The Many Hurdles to an Orderly Brexit
Posted by hkarner - 23. Dezember 2016
Source: The Wall Street Journal by Simon Nixon
Businesses should be preparing for the scenario that the U.K. crashes out of the EU without a deal, Simon Nixon writes
It was like pulling teeth, but Theresa May did eventually admit to a parliamentary committee this week that her government was preparing for all Brexit scenarios, including the possibility that the U.K. crashes out of the European Union in 2019 without securing any deal with the bloc at all. This should hardly come as a surprise. Not only is it a standard principle of deal-making to identify your Best Alternative To a Negotiated Agreement, but the possibility that the U.K. might be forced to fall back on its Brexit BATNA is alarmingly high. Perhaps the U.K. and EU will be unable to agree on a deal, or the EU unable to ratify what has been agreed upon.
Businesses should be preparing for this worst-case scenario, too—but there is scant evidence this is happening, judging by the output of the various industry lobby groups. Their submissions to the government invariably focus solely on their ideal negotiated outcome. In almost every case, this amounts to a plea to preserve the status quo—or as much of it as possible. After 43 years of EU membership, most sectors in Britain are deeply integrated into pan-European supply chains and are broadly content with EU regulation, which is seen as high quality, predictable and trusted by customers and consumers.
And as the Confederation of British Industry pointed out in a report published Wednesday, disruption to one sector could have severe knock-on effects on other sectors.
Yet a giant stumbling block stands in the way of businesses hopes for a soft Brexit—and even an orderly Brexit. That is Mrs. May’s insistence that post-Brexit, the U.K. will no longer accept the jurisdiction of the European Court of Justice. This is highly problematic, given the role the ECJ plays at the apex of the European regulatory system as the ultimate enforcer of EU rules and arbiter of disputes within the EU single market.
True, European Economic Area countries are members of the single market but not under the jurisdiction of the ECJ. But they are subject to the European Free Trade Area Court, which largely follows ECJ judgments. Switzerland also has high levels of access to the EU single market despite not automatically following ECJ rulings. But the EU has made clear it is not happy with this setup. It is very hard to see the EU conceding anything like it to the U.K.
Some British politicians exude confidence that rational economic self-interest will prevail. They repeat the well-worn British mantra that the EU is a political project and that a political solution will be found. But this fundamentally misunderstands the nature of the EU, which isn’t so much a political project as a legal project: at its core, the EU is a system of binding rules, overseen by a supranational court. Changing the rules is very difficult due to the EU’s complex governance, which means the EU has far less room for maneuver to strike political deals than the U.K. supposes—as then-Prime Minister David Cameron discovered earlier this year when his efforts to persuade the EU to rewrite its rules to suit U.K. objectives fell short of his—and much of the country’s—goals.
Belatedly, the British government is now trying to work out the likely consequences should it become clear that Mrs. May’s ECJ red line is likely to result in a post-Brexit trade deal not attractive enough to justify the high political and economic cost of a negotiated divorce. That requires the government to identify what one minister calls the “one-minute-past-midnight” issues that it would face the moment the U.K. crashed out of the EU. What steps does the U.K. government need to take to minimize disruption to U.K. businesses following a disorderly Brexit?
These one-minute-past-midnight issues vary sector by sector. The good news is that many EU standards aren’t set by EU bodies but by broader industry associations in which the U.K. could continue to participate after Brexit. The bad news is that many of these standards are still monitored and enforced by EU agencies operating under the jurisdiction of the ECJ.
The list of industries that currently rely on EU authorization to trade internationally includes aviation, medicines, chemicals and food and drink. At the same time, all sectors would face new trade barriers in the form of tariffs and customs checks. Another major issue for all businesses that trade with the EU concerns the right to transfer and store EU data to the U.K., once the U.K. is outside the single market.
Mrs. May’s proposed solution to all these issues is a proposed Great Repeal Bill, which wouldn’t only transpose all EU law into U.K. law but would arm the government with far-reaching powers to create powerful new British regulatory bodies to replicate functions currently carried out by EU agencies without the need for further parliamentary scrutiny. These are so-called Henry VIII powers, modeled on the 1539 Statute of Proclamations which allowed the Tudor monarch to issue new laws by royal decree. But would Parliament allow the executive to assume so much power? And having assumed it, would the civil service be capable of devising, building and staffing these new bureaucracies in the short window between the passing of the Great Repeal Bill and the Brexit target date, March 2019?
British businesses may be hoping for the best. But, like the government, they should prepare for the worst.