E.U. REFERENDUM

How to Make a Graceful Brexit

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What would Brussels do if there's a Brexit?
  • Why it matters

    Why it matters

    If Britain chooses a unilateral withdrawal, the European Union could retaliate by denying London access to the common market, creating economic volatility.

  • Facts

    Facts

    • Under Article 50 of the E.U. Lisbon Treaty, a member state and Brussels are given two years to negotiate a treaty to leave the union.
    • It’s unclear how long E.U. competition law, financial regulations and rulings by the European Court of Justice would still apply to Britain.
    • After leaving the European Union, Britain may then seek to negotiate a new partnership agreement with Brussels. Negotiations could take a decade or more.
  • Audio

    Audio

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If Britain votes to leave the European Union on Thursday, its relationship with Brussels will still be far from decided, as that will hinge on years of contentious negotiations.

In the event of Brexit, London would have two paths to choose from: An orderly exit governed by E.U. treaties or a messy unilateral withdrawal that could trigger a cycle of tit-for-tat political retaliation.

A weekend poll by the newspaper Mail on Sunday put the ‘Remain’ camp at 45 support and the ‘Leave’ camp at 42 percent support, others surveys have come out even closer.

Much depends on the domestic political situation in the United Kingdom following a Brexit. Prime Minister David Cameron has said he will stay on even if the voters choose to leave the 28-member bloc.

“It must be clearly demonstrated that exiting the E.U. will not become a rewarding precedent. ”

Elmar Brok, European Parliamentarian, Christian Democrats

As a supporter of Britain’s E.U. membership, Mr. Cameron would almost certainly lead the United Kingdom down the path of an orderly exit governed by existing E.U. law.

In this scenario, the path forward is relatively clear. Britain would activate Article 50 of the E.U. Lisbon Treaty, which would give Brussels and London two years to negotiate an exit treaty.

But drafting an exit treaty is no simple matter. The document would span hundreds of pages governing thousands of details, the most important and complex issue being the separation of financial assets.

Legally, Britain cannot just stop paying into the European Union’s budget the day after the referendum. And London would have to pay the pensions of British E.U. officials for years to come.

E.U. financial support for British farmers and research labs would wind down slowly, giving farmers and scientists time to find new financial patrons.

British E.U. parliamentarians would keep their mandates during the transition period, though the anti-Brussels faction would presumably leave the body immediately.

The British E.U. commissioner, Jonathan Hill, would also retain his office though Commission President Jean-Claude Juncker would probably remove him from the financial services portfolio.

London would also still have a voice in the E.U. Council of Ministers with the exception of meetings about the exit treaty negotiations.

Even in an orderly exit, however, it’s unclear how long E.U. competition law, financial regulations and rulings by the European Court of Justice would still apply to Britain.

Realistically, it would be difficult for Mr. Cameron to continue as a credible prime minister after having lost the most important political gamble in recent British history, leaving a political vacuum in London.

“After he steps down, it could result in a weeks-long battle among the Tories,” one E.U. diplomat told Handelsblatt on condition of anonymity.

The British Conservatives are deeply divided on the question of E.U. membership, with their two most visible leaders – Mr. Cameron and London Mayor Boris Johnson – on opposing sides of the issue.

With or without Mr. Cameron, the anti-Brussels wing of the Conservatives would wield much more power after a Brexit and given their distaste for all things European Union, they may press for the rockier path out.

 

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“We may need to take some unilateral action,” Chris Grayling, the conservative leader of the British House of Commons, told the Financial Times.

Mr. Grayling has said London should quickly move to restrict visa-free travel for E.U. citizens and declare rulings of the European Court of Justice null and void.

This is the nightmare scenario for E.U. officials. According to Handelsblatt’s sources in Brussels, the European Union would have no choice but to kick Britain out of the common market.

“The E.U. cannot allow the British to cherry pick the things it benefits from and throw out those that it doesn’t like,” according to the Cologne Institute for Economic Research.

A unilateral Brexit would have dramatic consequences for the British economy, with companies and banks losing access to the common market virtually overnight.

“It must be clearly demonstrated that exiting the E.U. will not become a rewarding precedent,” Elmar Brok, a European parliamentarian for the center-right Christian Democrats, told Handelsblatt.

After the Brexit has been concluded, London will then have to decide what relationship it wants to have with Brussels. Negotiating a partnership agreement could take a decade and there are different models.

Britain adopt the path of Norway and Switzerland. Both countries have access to the common market in exchange for adhering to some E.U. rules and making a contribution to the E.U. budget.

Then there’s the looser relationship between Brussels and Turkey, which maintain a customs union but aren’t striving for political integration.

Other E.U. neighbors, such as Albania and Ukraine, have negotiated association agreements with Brussels that give them trade privileges but also require significant political cooperation.

Or Britain could end up with a relationship as distant to Brussels as Botswana. In this case, there would be no new partnership agreement between London and Brussels.

As a member of the World Trade Organization, Britain would – like Botswana – only receive very limited trade benefits from the European Union.

A Brexit would also force other non-eurozone members of the E.U. – such as Sweden, Denmark and Poland – to decide whether they want more or less integration with the bloc.

And as soon as the upcoming national elections in Germany and France are settled, the eurozone will have to decide whether it’s ready to take its next leap and build a common economic government.

 

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the author: berschens@handelsblatt.com

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