Hard Brexit Benefits? Change Britain’s £24 billion of unicorns

Professor Steve Peers

On Boxing Day, the pro-Leave group ‘Change Britain’ produced a ‘report’ (actually a press release with an annex) claiming £24 billion worth of benefits from a ‘hard Brexit’ – leaving the EU without participating in the single market or customs union. This claim was widely repeated uncritically by the press – although a later critique of the economics by Jonathan Portes was published, and the economic analysis in the report was also fisked by Sam Bowman.

Their comments cover a lot of ground, but it’s worth standing back and looking at the report as a whole – and at how poor the debate over Brexit has become.

The report produces its £24 billion sum from three sources: a) no further contribution from the EU budget; b) future trade deals; and c) cutting back ‘red tape’. Let’s look at each of these in turn, and then note what the report neglected to mention.

EU budget contributions

The report starts with the UK’s contribution to the EU budget: £19 billion if the UK budget rebate is not counted; £14 billion if the rebate is taken off; and £10 billion if the amount spent from the EU budget in the UK (on things like farm subsidies, research and regional development) is deducted. Change Britain accepts that the possible savings are £10-14 billion.

So this necessarily admits that the £19 billion figure – which was the basis for the £350 million/week number ‘on the side of the bus’ during the referendum – was a lie all along. It was a lie because as I point out here, with further details and links, the rebate money is never ‘sent’ to the EU, and the UK has full control over how that rebate money is spent and whether the rebate is retained in future.

Starting by admitting (albeit only indirectly) that they previously told a huge lie is not a good beginning for the report’s authors, since it puts the credibility of anything else they say in question. But let’s give them the benefit of the doubt and examine their other claims separately.

Cutting back ‘red tape’

The report estimates possibly several billion pounds savings from scrapping some EU laws – concerning the issues of air pollution, animal welfare, data protection, GM foods, chemicals regulation, air passenger compensation, battery pollution and company law. These estimates should have been accompanied by numerous health warnings.

First, as Portes points out, these estimates (and the trade estimates), taken with the estimates on contribution savings, mix up several different things: public finances and business costs. Adding the numbers together is economically incoherent.

Secondly, most or all of the ‘red tape’ referred to has a non-economic value: many people prefer cleaner air, more privacy and better treatment of animals, for instance, quite apart from the impact on GDP. There may, in any event, be indirect economic costs from pollution and less secure data, among others.

Thirdly, in some cases there may be savings to business but not the overall economy. Take air passenger compensation: if passengers are not compensated for delayed flights, the airlines save money – but passengers no longer have that compensation money to spend. True, airlines might pass their savings on to passengers in general – but still the passengers who previously received the compensation money will no longer be getting it. Either way, how would the overall economy benefit? The same goes for cuts to workers’ holiday pay and other worker benefits that business groups sometimes campaign for (though not on this occasion): cuts will save businesses money, but how will the corresponding cuts in workers’ spending power make the economy as a whole better off?

Fourthly, some of the laws concerned are related to market access to the EU – most obviously, the biggest proposed saving, data protection law. As I discuss here, EU data protection law limits data transfers from non-EU countries without an ‘adequate’ level of data protection. Scrapping that law (which would be complicated anyway by the right to privacy in the ECHR and the separate Council of Europe data protection Convention) would mean limits on market access to the EU. This would surely have an impact on the economy. 

Future trade deals

The report claims that the UK would generate exports to non-EU countries by signing its own trade deals. It calculates these increased exports by taking EU estimates of the trade effect of new deals with certain countries and assuming that the UK would benefit from 15% of that increase, because the UK has 15% of the EU’s trade with non-EU countries. As Bowman points out, this is nonsense: the percentage of EU trade with non-EU countries which is held by the UK varies widely and depends on many factors.

