent was ravaged by war in the first half of the 20th century.

However, the next stage must also be forward looking. Indeed, Juncker insisted, “Europe’s future belongs to its youth,” and warned EU lawmakers that the continent must not be allowed to fragment yet again.

ICTSD reporting; “South Korea may seek bilateral FTA with UK after Brexit: trade ministry,” REUTERS, 25 June 2016; “Brexit tremors see pound tumble further in historic rout,” FINANCIAL TIMES, 27 June 2016; “Angela Merkel: no special favours for UK over single market,” THE GUARDIAN, 28 June 2016; “5 ways Brexit will transform energy and climate,” POLITICO, 24 June 2016; “I cannot stress too much that Britain is part of Europe – and always will be,” THE TELEGRAPH, 26 June 2016; “Brexit vote result bolsters case for CETA, trade lawyers say: ‘Quite optimistic about this’,” FINANCIAL POST, 27 June 2016; “U.K. wants free trade deal with Canada, high commissioner says,” CBC NEWS, 25 June 2016; “CETA on track for ratification before U.K. leaves EU, minister says, CBC NEWS, 27 June 2016.

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