Keeping the Bridges Open (Conservative Group for Europe).

The Conservative Group for Europe have published a policy options paper: “Keeping the Bridges Open”, written by Joe Egerton, a specialist in regulation. He was a research assistant to The Rt Hon Maurice Macmillan MP, he has been a Conservative parliamentary and county council candidate and has his own consultancy business. Advising the Conservatives under a Labour government he became an expert on how determined back bench MPs can force governments to abandon legislation.

The paper is a detailed and indeed lengthy analysis of problems arising from Brexit and the extent to which the negotiation of a transitional period can help to resolve them. Within it there are some very important issues that I (Robin Baker) had certainly not appreciated before reading it. The purpose of this summary is therefore to bring them to the attention of a wider audience.

The paper’s argument is that there is no possibility of a smooth transition taking place in March 2019 to a world in which the UK is no longer part of the European Economic Area. (The EEA comprises the current 28 EU member states plus Norway, Iceland and Lichtenstein who are EFTA member states; they largely participate in the European single market.) Even moving from the EU to the EEA in so short a time is highly problematic – over half the EU body of law, the acquis, would cease to apply overnight, including the EURATOM treaty and its associated international agreements.

The problems that arise from that are the following. The paper argues that a White Paper concerning their resolution is essential.

The Henry VIII clauses

These clauses in the Withdrawal Bill permit ministers to change the law of England without the assent of the House of Commons. They also allow the government to change the law of Scotland, but do not alter the Scottish Parliament’s power to enact primary legislation, that could lead to constitutional conflict. Dominic Grieve has described these proposals as making it “an extraordinary monstrosity of a Bill.”

Ministers claim that they are necessary because the changes needed to incorporate European Law into British law are too complicated to be considered by parliament in the time available. This could be avoided by having a long transition period to give time for the changes to be considered fully by the British legislative bodies.

Northern Ireland
The problem of the border between Northern Ireland and the Republic after Brexit appear almost intractable. The Government has published “a position paper” on Northern Ireland and Ireland that emphasises the importance of the “interim period”

Legal Certainty
Many business and individual contracts will continue post Brexit. Continuing legal certainty on their operation and mechanisms for resolving disputes is essential so that judgments and decisions by arbitrators can be enforced. Clarity as to how decisions of the European Court of Justice are to be regarded by British judges after Brexit is essential and Parliament must legislate clearly and unambiguously.

Systems and Physical Infrastructure
Our current trade and border systems were designed for the EU systems. If these were to cease to apply in March 2019 many of them would be incapable of coping with WTO requirements. The problem is not simply one of updating IT systems (complex and costly though that is) but of adding infrastructure and physical resources. This may require complete new facilities – for example, the cliffs behind the Port of Dover limit the space for lorries and indeed other vehicles. Creating new IT and physical systems would be neither easy nor quick even if we knew what was going to be required, but we do not and will not until agreement is reached with the EU on a number of areas. So, as yet, we cannot even state the system requirements. Big systems are notoriously costly and prone to failure; the Government’s record of managing the introduction of complex new IT systems in a hurry does not inspire confidence. The National Audit Office has doubts as to whether HMRC’s new customs system (designed only to meet the limited needs under EU membership) will be fully functional by 2019. We cannot risk an exit from the EU before we have put in place and tested systems to allow trade to continue to flow.

The Service Sector
Although a strong exporter, the UK service sector is frequently unable to export a service in the way in which a manufacturer exports products because the Single Market in services is not complete in the way it is for goods. A service company will often have either to invest in an establishment in each member state where it seeks to operate or enter into an arrangement with a company that is already established. This makes the service sector highly dependent on the ability of individuals to work in the different individual member states.

That means that any agreement that limits free movement of workers will not in practice permit free movement of services. The service sector generally is highly vulnerable to any restriction on free movement of people. This is especially true of the internet based sector.

As long as the UK remains in the EU or the relevant part of the EEA Agreement applies: the UK will continue to export these services without too much difficulty. Withdrawal from both would pose very serious problems. The service sector is very much at risk – and the sector that is the most dynamic is most at risk – unless there is a long Transition Agreement.

Impact on the City
There is worrying evidence that the Brexit vote has hit employment in the City. It is estimated that despite modest improvement after the election, the year to June 2017 saw a 23% year-on-year decrease in jobs available and a 49% year-on-year decrease in professionals seeking jobs. Unlike an assembly plant, human beings can decide to up sticks and move, in most cases having notice periods of one or three months.

An Open University survey of 400 British based firms has identified a loss of high earning (and high tax paying) EU professionals creating a skills gap costing British businesses £2bn a year. There is also wide disillusion among Millennials (those who reached young adulthood early in this century) who are now entering experienced or mid-level positions, making them a central focus of hiring across the financial services sector. They are integral to the future of the British workforce. We’ve already alienated countless EU nationals, we cannot afford to alienate a generation of creative and ambitious Britons too. Action must be taken to prevent a further brain drain of talent out of London. The Chancellor of the Exchequer is reported to have warned the Prime Minister that companies will start to implement contingency plans for a hard Brexit if they are not given reassurance in the next few months. He would be unfit for his great office were he not to have told the Prime Minister this uncomfortable fact.

