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Abstract

A referendum on whether the United Kingdom should remain a member of the EU is no longer science fiction. British Prime Minister David Cameron has committed to a referendum in 2017 if the Conservatives win the 2015 elections. Before that, Cameron wants to negotiate a ‘better deal’ with the EU. What is his understanding of this ‘deal’, and what would the prospects for Britain be if they fail to achieve this and vote for an exit from the Union? How should the EU react to this British challenge? Are there any areas that could be reformed in order to please the British, while avoiding a ‘Europe a la carte’? The article describes the political background and history that has led to the current situation and British prospects outside the EU. It concludes with Britain's demands for EU reform and a possible EU response.

Keywords

Brexit Britain Referendum Reforms Euroscepticism David Cameron

Introduction

Although Great Britain has been an EU member for more than 30 years, it has always been something of an ‘inside-outsider’ that keeps its distance. Britain held the first referendum on its membership of the European Economic Community (EEC) in 1975. Even though 67.23 % of Britons voted at that time to remain in the EEC, public opinion was not much in favour of the EEC later on. Ipsos MORI surveys in the 1980s showed that 65 % of Britons favoured leaving. The antipathy towards the EEC was promoted by the Conservative Prime Minister Margaret Thatcher, who transformed the Conservative Party from a pro-European party into a rather Eurosceptic one.

In the early 1990s public opinion shifted towards support for the European project. The highest support was seen in 1991, when 63 % of Britons were in favour of it according to an Ipsos MORI poll (House of Commons Library 2013). However, with the signing of the Maastricht Treaty in 1992, support for the EU started to fall again. In 1991 the London School of Economics professor and politician Alan Sked founded the Anti-Federalist League to protest against the Maastricht Treaty. Several members of this group then founded the UK Independence Party (UKIP) in 1993. UKIP has gained more attention over the years, particularly after 1999, when it won three seats in the European Parliament. Since Nigel Farage's election as leader of the party, it has garnered more and more attention from both the public and its political rivals (BBC 2014a). The domestic political pressure is such that, somewhat paradoxically, today's Labour Party leader Ed Miliband has warned that Britain may be ‘sleepwalking towards the exit door from the EU’ (The Guardian 2013). This is in spite of the fact that it was the Labour Party that had initially proposed the referendum in the 1970s, which led to a major split in the party (New Statesman 2013).

The arrival of the financial crisis in 2008 fuelled the growing public discontent with the EU, and the Conservatives started to use more and more of UKIP's anti-EU rhetoric. In December 2011, Prime Minister David Cameron vetoed the EU fiscal treaty and started a serious debate on the UK's future in the EU. In July 2012 the government launched its Review of the Balance of Competences, described as ‘an audit of what the EU does and how it affects the UK’ (Foreign and Commonwealth Office 2014). The project was completed in autumn 2014, having reviewed a total of 32 policy areas. In January 2013 David Cameron delivered a now-famous speech at the London headquarters of Bloomberg (the ‘Bloomberg speech’) in which he rejected the idea of ‘ever closer union’ (Cameron 2013). Moreover, he advocated changes to the EU that would give more flexibility to states and would return powers to the national parliaments, which he sees as the only democratic representation of the people (Cameron 2013). In the same month the Fresh Start Project (2013) was launched, headed by Conservative Member of Parliament Andrea Leadsom in cooperation with the reformist think tank Open Europe. The Fresh Start Project aims to analyse the EU's role in policy areas and to propose how ‘UK interests could be better served’ (Fresh Start 2013).

In addition to these initiatives, official parliamentary research has reviewed the EU's competences and British options (House of Commons 2013). The seriousness of the debate was confirmed by the scheduling of a European Union Referendum Bill (UK Government 2014) that requires that a referendum on the UK's membership in the EU should take place no later than 31 December 2017. It has even become common to refer to a possible British exit with the term ‘Brexit’. If the vote were to happen tomorrow, the percentage of Britons who would want to leave the EU is quite high (39 %), while 41 % of Britons want to remain in the EU and 20 % do not know or would not vote (YouGov 2014).

However before the referendum takes place, Cameron wants to negotiate a ‘better deal’ with the EU, reforming either the whole EU or just improving Britain's position within it. The UK government is aware of the vital role membership plays: ‘Membership of the EU is in the UK's interest. We will continue to make that case vigorously as we progress with our partners on proposals to reform the EU for the benefit of all member states’ (UK Government 2013).

