Introduction

Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Comments

A European “Special Relationship” WP Guiding Principles, Interests and Options for the EU-27 in the Brexit Talks

Barbara Lippert and Nicolai von Ondarza S

“Brexit means Brexit”, Prime Minister Theresa May promised the British, after a majority voted in June to leave the . But at this point, before formal exit talks have even begun, the shape of future relations between the EU and the UK is still absolutely open. Economic interests on both sides speak for integrating the country as fully as possible into the internal market – if could agree to accept its conditions. But the thrust of British politics is driving towards a “hard Brexit”. Theresa May categorically rejects partial integration models of the kind enjoyed by and Switzerland. In the process of reshaping the relationship, and the EU should therefore seek a specific solution for the British: a European “special relationship”. This would allow the UK to remain a close partner, but outside the internal market and the EU institutions.

Brussels and London are facing years of modalities for extracting the UK from the complex negotiations over the UK’s depar- EU and its entire legal framework. This in- ture from the Union (see SWP Comments cludes all claims and obligations relating to 35/2016). The legal corridor for the process the EU budget and the fate of British staff is laid out in Article 50 of the Treaty on working in EU institutions. Not until the European Union. Politically too, both sides exit agreement comes into force – or the have already put down markers. The EU-27 two-year deadline (which can only be exten- insist that talks will not begin until London ded by unanimous accord) expires – is the has formally notified the Council of its in- UK actually outside the EU and its organs. tention to leave, which Prime Minister May That is likely to occur in spring 2019. has declared she will do no later than the end of March 2017. Although the timeframe could be prolonged by a court ruling that Reformatting the EU-UK Relationship the British parliament must be consulted, The central political and economic chal- MPs are not expected to block the process if lenges thrown up by Brexit affect not only the ruling is upheld by the Supreme Court. the arrangements for separation, but also After notification under Article 50, both the shape of future cooperation between sides have two years to agree the concrete the EU-27 and the UK. The central question

Dr. Barbara Lippert is Director of Research, Executive Board of SWP SWP Comments 49 Dr. Nicolai von Ondarza is Deputy Head of SWP’s EU/Europe Division November 2016

1 is the form in which the British will partici- The Interests of the EU-27 pate in or enjoy preferential access to the Directly after the referendum, the heads of internal market. Although the exit agree- state and government of the EU-27 agreed ment is required to take into account the that there will be “no negotiations before framework for future relations, the con- notification”. This put the ball in London’s crete details are completely open and will court as far as talks about leaving and have to be regulated in a subsequent docu- creating a new relationship are concerned. ment. These talks will take place during a The British government and parliament period that is already critical for the EU, will use the time between now and late in light of the European poly-crisis, geo- March 2017 to define the interests it wishes political developments in the neighbour- to prioritise in the coming talks. The EU hood and ’s election as US should define its own interests equally President. dispassionately and thoroughly. In its relations with other European The interests of the EU-27 are shaped by states, the EU has to date insisted on an three principal factors. Firstly, the EU states absolute distinction between members and have an undeniable economic interest in non-members. While there is no such thing maintaining regulated access to the British as partial membership, partial integration market. In 2015 about 10 percent of intra- is an option, above all in the internal mar- EU trade went to the UK (value €302 bil- ket. Two possible models are offered by the lion). But the economic significance of European Economic Area (EEA, “Norwegian trade with the UK varies between member model”) and the bilateral treaties between states. The UK is one of the top five trading the EU and Switzerland, which permit partners for Germany, and , preferential market access in individual for example (about 7 percent of exports in sectors. However, under these models, each case), for it is the most impor- Norway and Switzerland both accept the tant (about 14 percent). The UK is a less EU’s rules (including freedom of move- central trading partner for many Central ment) and the rulings of the European and Eastern European countries, such as Court of Justice (ECJ); they also contribute , and the Baltic states, and to the EU budget. enjoys a customs for . In intra-EU trade, the UK has the union with the EU, which covers most of second-largest trade deficit, after France. the goods traded between them and in- It originates entirely in visible trade; in cludes a common external tariff. Despite services the UK has a trade surplus with the this partial integration, the states in ques- rest of the EU, above all on account of tion continue to be treated as non-members financial services. While Brexit will always of the EU. They have no representation involve additional economic restrictions, or voting rights in EU organs, and play no preserving free movement of goods would part in creating EU secondary legislation – serve the central economic interests of the even in cases where they are obliged to EU-27. The UK, on the other hand, stands implement it. more to lose from relinquishing its privi- Any of these models would allow the leged access to free movement of capital British to pursue a “soft Brexit”. But they and services than its European partners. would also require significant concessions Secondly, the EU has an interest in on national sovereignty. The looming guarding the Union’s cohesion. The un- alternative is the threat of a “hard Brexit”, certain future of transatlantic relations where not only most of the political, but following the US presidential election also the economic ties would be cut. makes European unity even more crucial. Brussels will therefore insist that full participation in the internal market can only be granted if the EU’s legislation and

