Issues

“Brexit”- Is it really as simple as stay or go?

When it comes to the forthcoming EU referendum on 23 June, the debate has largely been about ‘leaving’ or ‘staying’ but the reality is that the issues are considerably more complex. Without commenting on the relative merits of the ‘leave’ and ‘remain’ argument, it is worth examining what the UK would actually be leaving if the nation voted for exit and what might influence any subsequent structures.

What would the UK be “leaving?”Issue_img7

While the referendum question is on whether the UK should, “… remain a member of the European Union or leave the European Union,” there is no referendum question on the UK’s membership of other linked European institutions. The UK is currently a member of both the European Economic Area (EEA) and European Court of Human Rights (ECHR) and was a member of the European Free Trade Association (EFTA) prior to joining the EEC in 1973. That means a referendum outcome to leave the EU is not a vote to leave the EEA or ECHR.

Under the Lisbon Treaty (Article 50), the UK can at any time give notice of its intent to leave and a two year period would follow to allow negotiations on the exit terms. The Treaty does not obligate the EU and/or Member States to give a departing member favourable or collectively agreed terms, so a vote to, “leave the European Union,” would launch a negotiating process where the final outcome might conceivably see a further UK referendum on the exit terms negotiated. And, if the UK votes ‘leave’ and Scotland votes ‘remain’ there may be calls for a further Scottish independence referendum.

The consequences of leaving the EU would depend largely on the outcome of the negotiating process outlined above and there are a number possible options as the parties might agree to, ranging from a simple EU exit, but remaining within the EEA, to a default position where UK-EU trade is conducted under World Trade Organisation (WTO) rules. The three most commonly quoted options are:

•   Continued membership of the EEA (‘The Norway ’model)

•   Negotiated bilateral treaties (‘The Switzerland’ model)

•   No agreement – WTO rules (‘The HK/Singapore’ model)

At this point, the implications become highly technical, but to illustrate the complexity, if the UK left the EU, but negotiated to remain within the EEA, it would retain access to EU markets, but could negotiate separate trade arrangements with other countries. However, the UK could remain subject to substantial EU regulation, including State Aid rules and the so-called Fundamental Freedoms (free movement of goods, capital, workers and the right of establishment of EU nationals in any Member State and the freedom to provide cross-border services). There would be a reduced, but possibly still substantial, financial contribution to the EU.

At the other extreme, a total exit from the EU and all other treaty obligations could mean operating on WTO rules, meaning the potential for tariff barriers to EU markets, but with the ability to negotiate separate trade arrangements with other countries and no financial contribution to the EU.

Exports and EU funding

The net cost of the UK’s EU membership was around £8.5 billion in 2015, some 1 per cent of public expenditure, equivalent to about 0.5 per cent of GDP. The EU is also the UK’s most important trading partner; in 2014 it accounted for 45 per cent of UK goods and services exports (c £230 billion) and 53 per cent of imports (c £289 billion). Whilst the UK has a substantial trade deficit in goods with the EU (£59 billion 2014) and an overall net deficit, this masks a substantial surplus in services (£10 billion 2013) and a surplus in Financial Services (c £20 billion) so, if it came to negotiating exit scenarios, the evidence is mixed on who needs whom more in terms of markets.

One of the most significant areas of EU policy is the Common Agriculture Policy (CAP) which accounts for around 40

per cent of the EU budget and is the largest element of the UK’s EU costs. And while losing CAP support would be damaging to UK farming and rural communities in terms of short and medium-term incomes, the counter argument is that the UK would have the freedom to negotiate bilateral trade deals with countries outside the EU and at the World Trade Organisation (WTO). Such deals could possibly offering more flexibility on pricing and the opportunity to exploit competitive advantages.

The EU is a significant export destination for the devolved nations, worth about £11.6 billion annually to Scotland, some £5.6 billion to Wales and around £2.4 billion to Northern Ireland. Northern Ireland will receive a total of €1.2 billion in EU Regional Policy Funding between 2014-20, with around €500m coming from the INTERREG and Peace IV programme alone.

Political considerations

The road to full exit would could take up to ten years, with the parties engaged in a lengthy period of negotiation to agree trade deals. There are further political factors impacting this timeline including the position of the Prime Minister in the event of a ‘leave’ vote, a possible second independence referendum in Scotland and the outcome of the 2020 General Election.

Northern Ireland is the only region of the UK to share a land border with another EU member state – the Republic of Ireland. As immigration is an issue for both pro-Euro supporters and their Eurosceptic opponents, there are concerns about the imposition of hard border controls between Northern Ireland and the Republic of Ireland to mitigate against uncontrolled movement of people and goods into the UK from the EU and further afield. That would impact on the Common Travel Area, which encompasses the entire British Isles and has been in place since partition in 1921.

There may also be implications for the Belfast Agreement, and while this is an international treaty, enshrined in international law, the status of the UK and Ireland as EU Member States is woven through the Agreement and post-exit implications (if any) would have to be clarified.

The impact on business

As with all other aspects of the EU membership debate, there is no overall consensus. While 80 per cent of CBI UK members believe that the UK remaining a member of the EU would be best for their business, and BT chairman Sir Mike Rake, has said there are “no credible alternatives,” Lord Bamford, chairman of construction equipment firm JCB has said the UK should not fear an exit from the European Union as it then could, “negotiate as our country rather than being one of 28 nations.”

Less certain is the British Chambers of Commerce, where 55 per cent of members back staying in a reformed EU. In general terms however, sectors like aerospace and defence, banking and asset management – areas where investment and trade are most closely aligned to EU policy and regulation – would be most affected by a potential exit. Sectors like manufacturing, retail and consumer, business services and pharmaceuticals may face lower levels or regulation, oversight and fewer barriers to trade, while telecommunications and power generation, which are more focused on meeting domestic demand may be potentially less impacted still.

In conclusion

The UK last voted to remain in the Common Market (as it was then) in 1975, now we’re repeating the process, but in an environment where much of UK legislation already enshrines EU policies. There is no overwhelming or definitive evidence of the economic consequences of either a ‘remain’ or ‘leave’ vote, principally because of the great uncertainty about the scale and length of any period of negotiation and the nature of any future relationship with the EU. Longer term both ‘in’ and ‘out’ campaigns have made economic cases for enhanced economic growth but understanding what we are actually voting for may help inform choice.

Janette Jones, Head of Tax NI

Tel: 028 9041 5201

Email: janette.jones@uk.pwc.com

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