The results of the 2014 European elections reflected the Eurosceptic mood of Britons, with UKIP placing first, the Labour Party second and the Conservatives third. The Conservatives’ poor result caused David Cameron to take a hard line, by strongly (but unsuccessfully) opposing the appointment of Jean-Claude Juncker as the president of the European Commission. Furthermore, in July he exchanged Foreign Secretary William Hague for the strongly Eurosceptic Phillip Hammond and, finally, at the end of July, the government curbed unemployment and child benefits for EU migrants.

Given these latest developments, it seems that UK politicians will have to show their voters that they have a say in the EU and that they are able to reshape the Union according to British wishes. Of course they still have the option to exit and choose an alternative to EU membership. The alternatives will be introduced below.

British demands

What exactly are Britain's demands regarding the EU? As no negotiating process has started yet, the demands are not clearly defined. However, from Cameron's Bloomberg speech we can draw some conclusions about precisely what his aims are (Cameron 2013):

to deepen the internal market–-complete the single market in services, energy and the digital market; sign free trade agreements (FTAs) with the US, Japan and India; exempt Europe's smallest companies from more EU directives, reduce bureaucracy and the number of officers, and increase control over the EU budget;

to increase flexibility for countries–-omit the phrase ‘ever closer union’ for states that do not want to adopt it, be open to new EU members;

to review the EU competences–-and possibly de-harmonise some policies (i.e. the working time directive, environmental issues, social affairs and crime);

to return power to the member states–-national parliaments should remain the true source of democratic legitimacy and accountability; and

to guarantee non-discrimination of non-eurozone states.

Due to its economic size and importance, Britain's negotiating position is not weak; however, there is a limit to the demands it can make. It is in the interests of everyone to settle the discontent between Britain and the rest of the EU, but possibly not through another set of opt-outs for Britain, because flexibility adds bureaucracy and obstacles to free movement. There cannot be a ‘Europe à la carte’, as French President Francois Hollande put it in the European Parliament in February 2013 (BBC 2014b). The House of Commons Foreign Affairs Committee (2013) is aware of this: ‘UK proposals for pan-EU reforms are likely to find a more favourable reception than requests for further “special treatment” for the UK…. The Government must reckon with the fact that the body of existing EU law is a collective product in which 27 countries have invested’.

Alternatives to EU membership

EFTA: the Swiss model

The European Free Trade Association (EFTA) comprises the EU, Iceland, Norway, Switzerland and Liechtenstein. Switzerland is only a member of the EFTA [i.e. not of the European Economic Area (EEA)], so we can call this model the ‘Swiss model’. The Swiss do not accept EU law automatically, instead they conclude bilateral agreements with the EU, which currently number around 70 (European External Action Service 2014). The agreements do not include the free movement of services. This would be disadvantageous for Britain, which has a service trade surplus of £13 billion with the EU (House of Commons Library 2013). Another disadvantage would be that bilateral agreements do not constantly evolve with changes to EU law, but that new protocols must be negotiated to amend them (House of Commons Library 2013). A very serious problem for British companies would be the duty to respect the ‘rule of origins’, meaning that companies would have to prove from which countries the components of their products come (Busch 2014). They would then have to pay duty on the components that do not originate from EFTA countries. Switzerland contributes to the EU budget through an ‘Enlargement Contribution’ which goes to the 12 new EU member states (the agreement with Croatia is being negotiated now) (Federal Department of Foreign Affairs 2013). Switzerland's contribution in recent years has been around £53 per capita (House of Commons Library 2013).

It is very improbable that the EU would want to sign an agreement with Britain based on the Swiss model, because the EU does not favour this model and it was never intended as a long-term model. The relationship has become even more complicated since Switzerland limited the free movement of people due to the results of a referendum in 2014.

EEA: the Norwegian model

The EEA is a regional FTA. This model applies to Norway, Iceland and Liechtenstein. It covers cooperation in many areas; however, it also requires members to respect the vast majority of EU regulations, including the working time directive, which the UK sees as a burden (in total the EEA countries accept about two-thirds of the EU's acquis communautaire) (House of Commons Library 2013). The EEA countries have the right to be consulted when there is an EU proposal that affects them, but they do not have the right to vote on it. They can have employees in the EU's agencies, but not in the main EU institutions. Free trade between the EU and the EEA does not include agricultural products. All current members of the EEA are also members of the Schengen area and they have to contribute to the EU budget. Norway contributed £106 per capita in 2011, which is only 17% less than the UK contribution (£128) (House of Commons Library 2013).