SWP Comments 49 November 2016

2 regulations are implemented in full and its tion for protecting the EU’s cohesion, court rulings accepted. At their first infor- rather than a punishment for the UK. mal meeting in June 2016, the twenty-seven Thirdly, specific national interests will heads of state and government reiterated play a role in the talks with London. The their insistence that the four freedoms of , in particular, is con- the internal market are indivisible. Indeed, cerned to keep its border with Northern Switzerland and all the EEA states (like Ireland as open as possible. Although free- Norway) also are required to implement EU dom of movement between Ireland and legislation in those areas where they par- the UK is regulated in a separate bilateral ticipate in the internal market. Within the agreement, the openness of the shared EU, too, flexibilisation on customs union border is heavily affected by EU member- and internal market is excluded. For the ship. If the UK leaves the customs union heart of internal market is not just exemp- with the EU, for example, customs controls tion from customs duties, but collective would have to be introduced. And any regulation of the market and reciprocal hardening of the border would endanger recognition of standards and norms. This is the Northern Ireland peace process. what makes it possible to minimise non- in turn demands at least shared sovereignty tariff trade barriers. Simply in order to safe- over Gibraltar if the UK leaves the internal guard the functioning of the much more market; otherwise, Madrid threatens to important intra-EU market, the Union has close its border with the British enclave. no option but to insist that participation The EU states with most citizens living in in the internal market means accepting the UK will want to protect their rights. its rules. In the negotiations, these particular inter- Additionally, like monetary union, the ests will have to be reconciled with the internal market is not governed by a purely overall interests of the EU-27. economic rationale. Instead it is set up as The EU-27’s existing position for the an integration project, based on a political Brexit talks can be summarised as follows: balancing of the preferences and interests British participation in the internal market of the participating states. This includes is desirable and possible, but only under mechanisms by which the more powerful EEA conditions. That means acceptance of economies compensate the benefits they all four freedoms (including freedom of derive from the internal market through movement), contributions to the EU bud- EU-funded spending for the weaker mem- get, and implementation of EU rules (in- bers. The EU therefore demands that third cluding interpretation of internal market states like Norway and Switzerland accept law, which in the EEA context means the these package solutions and make their ECJ and the EFTA Court). Notably, all own contributions, for example through twenty-seven member states are in com- cohesion payments. On account of their plete agreement on these points. participation in the internal market, these countries are also bound to permit freedom of movement for economically active per- London Wants the Hard Brexit sons. In purely economic terms, the inter- Political developments in the UK since the nal market would also function with Brexit referendum, however, show that restricted freedom of movement, as evi- any kind of partial integration that would denced by the long transition periods effectively turn the UK into a satellite of the imposed on workers from new member EU is out of the question. This is despite the states. So making participation in the UK having more to lose than the EU from internal market conditional on freedom ending privileged access to the internal of movement and contributions to the EU market. The EU-27 is by far the most impor- budget represents an important precondi- tant trading partner for the UK, with about

