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BABCSF Chairman, Colin Brown on BREXIT - EU / UK Institutions and history point to what comes next.

Two weeks ago I wrote a post on Brexit - a snapshot of events leading up to the June 23rd referendum and a few (hopefully) objective comments on the situation facing the UK, as a reminder:

  1. Brexit hasn't happened (yet), while the referendum cannot be ignored, there is time to shape what Brexit really means for the UK and EU;
  2. Two years of post-exit negotiations are likely. Year 1 painful, and Year 2 more productive (see below for the reasons why);
  3. Bravely working towards a brighter future was the only way for the UK to proceed, leaving behind a negative narrative of disappointment.

After being interviewed by ABC7, the San Francisco Business Times, and subsequently by the Washington Times it was clear that there was real lack of awareness in the US about the EU, and the attempt by David Cameron to secure concessions from the EU in Q1 2016 before a referendum took place. David Cameron sough to address border control, and judicial independence while maintaining market access as a member state - this failed.

To be able to explain what happened, to better forecast a ‘most probable’ outcome from Brexit before another set of interviews that took place this past week, it was necessary to take a much closer look at the institutions at the heart of the EU. The result of this research was interesting, elements of it are shared below.

Looking forwards – and as most people will know, the UK Government is in short term flux, inevitably it will do what is necessary to get ready for negotiations with the EU by September 2016. This means establishing a Brexit team reporting into the UK Cabinet office, most likely under the leadership of a new (female) Conservative Prime Minister, supported by professional trade negotiators, and armed with clearly agreed negotiating priorities.

That's the easy bit, the next challenge will be getting to an agreement with the EU, and this is where some deep thinking will be required.

The diagram below outlines the seven core EU institutions, plus the treaties that have been agreed since the EEC was established in 1957.

The bicameral relationship between the European Parliament and Council of the EU (not to be confused with the European Counci) needs to be understood relative to the European Commission. The next step in predicting how the EU might respond to UK negotiations is to look at recent history.

The Treaty of Lisbon was agreed in 2007, implemented in 2009. Proposed by the European Commission after an attempt to adopt an EU Constitution was rejected by French and Netherlands voters in national referendums in 2005, the Lisbon Treaty was drafted to deliver much of the ‘integration’ policy that the defunct 'Constitution' contained. The Lisbon Treaty was subsequently approved by Members of European Parliament and the ‘Council of the EU’. The referendums in the Netherlands and France were bypassed by EU policy makers.

Faced with national challenges to greater integration, the response from the EU has been to ‘work around’ these ‘populist’ challenges rather than change course away from greater political integration. This approach has worked for the EU for 40 years, moving the EEC from free trading block (analogous to NAFTA) through fiscal union, to greater political union, and asserting the supremacy of the European courts over national courts has been achieved with little public consultation.

The largest political party within the EU, the European People's Party (EPP) explicitly states political integration in its manifesto, it holds the largest single block of votes within the European Parliament, combined with other pro-integration parties, it is inevitable that these voting blocks will defend the political integration project more effectively than it can be challenged by the small number of Euro-Skeptics.

What does this mean for the UK and Brexit negotiations?

The European Commission fulfills an Executive role proposing legislation, and enforcing current treaties. Unless the European Council mount a strategic intervention, a Brexit negotiation would by default result in an EU Commission treaty enforcement debate with Jean-Claude Junker (Commission President, and EPP Party member). This would be a bad outcome for all involved.

The European Council, created by the Lisbon treaty, convenes the 28 heads of state to offer advice to the Commission on ‘Strategic Legislative Policy’, this is a group for the UK to work with in future negotiations. Some of the newer EU member states (Poland, Slovenia, Slovakia) and political elements in Germany can sense the need for a more responsive EU, rather than more centralization of power, this is something to explore.

In seeking access to the free market on one hand, and limiting movement of people across borders on another, the UK would be asking for something that is fundamentally opposed by Angela Merkel, the German Chancellor, and the Lisbon Treaty. This is inevitably going to make for difficult negotiations.

The diagram below outlines how UK seats at the EU parliament are distributed within the broader EU political parties. With limited influence in the main political party the EPP, any compromising on the ‘Utopian European Dream’ will be difficult to manage. This situation will become more pronounced as more euro-skeptical British MEPs will be removed post-exit.

‘Final approval’ for a post-exit EU-UK relationship will need to pass the chamber, communication to these constituents will need to be handled carefully and focus on the benefits of any proposal for the broader EU. This is not going to be easy given the recent abrasive departure speech delivered by the UK Independence party leader, Nigel Farage.

It will be important through the remainder of 2016 and into 2017 for effective political campaigning, and sound reasoning to be applied to swing voters of the European Parliament towards a more conciliatory, compromising tone, not something that history shows us is easy to achieve.

A role for UK’s allies, commonwealth and friendly nations

The EU currently has trade agreements with 52 countries, as an EU outsider the UK will be free to negotiate terms bilaterally with each of these, and perhaps more. In the past two weeks the politicians within US, India, China, Japan and South Korea have expressed interest in fast-tracking trade negotiations with the UK.

As in all negotiations, being able to demonstrate a confident and strong position is 90% of the battle. The UK must spend the time between now and appointment of a new Prime Minister in September to prepare a case to convince the EU that a close relationship is in everyone’s interest. Achieving a better result from outside of the EU (border controls, judicial independence, free market access) than could be achieved from within is going hard, require ingenuity and persistence.

An ambitious plan with key international partners that delivers a brighter future for all involved, is still the only outcome that the UK can aim for. Convincing the EU to be one of these partners is going to take statesmanship, hard diplomacy and a deft touch. It will be interesting to see which of the two leading candidates for Prime Minister will win as they will have the tough task of taking the discussion forward.

colin.brown@venturexcel.com / cbrown@babcsf.org

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