Moreover, country where the biggest possible trade benefit exists in the ‘asked for a trade deal’ list – Korea – already has a trade deal with the EU, under which UK trade has already increased. (The EU document which the Change Britain report links to even refers to the EU/Korea deal as being in force already. Change Britain either a) did not read this document – which it uses as a key source – and is moreover ignorant of the EU/Korea deal generally; or b) it is simply telling a blatant lie.)

So while it’s theoretically possible that the UK could sign a better trade deal with Korea than the EU did, the benefit of that deal would not be anything like the £25 billion claimed. Certainly, the report provides no evidence of this. Indeed, the UK will be worse off re exports to Korea after Brexit unless it convinces Korea to agree to a UK-only version of the existing deal.

Moreover, several other countries referred to in the report have agreed a trade deal with the EU which is not in force yet: Canada and two ASEAN states (Vietnam and Singapore). Others are negotiating with the EU (USA, India, Japan, Mercosur, several other ASEAN states). The report’s estimates could therefore only be valid if (a) the EU trade deals agreed or under negotiation are respectively either not ratified or not agreed; and (b) the UK is able to negotiate trade deals with those states.

Note that trade deals are not that easy to negotiate or ratify: the US has also had trouble doing a trade deal with the Mercosur states in South America, and the Change Britain report itself notes that the trans-Pacific trade deal might not be ratified. The report also fails to refer to the obvious increase in imports from the countries concerned that would follow from such trade deals. Finally, it one reason there is no EU/India trade deal is a dispute between the UK and India during the talks. Obviously Brexit will not solve that problem.

In any event, if the UK stayed in the single market but fully left the customs union (like Norway), it could still sign its own trade deals with non-EU countries. 

Costs of leaving

The report says nothing about costs of leaving the single market – estimated at 4% of GDP by the IFS, for instance. Maybe those forecasts are incorrect, but the Change Britain report doesn’t even acknowledge their existence, never mind try to rebut them. In practical terms, for instance, how much will it cost to hire extra customs officers after leaving the customs union, or extra border guards and other immigration staff after ending free movement of people? In Change Britain’s fantasy world, these people must be invisible, or work for free.

Conclusion

An interesting coda to the Change Britain report: late last night, Michael Gove, the head of the official Leave campaign, went on Twitter to debate with Jonathan Portes about it. Portes repeatedly asked Gove to confirm if he had read the report, and Gove repeatedly avoided answering. Instead he demanded Portes first tell him how he voted in the referendum. How is that relevant to a debate over the issues?

And how can Gove assert simultaneously that he is certain Brexit will be economically beneficial and sneer that he is tired of ‘expert’ economic forecasting? The Change Britain report – or any other economic assessment of Brexit – necessarily involves making some hypothetical assumptions. The alleged ‘savings’ from red tape reduction and new trade deals both rely on such assumptions. So Gove is in effect taking the effect of Brexit on faith, assuming without evidence (since he won’t debate the issue in detail) that the ‘experts’ he agrees with must be right about the future, and the ‘experts’ he disagrees with are wrong about it. That’s not an argument against experts; it’s just confirmation bias. To be fair, though, the number on the side of the bus wasn’t confirmation bias. Rather, it was a lie.  

Scribbled without numeracy by incompetent interns; published without scrutiny by hungover journalists; cheered without irony by back-stabbing politicians. Six months after the referendum vote, the debate over Brexit deserves better than this report. We can only cross our fingers for 2017.

Barnard & Peers: chapter 27

Photo credit: Imgur

Could the UK stay in the single market after leaving the EU? The planned case on Article 127 EEA

Steve Peers

Might the UK stay in the single market, even if it leaves the EU? This is the issue to be raised by planned litigation relating to the UK’s position in the European Economic Area (EEA) – a zone set up by a treaty between the EU, its Member States, and Norway, Iceland, and Liechtenstein, which extends EU single market rules to the latter three States. It raises issues of both international and domestic law; but first, it would be useful to explain the EEA further.