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3 47 percent of goods exports (August 2016); This makes it even more crucial from the even its trade with Ireland remains larger European perspective to define principles than with China. But since her defining and mechanisms to enable cooperation speech to the Conservative Party conference with the British without integration into in October 2016, Prime Minister May has the internal market. The issue in question repeatedly excluded the possibility of any is a special relationship between the EU kind of cooperation based on existing and the UK. The European interests out- partial integration models. lined above suggest four elements. In connection with the talks, May has drawn three red lines. After leaving, the UK will neither accept full freedom of move- 1. Change of status: from member to ment nor implement EU legislation, and third country will not be bound by rulings of the ECJ. Brexit means a change of status from mem- May’s government interprets the referen- ber to third country, requiring a different dum above all as a vote against freedom of perspective on the whole relationship. movement and loss of national sovereignty. When the UK leaves, this will be the first The British Conservatives would not accept time that the EU has to establish compre- these aspects of the EU – which they regard hensive relations (“close partners”) with as negative – surviving Brexit, even in ex- an ex-member, which for its part will be change for participation in the internal seeking to cut many of its ties with the market. Union. In principle the process of severing The Labour Party has also publicly com- links should be regulated in the exit mitted to accepting the outcome of the agreement. referendum – especially with 70 percent of As described above, London rejects any Labour MPs representing seats that voted option that involves replicating the con- “leave”. The Scottish regional government, ditions of the internal market. So the on the other hand, is pressing for access to question will be not which of the benefits the internal market. But it possesses no for- of EU membership can be preserved (mem- mal veto right and has seen Prime Minis- bership minus), but which (trade) relations ter’s cold shoulder. Even with the parlia- the EU wishes to maintain with the UK over mentary participation required by the Brit- and above simple trade in goods (free trade ish courts, Britain is heading for a hard plus x). The EU should therefore treat Brexit. talks over future cooperation with the UK primarily as trade talks.

Building Blocks for a European Special Relationship 2. Preserving free movement of goods Although the UK and the EU-27 derive great In these trade talks the EU should seek at economic benefit from the common mar- least a basic free trade agreement (FTA), in ket, political interests on both sides thus order to ensure tariff-free movement of largely exclude partial integration – unless goods. Potentially, if the negotiations went one side decided to decisively subjugate its well, the corresponding provisions could political interests for the sake of economic follow on seamlessly from the transitional gain. This cannot be entirely excluded, for arrangements of the exit agreement. This example if the economic costs of Brexit rise would create legal security for European significantly before the talks are completed, companies and safeguard a vital export or pressure is exercised by the British par- market – especially for German businesses. liament. But a hard Brexit must be the base- In view of the tight timeframe for the line scenario for Germany and the EU-27. Article 50 talks, such a basic FTA should initially be configured purely as a duty-free

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4 arrangement. This would place it far below vices market by the back door, without the level of the EU’s recent deep and com- shouldering the associated political and prehensive agreements like CETA, which financial costs. What London most wants to aim primarily to abolish non-tariff trade avoid is concessions on sovereignty and barriers. As such it should be possible to freedom of movement. conclude it within the two-year deadline, The UK’s primary interest is passporting in parallel to the exit agreement. One rights for financial services. These presently relevant consideration is that a basic FTA permit banks and insurance companies could be ratified at EU-level, without operating in the UK – most notably the City involving the member states. of London – to offer their services across the Such an agreement would also be clearly EU, while operating under British regula- distinct from partial integration into the tions. Despite her statements on a hard internal market, even in visible trade. For Brexit, Theresa May has already promised example there would be no common exter- international firms that their access to nal tariff, no free movement of services and the EU market will be preserved. Here the no “passporting” permitting firms based EU-27 needs to preserve its existing con- and regulated in the UK to sell financial sensus that full access to the internal mar- services throughout the EEA. Nor would a ket is contingent on all four freedoms. This basic FTA contain harmonisation measures should continue to apply if the basic FTA or reciprocal recognition of norms and is gradually expanded. standards, which work to minimise the non-tariff trade barriers that play a much larger role today. 3. Multidimensional cooperation Initially at least, trade barriers created by Beyond the basic FTA, the EU has an inter- differences in regulations will be minimal est in comprehensive cooperation with the anyway. London has already announced future non-member; the form and level of that there will be a “Great Repeal Bill” to commitment are initially open. Fundamen- ensure legal security. Despite its name, as tally the entire spectrum of existing EU well as ending the applicability of Euro- policy fields, including foreign and security pean law within the UK, the proposed bill policy, needs to be reviewed to ascertain in would also adopt the EU’s entire acquis into how far and in which form cooperation British law with effect from the leave date. with the third country UK should be orga- This will initially ensure close regulatory nised. Donald Trump’s election as US congruence. But each subsequent legal act President will force Europe to adopt more and court ruling in the EU and the UK responsibility for its own defence, and will widen the regulatory gap. In order to heightens the EU’s interest in cooperating enforce European standards after Brexit, closely with the UK on internal and exter- it may therefore make sense for the EU-27 nal security. The EU’s broad range of forms to gradually augment the basic FTA with of cooperation with other third states sup- elements pointing towards a deeper and plies a good illustration of the possibilities more comprehensive trade agreement. The for bilateral cooperation. EU should also prepare itself for any kind of In justice and home affairs Brussels and targeted undercutting of EU standards by London will continue to share an interest the UK to enhance its competitiveness, in working together to tackle transnational including in taxation. challenges. Theresa May has already said As its preference for an EEA-type solution that she intends to continue to work with indicates, the EU is interested in an evolu- the EU on policing, above all the fight tionary clause to open a route for expand- against terrorism and organised crime. ing relations beyond free trade. But London Here the British – despite their opt-outs – will attempt to secure access to the EU ser- have long played a leading role in the EU.