None of these factors bode well for the UK. More than that, in order to become a member of the EEA, one has to be either a member of the EU or of the EFTA. Joining the EEA could entail a difficult application process with the possibility of a veto from existing members (House of Commons Library 2013).

No agreement

Having no agreement would be the worst option economically for both the UK and the EU. The UK and the EU would apply ‘most favourable nation’ tariffs (MFN) to each other, as they do for other WTO members. This would be extremely damaging for both the UK economy and the European economy since trade would be hindered by many tariff and non-tariff barriers. On the other hand, if Britain did not succeed in negotiating an agreement with the EU, EU countries would probably apply MFN tariffs based on the principle of nondiscrimination. These tariffs have fallen over time to circa 1 %, but they vary considerably among areas, with tariffs on agricultural products significantly higher. The MFN tariffs would be imposed on around 90 % of the UK's goods exports and similarly the UK would impose this tariff on EU imports, making the prices for consumers higher (House of Commons Library 2013).

The likelihood of exiting the EU without any agreement is small, due to Great Britain's size and importance, but we cannot ignore the possibility. Britain must be aware that the withdrawal process as it is drafted in Article 50 of the Lisbon Treaty is not very favourable for the state that wants to exit the Union. The process of withdrawal starts when the withdrawing state informs the European Council of its intention. The European Commission then puts forward a negotiator. The withdrawal agreement must be drafted in two years (with a possible extension). During those two years Britain could not take part in the discussions or decisions in the European Council and the Council of Ministers on matters related to its withdrawal. The withdrawal agreement must be confirmed by a qualified majority in the European Council (without the British representative having the right to vote on it) and in the European Parliament. All these parties must agree on Britain's withdrawal terms, which might pose some difficulties.

Neither of the above-mentioned alternatives to EU membership is clearly advantageous for the UK. The UK government and the House of Commons are aware of this: ‘We agree with the Government that the current arrangements for relations with the EU which are maintained by Norway, as a member of the EEA, or Switzerland, would not be appropriate for the UK if it were to leave the EU’ (House of Commons Foreign Affairs Committee 2013).

Brexit consequences for Britain and the EU

Studies vary in their assessment of the Brexit consequences for Britain. Most studies expect economic losses, with estimates varying between 2 and 3 % and 9.5 % of GDP (Ottavio et al. 2014). It is difficult to predict the dynamic losses, which could be a lot bigger than the static losses (dynamic losses include lower productivity growth). The economic losses depend on many factors; the main factor is whether Britain succeeds in negotiating free access to the EU market. If it does, based on either the Norwegian or Swiss model, it will also have to accept a large portion of the EU legislation which is often viewed as controversial in the UK (i.e. the free movement of persons and the working time directive).

The EU is the UK's most important trading partner, accounting for 46 % of its goods and services exports (£224 billion) and 51 % of its imports (£265 billion) in 2012 (House of Commons Library 2013). The UK runs an overall trade deficit with the EU. However, in recent years the deficit in goods trade has been increasingly offset by a surplus in services, particularly financial and business services; in 2012 the UK ran a services trade surplus of £13 billion with the EU (House of Commons Library 2013). The share of UK exports to the EU has declined from a historical peak of 54 % in 2006 (shortly after the addition of 10 new member states), which has led some Eurosceptics to the conclusion that trade between the UK and the EU is falling while trade with non-EU countries is rising; thus that leaving the EU would not harm the UK economy significantly (Mansfield 2014).

When looking at trade, it is also necessary to evaluate the possible reduction in foreign direct investments (FDI) resulting from a Brexit. Today, Britain is the number one country in the EU receiving FDI and the second largest stock of inward investment in the world, behind the US, with average net inflows of £44.5 billion over the last 3 years (Mansfield 2014). EU member states account for 48 % of the UK's FDI stock. It is difficult to predict whether the exit would have a big effect on FDI. Eurosceptics dispute an Ernst and Young Attractiveness Survey (2013) that says 47 % of companies consider that a Brexit would make the UK more attractive and that the same percentage of companies think that it would make it less attractive, with big regional differences (72 % of companies in North America and 66 % of those in Asia thought that reduced integration would make the UK more attractive, compared with 38 % of companies from Western Europe) (Mansfield 2014). However, a recent survey by the Confederation of British Industry (2013) found that 35 % of firms would reduce their business investment in the case of a Brexit. If the UK was to leave the EU, it would also not be able to count on the automatic transfer of FTAs concluded with Britain. This could be particularly important if the EU succeeded in concluding an FTA with the US (the Transatlantic Trade and Investment Partnership).