Transitional arrangements giving individuals and companies confidence that nothing much will change as a result of the UK leaving the EU should do something to limit the decline in investment in both physical and human capital that is currently taking place, and reduce the outflow of skilled EU citizens.

EURATOM
International transfer of nuclear material, technology and know-how must be strictly controlled. This is achieved by the Nuclear Cooperation Agreement (“NCA”) between states that have domestic legislation prohibiting nuclear trade with entities in other states with which there is no NCA. One of EURATOM’s functions is to act as an “umbrella” organisation for its member states so the NCA between the USA and EURATOM allows nuclear trade between the USA and all EURATOM’s members.

The Government have given notice of its intention to leave both the EU and EURATOM. This will require the UK to negotiate a number of new NCAs, which is complex and time consuming. It will mean a new regulatory structure, approved, after inspection, by the International Atomic Energy Authority. Only after that can the UK negotiate an NCA with another state. Apart from the prodigious cost and diversion of resources that this will involve, there is a real timing problem.

Nuclear generation in the UK relies on the USA for imported fuel, nuclear technology and knowhow. If the UK leaves EURATOM an NCA with the USA will have to be put in place. A proper and transparent planning process for leaving EURATOM should have detailed the possible risks and in particular an assessment of the possibility of denial of fuel (fissile material) or components for the UK’s reactors, currently producing around one sixth of the UK’s electricity. Such an assessment should have included an analysis of potential loss of output and plans to deal with it. The Nuclear Paper seems to take for granted that the UK will obtain NCAs before the UK leaves EURATOM, presumably on the day it leaves the EU.

The worst case scenario of a loss of capacity causing a widespread failure of the grid may be highly improbable. But there is no detailed objective assessment of the risks. One needs to be made quickly and subjected to proper scrutiny because, if there are significant risks to generating capacity from leaving EURATOM, then these may be mitigated by transitional arrangements.

Nuclear Medicine
Imported radioisotopes, which have short half-lives and so cannot be stored, are used extensively for diagnostic scans and cancer treatment. Widespread concern has been expressed, e.g. by the Royal College of Radiologists, over continued access if the UK leaves EURATOM. The Government have stated that as these products are not fissile nuclear material they are not subject to international nuclear safeguards. However it is unclear what will happen if other EU member states interpret their obligations differently and decline to supply. If the UK rejects the ECJ for resolving such a dispute, what alternative is there? The risk is that people are going to die. The Commons’ Health Committee should demand the evidence on which the Government’s statement was based and also ask the Royal College of Radiologists and the Euratom Supply Agency to give their evidence.

Nuclear Research and Development
Leaving EURATOM will terminate the UK’s participation in 3 international research projects involving many countries from outside Europe and including two important nuclear fusion projects. There is a clear risk of the UK, with a very substantial physics and engineering base, being excluded from what may prove exceptionally important research projects creating important opportunities for industry and employment.

EU Agreements with Third Parties (“ASSOCIATION AGREEMENTS”)
There are more than 20 agreements between the EU (or EU and the member states) and third party states. Except in cases where the UK is a contracting party to the agreement in its own right, on leaving the EU the UK’s participation and the benefits from them will cease unless the UK has negotiated a new agreement to replicate the benefits.

The WTO
The UK is a member of the World Trade Organisation both in its own right and as an EU member state but all WTO arrangements have been collectively negotiated by the EU. Thus the EU has single quotas (which permit it to export a defined quantity of the goods in question that incur lower tariffs than those that would otherwise apply); when the UK leaves the EU new quotas for the UK will have to established and that will raise the issue of a reduction in the EU quota – a process referred to as “carving out”. Because the WTO proceeds by consensus, this could cause problems. For example Poland would be able unilaterally to veto a UK agreement under WTO rules unless its demands for extra permits for Polish citizens were met. Sorting out WTO arrangements could be a protracted process. Transitional arrangements may well be essential while this is done.

Open Skies Agreement
Under the Open Skies Agreement any airline of an EU member state can fly between anywhere in the EU and anywhere in the USA. A new agreement involving the UK will have to be negotiated but this may well be less favourable. The Sun newspaper has leaked a report warning of a drop of 41% in passenger numbers between March 2018 and March 2019 if no agreement is put in place.

Banking
The Prudential Regulation Authority, part of the Bank of England, has warned that UK banks’ ability to lend might be constricted since contractual arrangements underpinning long term financial arrangements will cease to be effective after Brexit. That will substantially weaken UK banks’ balance sheets, giving the choice between reversing the progress on strengthening the banking system since 2007, creating major risks for the economy and taxpayers, re-capitalising the banks or banks reducing or even stopping lending.

Conclusion

At this moment there is an opportunity for the UK and EU27 to enter into a Transition Agreement. Whether that is based on the EEA Agreement or an extension of the two-year period under Article 50 is less important than both sides signing up to a binding Agreement that avoids dislocation in March 2019.

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The above only covers a minor portion of the subjects covered in the original paper (the whole paper can be downloaded from the publications section of the Conservative Group for Europe website). It was, of course, written before the Prime Minister’s speech in Florence in which she accepted the principle of a Transition Period. So at least some progress has been made, albeit without the detailed information that the subject deserves.

Robin Baker

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