SWP Comments 49 November 2016

5 Even after the Brexit vote, the UK has made has a cooperation agreement with the Euro- use of its opt-in rights to continue its pean Defence Agency (EDA), and partici- voluntary participation in Europol and the pates in an EU battlegroup as well as in EU Eurodac database. Complete isolation from military and civilian operations. Oslo also police and judicial cooperation in the EU regularly supports joint EU positions at the would hit the British themselves hard, but and has joined EU sanctions also tear a hole in international crime- against Iran, Syria and Russia. But Norway fighting. is excluded from the decision-making Through Europol the EU and the United processes and consultation bodies of the States have concluded an operational agree- CFSP/CSDP. Cooperation with NATO mem- ment on exchanging data for fighting ber Turkey is considerably less extensive terrorism and organised crime. In the case because of the conflict, but Ankara of Norway cooperation is even deeper. In has also participated in EU military opera- justice and home affairs, the EU has numer- tions. In a similar fashion, the association ous agreements with Oslo supplementing agreement with provides for poli- the EEA, ranging from data exchange to tical dialogue on foreign and security cooperation with Europol’s Cybercrime policy, as well as cooperation with the EDA Centre. Following Norway’s example of and participation in EU exercises and oper- joining Schengen is out of the question for ations. EDA cooperation is already active the UK; not even for the forms of coopera- and there is political dialogue, but not to tion it provides, for example in EU asylum full extent envisioned in the agreement, on policy and the European border and coast account of the ongoing Ukraine conflict. guard Frontex. Even as a member of the EU, There are, however, two significant the UK rejected Schengen membership. reservations concerning future European- The association agreement with Ukraine British cooperation on foreign and security represents a middle path for collaboration policy. Firstly there is a question of how far with Brussels, with cooperation on border London would even be willing to partici- protection and counter-terrorism joining pate in the CFSP/CSDP. Even as a member of the long-term goal of visa-free travel. The the EU, the UK was always very reserved in principle in all three cases is that the this context, sometimes even obstructive, respective countries are not involved in for example with respect to a joint head- the EU’s decision-making processes, but quarters or the EDA budget. Secondly, as a is enabled through non-member of the EU the UK would not bilateral agreements. have a say in CFSP/CSDP decisions; instead Parallels to this are found in the EU’s there would have to be bilateral dialogue Common Foreign and Security Policy (CFSP) between Brussels and London. and Common Security and Defence Policy (CSDP). As a NATO member with a perma- nent seat on the UN Security Council, the 4. Institutional framework UK will remain an important partner for for cooperation most EU states in this field. If it wished, the Even in the event of a hard Brexit the EU UK could contribute considerable military should build an institutional framework capacities and a wide-ranging diplomatic that enables it to discuss with London on network. The UK also maintains close a regular basis. This applies above all to bilateral and multilateral relations with cooperation in non-economic fields. In certain EU states, such as France and the association agreements the EU has already . created sometimes elaborate institutional The EU has always kept NATO member means for dialogue with third states. The Norway closely integrated into its defence association article of the Treaty on the policy, above and beyond the EEA. Norway Functioning of the European Union re-