Besides trade, the withdrawal would have significant financial impacts on certain sectors, for example farming, which currently receives subsidies under the Common Agricultural Policy, and research and development. Certain geographic areas would also be affected, for example, Wales, which receives considerable funding opportunities from the EU, notably from the Common Agricultural Policy and Structural Funds (estimated to be worth over €5 billion for the period 2007–13), and Northern Ireland, which received over €1 billion in 2007–13 (House of Commons Library 2013).

All of these sectors and regions would have to be subsidised (at least for a transitional period) by the UK government if the UK was to leave the EU. Eurosceptics argue that this should not be a problem, since the UK is a net contributor to the EU budget and also because EU regulations are placing a financial burden on the economy (Mansfield 2014). In 2011 Britain paid £15.4 billion to the EU, which was an £8.1 billion net contribution (£128 per capita) (House of Commons Library 2013). The Open Europe think tank (2013) also assessed the impact of the 100 most expensive EU acts at £27.4 billion per year and it thinks that costs outweigh benefits in a quarter of cases.

Brexit would not only have financial, but also political impacts. Brexit opponents fear that the UK would lose its political influence on EU legislation, having to accept it without any say on it. Britain's citizens who currently work in the EU institutions would have to leave their jobs (since they would no longer be EU citizens). If Britain and the EU decided to reciprocally close their jobs markets or even borders, workers from the EU would have to leave unless they were granted a work permit (about 2.34 million EU citizens live in the UK and about 1.8 million Britons live in the EU) (Financial Times 2014).

Brexit would probably have a damaging impact not only on the UK, but also on the EU. The economic losses have not been calculated as yet; however, the political losses could be even more dangerous, with a potential domino effect of other states also wanting to exit the EU. In addition, the EU would lose a strong advocate for free trade, a small administrative apparatus and the balance between the states (big and small; northern and southern). For these reasons, Germany, Denmark and the Scandinavian countries fear Britain's exit the most (Oliver 2013). Also, all the treaties would have to be rewritten to omit any mention of the UK and to recount the numbers for voting procedures in majority and qualified majority votes.

Conclusion

In his Bloomberg speech, David Cameron proposed several reforms that the EU would have to undergo in order to meet British demands. Some of those proposals would surely please more than Britain, and it is therefore worth reflecting on them (Ondarza 2014). The proposed reforms actually address several issues that are also being discussed in other national political contexts. Therefore, it does not seem to be wishful thinking that the EU and the UK might reach a deal that not only reflects some of Britain's interests, but would also lead to a better EU as a whole.

Certain steps have already been taken, such as the implementation of ‘REFIT’, the Regulatory Fitness and Performance Programme, by former European Commission President Barroso. This initiative should continue to reshape EU competences and bureaucracy in light of the principle of subsidiarity.

Commission President Jean-Claude Juncker's decision to assign an important portfolio to Britain is a positive step, as is his commitment to solving the British question during the next five years. Also worth considering is the demand for a stronger role for national parliaments in the legislative process of the EU. As regards approving new legislation, national parliaments could have the option of not only a ‘yellow card’, but also a ‘red card’. In order to block a piece of legislation, a coalition of national parliaments would have to be formed (a single state veto would not be allowed). This could strengthen the cooperation between national parliaments.

Concerning the eurozone, it can only be in the EU's interest to clarify the relationship between eurozone and non-eurozone states, since these issues touch upon the general question of how to consolidate the process of European integration. Since these reforms do not extend the EU's competences, they could possibly be adopted through the simplified revision procedure mentioned in Article 48 of the Lisbon Treaty. This would avoid the strenuous and uncertain process of ratification in the member states. However, a line should be drawn when it comes to the proposal to omit the phrase ‘ever closer union’ from the treaties and to create an EU à la carte. A profusion of exceptions would complicate the functionality of the four freedoms which define the EU's core identity. This would lead to even more bureaucracy and hinder economic growth tremendously.

Footnotes

Vlad'ka Vojtíšková is an intern at the Wilfried Martens Centre for European Studies. She studied veterinary medicine and journalism in the Czech Republic and abroad. Since her studies she has worked in medical research. Her interests include Central Europe, ethics and values, Euro-Atlantic relations, and research and development.

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