The EEA

The EEA treaty was originally signed in 1991, adjusted in 1992, and come into force at the start of 1994. The aim was to extend the EU’s internal market (known as the ‘single market’ in UK political debates) to the countries which were part of the European Free Trade Area (EFTA). In the event, three of those countries decided to join the EU from 1995 (Sweden, Austria and Finland), and Switzerland decided not to sign up after all, relying on a separate network of treaties with the EU.

Some believe that the EEA is the same as the EU, but there are many differences. The EEA does not include the EU’s common trade policy, and indeed EFTA states have signed separate trade deals with non-EU countries. It also does not include EU policies on tax, justice and home affairs, foreign policy, agriculture, the single currency and fisheries, although EFTA states have signed separate agreements with the EU on aspects of these issues. In particular, while all EFTA states have signed up to the EU’s Schengen system for the abolition of internal border controls, that is a separate issue from the EEA (indeed, the treaties to become Schengen associates were signed later than the EEA).

The EEA does include applying EU laws on the free movement of goods, services, capital and people, along with the freedom of establishment.  However, EFTA states can apply an emergency safeguard to limit free movement, including the free movement of people. The EEA also involves participation in most of the EU laws concerns labour and environment, as well as competition and state aids. EFTA states make contributions to participate in EU programmes and to assist the development of poorer EU countries; but the money does not go into the EU budget and the EFTA countries have more control over how it is spent.

As regards institutions, the EFTA states have no role in EU institutions, but rather the EEA has its own bodies, where EFTA states are consulted on draft EU laws, but do not have a vote on the EU decision-making process. They are expected to apply new EU laws within the scope of the EEA (which, as noted already, does not extend to many areas of EU law-making), but they can in principle reject them, subject to the possibility of EU retaliation. They are not directly subject to the EU court, but instead take part in an EFTA Court, which usually follows the EU court’s case law – although note that some EFTA Court judgments are not binding.

Some argue that the UK should stay part of the EEA on at least an interim basis after leaving the EU, while negotiating a longer-term agreement. The basic arguments for this position are set out here; see also the EUreferendum site. One thing is clear: staying in the EEA was not on the referendum ballot paper. While comments by some on the Remain side or Leave side suggested that a vote on EU membership was also a vote on single market membership, that is not what voters actually voted on.

How to leave the EEA?

Leaving the EEA has two dimensions: international law and national law. Internationally, the only explicit way to leave the EEA is by invoking Article 127 of the EEA treaty, which says that any party can leave with at least 12 months’ notice. There is no explicit requirement to name the date of departure when giving the notice, so arguably the UK could specify the date of departure as the same date it leaves the EU. Therefore, as long as the UK gives notice to quit the EEA at least twelve months before Brexit Day, it could align leaving the EEA with leaving the EU.

What if the UK doesn’t give that notice? In that case, although Article 127 is the only explicit way to leave the EEA, some argue that that the UK would leave the EEA automatically when it leaves the EU. Why? Firstly, because the clause on territorial scope (Article 126) refers to the EU and EFTA states, but not to any other countries. Also, many of the substantive legal rules refer to the EU and EFTA states. Article 2(c) defines the contracting states as regards the EU and its Member States, and allocates responsibility as between them, but does not mention EFTA states.

If this analysis is correct, the UK could still rejoin the EEA after (or at the same time) as leaving the EU. In that case, Article 128 says the UK would have to join EFTA and apply to rejoin the EEA, subject to EU and EFTA states’ agreement, because only EU and EFTA states can join up to the EEA. (Article 128 isn’t, by itself, a good basis for arguing that the UK would have to leave the EEA if it leaves the EU, because it only addresses which countries may join the EEA in future, not which countries are members now and whether they might retain membership or implicitly lose it if they leave the EU or EFTA. It might, however, be referred to reinforce a conclusion based on Article 126 or other provisions).