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6 quires that such agreements define shared There are various options for an appro- procedures and specific processes, as well priate institutional arrangement. Either as reciprocal rights and responsibilities. In the EU pursues a bundling of treaties and practice this means regular meetings at agreements – which could end up being as senior official, ministerial or even summit confusing as the package of more than 120 level to discuss the state of relations and bilateral agreements with Switzerland. Or progress made. To this end there is usually Brussels seeks a framework agreement, also an ongoing dialogue between MEPs eventually building on the FTA, and embeds and the respective national parliaments. this further. It would also be conceivable to The setting often reflects the partner coun- create a joint organisation with its own tries’ strong desire for dynamic relations organs, modelled on the EEA. But that and ever closer association. As a rule repre- would presuppose shared interests in sub- sentatives of the EU – Council President, stantive areas. In all this it must be remem- Commission President or High Representa- bered that the EU is a community of law tive – meet directly with the third state; that requires a dependable framework consultations between third states and the for properly regulated relationships, and representatives of all EU members tend to cannot be directed primarily by British be the exception. pragmatism. The EU will face particular challenges in seeking to institutionalise its relations with the UK. Firstly, all forms of partial integra- After the Divorce – a Special tion – and not just the hard Brexit – ex- Relationship clude British participation in EU decision- Negotiating the UK’s departure and future making processes. Leaving aside the poli- relations will be an extremely complex tical imperative to preserve the Union’s operation even for the EU, both legally and cohesion. In the context of the founding politically. In the light of the three red lines of the EEA the ECJ explicitly ruled that London has already drawn, the EU’s answer decision-making and enforcement systems can only be to seek partnership rather than located outside the EU must not be binding partial integration. In view of the shared on the EU organs. Secondly, even a basic interests and geographical proximity, this FTA may require a basic institutional frame- should be a special partnership, a European work with working groups, a cooperation special relationship. In the two years of committee at senior official level and a leave talks it will only be possible to build ministerial cooperation council. But this the base of this partnership, which should rather technical cooperation would not be have four cornerstones: (1) the UK will be adequate for developing relations in non- a third country outside the internal mar- economic fields. For example in the field of ket, with (2) trade in goods is governed by security a new institutional arrangement a basic FTA; (3) arrangements for coopera- could be developed for cooperation on tion in external and internal security and internal and external security. (4) institutionalised forums for regular All in all, the specific solution for the UK exchange. is likely to lie somewhere between the EU’s Both the exit agreement and the special loosely institutionalised relations with the relationship will be new territory for the United States and its over-institutionalised Union. So the talks are likely to be strongly arrangements with Russia. Both versions characterised by insecurity, speculation involve summits. Like Washington and Mos- and perhaps also experiments. Mitigating cow, London can also be expected to test harm will not suffice as the EU’s objective. whether it can divide the EU-27 through At the same time the EU side is unlikely to strong bilateral relationships (for example find it easy to maintain a thoroughly con- London-Berlin, London-Paris etc.). sistent and unified negotiating stance

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7 towards the UK. Strong conflicts of goals can already be seen emerging – between market interests and freedom of move- ment, between hard Brexit on economic questions and cooperation in foreign and security policy, and between the national interests of individual member states. It is therefore central for the Brexit nego- tiators to communicate quickly and clearly which procedures are being applied and which goals the EU and its member states are pursuing. A European special relation- ship is a realisable project that also gives the EU space to pursue its internal reforms.

© Stiftung Wissenschaft und This is necessary if the EU is to assert its Politik, 2016 foreign policy and security interests in a All rights reserved world in geopolitical turmoil. Despite These Comments reflect Brexit the Union has the chance to renew the authors’ views. itself as a political and economic power- SWP house of the West. Stiftung Wissenschaft und Politik German Institute for International and Security Affairs

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Translation by Meredith Dale

(English version of SWP-Aktuell 74/2016)

SWP Comments 49 November 2016

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