Who will be elected by the members of the Conservative Party? Will it be Boris Johnson or Jeremy Hunt? For the time being, Boris Johnson seems to be the favourite. On 22 July it will be announced who will be the new Prime Minister of the United Kingdom. Leon Kanters, Brexit expert and partner of KPMG Meijburg & Co, explains the current developments in his blog.
This election is followed with great interest on the European continent and certainly in Brussels. Both candidates indicated that they did not shy away from a so-called 'no deal' Brexit. Boris Johnson even indicated that if no agreement is reached, the United Kingdom under his regime will leave the European Union on 31 October 2019.
‘No deal' most likely option
If we look at all possible options: 'no deal', another postponement, an agreement (deal) or the repeal of Article 50, then 'no deal' is by far the most likely outcome. The chance that the United Kingdom (UK) will decide to stay in the European Union (EU) is almost impossible in my view. I also consider it out of the question that there will be an agreement before 31 October 2019. The UK wants the agreement that Prime Minister May made with the EU to be amended. The British are calling for the possibility of unilaterally ending the Irish backstop. At the moment, both EU and UK are still deciding on this. The EU says that it no longer wants to change the withdrawal agreement. If any changes are made, then only in the political declaration. In view of the fact that the new British Prime Minister will not be known until 22 July, the government will not be appointed until shortly afterwards and immediately after that the summer recess will start in the EU, negotiations can only start in September. The next EU summit is scheduled for 17 October 2019. It seems inconceivable that such fundamental changes could be made in such a short space of time. More time is needed for this.
A third postponement?
Is the EU prepared to grant a third postponement? In the current extension period, nothing has actually happened and no negotiations have taken place. Some Heads of Government, including the French President, Mr Macron, have therefore already indicated that they are not in favour of a third postponement. If a third postponement, which must be approved unanimously by the European Council, is not forthcoming, we will automatically end up in a 'no deal' situation. This 'no deal' will then start from one moment to the next and there will be no transition phase. This is a highly unfortunate and undesirable situation for both UK and EU entrepreneurs.
When you talk to British entrepreneurs about Brexit, you often hear that a 'no deal', if it ever comes about, will be very short lived in the end. A frequently heard comment here is that EU and UK undoubtedly want to put an end to the chaos as soon as possible, because in the end, no one benefits from a 'no deal'.
Free trade agreement
However, it is not as simple as everyone thinks. This is more of a constitutional nature. Once the UK has left the EU, the Article 50 procedure is closed.
It is often claimed in the UK that a temporary free trade agreement is being negotiated under Article XXIV of the General Agreement on Tariffs and Trade (GATT, now WTO). Article XXIV only applies to the creation of a customs union or a free trade area for goods. Discussions on future relations between UK and EU will have to address many other aspects of trade, such as the degree of regulatory approximation, mutual recognition of standards and trade in services, for which the equivalent of Article XXIV of the GATT applies to Article V of the GATS. Article XXIV is the door to any preferential trade relationship between UK and EU. However, it is unlikely that the 'interim agreement' option will be immediately effective. Article XXIV is often applied to a full free trade agreement.
When the UK ceases to be a member of the EU and there is a rapprochement to conclude trade agreements, this will be confirmed in accordance with the procedure laid down in Article 218 TFEU. This is done by a qualified majority of the European Council. In addition, Article 218 offers the possibility to the European Member States and the European Parliament, among others, to seek the opinion of the Court of Justice. If the Court gives a negative opinion, the proposed agreement cannot enter into force. Just as the Canadian Free Trade Agreement (CETA) is a mixed agreement, i.e. an agreement that partly covers the competences of the EU and partly the competences of the Member States, the agreement is concluded both by the EU and by the individual countries. This means that not only the European Council, but also the European Parliament and the national parliaments have to deal with it. It is impossible for this process to take place in just a few months. Moreover, the past has taught us that, for a variety of reasons not directly related to the current treaty, local or regional parliaments can vote against it. For example, the Walloon Parliament (Belgium) blocked the CETA Treaty for a long time.
‘We agree to disagree’
In short, if the UK leaves the EU without an agreement and trading takes place at WTO level, even with the best intentions, it will take a very long time before a new agreement is ratified. Businesses will then have to resign themselves to much disruption in trade between EU and UK.
In the unlikely event that there really is no alternative to a 'no deal' Brexit, I would argue that both sides (UK and EU) should seal this in an agreement ('we agree to disagree') and that a transition phase of, for example, three months should then come into effect, allowing citizens and businesses to prepare for a hard Brexit.
Entrepreneurs who are heavily dependent on trade with the UK have already made the necessary preparations before 29 March. However, some issues simply take some time to implement. Think of adjustments in IT systems. In addition, most companies have postponed their preparations because of the great uncertainty around Brexit, which is understandable. "In these uncertain times, should I now remove all my activities from the United Kingdom? Maybe there will be a deal that makes this unnecessary and I have already unnecessarily intervened in my organization with all its consequences."
31 October 2019
If it is certain that the UK will leave the EU on 31 October 2019, then that long uncertainty will have ended. The UK will then cease to be a member of the EU and WTO rules will apply at the end of the transition period. Businesses will then be able to prepare for a hard Brexit, however strange it may sound, with a clear or (un)easy conscience.
Would you like to know more about the consequences of the Brexit for your business or do you want personal advice?? We have developed five concrete products to help your organization. Feel free to contact Leon Kanters or other specialists of the Brexit team.