So does the UK implicitly lose EEA membership if it leaves the EU? The answer isn’t clear, because the drafters of the EEA treaty never considered this possibility. On the one hand, the presence of an explicit clause on leaving presumes that states cannot implicitly cease to be EEA members. On the other hand, the substantive provisions and the clauses on territorial scope imply that leaving the EU is incompatible with being part of the EEA – unless the country concerned joins EFTA. That raises the question of how this would work: arguably there would be a ‘fundamental change of circumstances’ under Article 62 of the Vienna Convention on the Law of Treaties. (Note that the latter clause can’t be used as a quick route to leave the EU, since it only applies where a change was ‘not foreseen’ by the parties; but the prospect of a state deciding to leave the EU clearly was foreseen by the parties to the EU Treaties, since Article 50 TEU refers to it).  Or the other parties to the EEA could argue that the UK had committed a ‘material breach’ of the EEA by ceasing to be an EU Member State (if the UK does not join EFTA), and terminating application to the UK under Article 60 of the Vienna Convention.

The issue is arguably relevant by analogy to many other treaties which the UK signed up to as part of the EU, in particular trade agreements. Does the UK retain its status under the EU’s free trade deals with Korea, Canada and many other countries automatically on Brexit Day, or does it lose that status and have to negotiate a separate treaty? (Arguably, the international law principle of continuity of treaties could play a role here; and the legal issue also arises of whether the UK can start negotiating replacement treaties, if it has to, before Brexit Day).  

National law aspects

The termination of the UK’s EEA membership raises different issues as a matter of national law – which perhaps is the purpose of the planned litigation. If the UK government gives notice under Article 127, or asserts that it will implicitly cease being a party to the EEA on Brexit Day, does Parliament have to give its approval?

If the government is legally obliged (as a matter of international law) to give notice of leaving the EEA separately from the Brexit process, then the case is arguably analogous with the Miller case recently decided by the High Court, and now on appeal to the UK Supreme Court.  That case raises the question of whether the UK government’s royal prerogative extends to the termination of the UK’s EU membership, or whether Parliament must approve such use of the prerogative because leaving the EU would terminate rights conferred by an Act of Parliament. Since EEA membership is referred to in the European Communities Act, and extends many (though not all) of the same rights conferred by the EU Treaties, the answer to this question which the Supreme Court ultimately gives in the Miller judgment should logically apply by analogy to the EEA.

Therefore, in this scenario, if Parliament is obliged to approve withdrawal from the EU, it is also obliged to approve withdrawal from the EEA. And since EEA membership was not on the referendum ballot paper, the force of the political argument that Parliament ought to follow the view of the majority of those voting that the UK should leave the EU is not as strong. There will undoubtedly be a political argument that the referendum vote should apply by analogy – since to some extent the issues raised often by the Leave side as regards EU membership (migration of EU citizens, contribution to the EU, control over law-making) apply also to the EEA. But, as noted already, there are possible counter-arguments: the free movement safeguard clause in the EEA, the different nature of budget contributions, and the more limited scope of the EEA compared to EU law. Participation in the EEA could also, as some Leavers have suggested, be limited in time: an interim status pending negotiation of a longer-term framework for UK/EU relations.

On the other hand, if there is no distinct legal obligation to notify departure from the EEA, because its application to the UK will necessarily cease when the UK leaves the EU, then any Parliamentary vote to approve invoking Article 50 should logically encompass also the end of EEA membership, and the legal challenge relating to the EEA may find it harder to succeed. Or if the UK government succeeds in its appeal in Miller, it would be hard to convince a court that leaving the EEA raises distinct questions from leaving the EU.

In any event, any fresh litigation on the EEA could provide an opportunity to argue about whether an Article 50 notice is revocable – and it might be argued that that issue, and/or the issues about termination of EEA status as a matter of international law, should be referred to the ECJ to decide.

See also blog posts by:

Christian Dadomo and Noelle Quenivet

Francis Davey

David Allen Green

Jolyon Maugham QC

UK Civil Servant

Michael O’Connor

Meme: Steve Peers

Barnard & Peers: chapter 25, chapter 27