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Report on 2016-17 Contents

Chapter 2: Scrutiny of Brexit

Introduction

10.Brexit dominated the European Union Committee’s work programme in 2016–17. In the run-up to the 23 June 2016 referendum we published a report assessing the Cameron Government’s proposals for EU reform, and reviewing the ‘new deal for the UK’ agreed by the European Council in February of that year.1 Seven weeks before the referendum we also published a report analysing the process whereby the UK would, in the event of a ‘leave’ vote, withdraw from the EU.2 Following the vote to leave, that hypothetical scenario became a reality.

11.Our terms of reference require us to consider “matters relating to the European Union”, and we therefore concluded, in the wake of the referendum result, that we would best contribute to public debate, and to effective scrutiny of the Government’s implementation of the electorate’s decision, by devising an entirely new programme of cross-cutting inquiries, addressing the key themes that we expect to arise in the Brexit negotiations. In so doing we sought to build on the unique structure of the EU Committee, its six sectoral sub-committees, its 73 Members, and its large and expert staff.

12.We published an outline of our proposed work programme in our first report of the session, published on 22 July, just a month after the referendum.3 In that report we listed 29 “key themes”, and stated our ambition to produce a series of focused reports on these themes. In this chapter we reflect on the delivery of that work programme, and on the key lessons learned.

Brexit reports

Overview

13.In total we published 17 Brexit-related reports in the 2016–17 Session, including two reports on the principles underpinning parliamentary scrutiny, and 15 thematic reports. Our work was cut short by the Prime Minister’s decision to call a general election for 8 June 2017, and the dissolution of Parliament on 3 May 2017, at which point a further eight inquiries, at various stages of planning or in some cases nearing completion, were paused.

14.Taken as a whole, our work, despite the interruption of the general election, represents arguably the most wide-ranging and detailed analysis of Brexit yet published. Our 15 thematic reports covered the following themes:

15.Inquiries on the following Brexit-related themes were paused when Parliament was dissolved, and will be resumed in the new Parliament:

We also expect to launch other Brexit-related inquiries early in the new Parliament, as well as following up the findings of reports that have already been published.

Brexit: parliamentary scrutiny

16.Our first two reports focused on parliamentary scrutiny of Brexit.4 We sought to set out the key stages of Brexit, identifying at each stage the opportunities for parliamentary engagement, and the challenges Parliament would face. We focused on the negotiations between the UK and the EU, recognising that committee scrutiny of the negotiations, while drawing on long traditions of scrutiny across both Houses, would break new ground. We sought to find a middle ground between parliamentary ‘micro-management’ of the negotiations on the one hand, and a purely retrospective role, limited to establishing accountability after the fact, on the other:

“Within this middle ground, Parliament, while respecting the Government’s need to retain room for manoeuvre, should be able both to monitor the Government’s conduct of the negotiations, and to comment on the substance of the Government’s negotiating objectives as they develop. Only if these principles are accepted will Parliament be able to play a constructive part in helping thee Government to secure the best outcome for the United Kingdom. Such scrutiny will also contribute to a greater sense of parliamentary ownership of the process, strengthening the Government’s negotiating position and increasing the likelihood that the final agreement will enjoy parliamentary and public support.”5

17.We reached that conclusion in October 2016 and, notwithstanding the many subsequent parliamentary debates, the decision of the Supreme Court in the Miller case that parliamentary approval for the triggering of Article 50 was required, and the passage of the European Union (Notification of Withdrawal) Act 2017, we stand by it. It is disappointing that the Government, despite warm words about providing Parliament at least the same amount of information on the negotiations as the European Parliament receives from the Commission, and despite its concessions during the passage of the Article 50 Bill, has failed to bring forward proposals to ensure effective parliamentary scrutiny of the negotiations. In its response to our report, which appeared in January, the Government said that “in due course, the Government expects to be able to set out how it will enable information flows to work in practice”.6 No further announcement has been made. The cancellation of our scheduled meeting with the Secretary of State on 22 March (because of the terrorist attack in Westminster that day) meant we were unable to ask questions on this issue before the end of the last Parliament, and thanks to pre-election purdah restrictions we have yet to receive a response to a follow-up letter sent to seek further information on the Government’s plans.

18.Nor does the Government appear yet to have taken account of the position of the EU side, initially set out in comments by the Commission’s chief negotiator, Michel Barnier, and formally confirmed by the General Affairs Council (GAC) on 22 May 2017, that it will conduct the negotiations as transparently as possible.7 Not only have the GAC and the Commission made a commitment to keep the European Parliament “closely and regularly informed throughout the negotiations”, including through the transmission of documents and regular meetings, but they have explicitly authorised the transmission of documents to national parliaments of the EU-27. This could include documents originating from the UK—raising the possibility that even if the Government refuses to share documents relevant to the negotiations with Parliament, those same documents will emerge, in uncontrolled and unpredictable ways, from Brussels. Information will be a powerful tool, even a weapon, in the coming months. If the Government is to retain any control over that information it will need at least to match the level of transparency achieved by the EU.

The withdrawal agreement

19.Following the Prime Minister’s letter formally notifying the European Council of the UK’s intention to withdraw from the EU, and the European Council’s adoption of its guidelines for the negotiations, it appears that three issues at least will figure in any withdrawal agreement. The first is the need to determine the rights of EU and UK nationals resident in each other’s countries, a total of more than four million citizens, who currently benefit from the extensive rights afforded by the EU principle of free movement of people. The second issue is the need to reach agreement on any outstanding financial liabilities attaching to the UK, as a result of commitments entered into during its EU membership. Both these issues arise as a direct consequence of the act of withdrawal. There is also recognition on both sides that the unique circumstances of the island of Ireland mean that measures to protect the Northern Ireland peace process, and to mitigate the impact of Brexit upon those living on either side of the Irish land border, should feature early in negotiations. We published reports on all three issues.

‘Acquired rights’

20.The rights of EU nationals currently resident in the UK, and of UK nationals resident in the EU, over four million citizens in total, have been the subject of much debate in Parliament and beyond. Our report on Brexit: acquired rights,8 following an inquiry by the Justice Sub-Committee, concluded that, contrary to assurances given during the referendum campaign, the doctrine of ‘acquired rights’ under international law would provide little protection to those currently enjoying rights under EU law. We therefore judged that, in order to provide legal certainty, “the withdrawal agreement concluded under Article 50 should set out the EU rights that are to be maintained post-Brexit”.

21.We concluded that, in respect of citizenship rights, “absolute reciprocity should apply and be guaranteed”. Yet at the same time we underlined that the Government was “under a moral obligation to provide certainty and legal clarity to all EU nationals working, living and studying in the UK, who contribute so significantly to the economic and cultural life of the UK”. We therefore urged the Government, as a first step towards concluding a reciprocal agreement, to give “a unilateral guarantee now that it will safeguard the EU citizenship rights of all EU nationals in the UK when the UK withdraws from the EU”. We also addressed the obstacles that, under current immigration rules, would stand in the way of EU nationals seeking to establish an entitlement to permanent residence in the UK. We supported the view of witnesses from across the political spectrum that the criteria applied to EU nationals resident in the UK should be “reasonable, flexible and cost-effective”.9

22.It is regrettable that, while both sides acknowledged the need to reach agreement as early as possible in negotiations on the status of UK and EU citizens, and despite pressure from across the political spectrum, the Government repeatedly refused to offer a unilateral guarantee to EU citizens lawfully resident in the UK, insisting instead that it would wait for reciprocal “future guarantees”, to be agreed by the two sides.10 We trust that a rapid and binding resolution of this issue will be agreed now that formal negotiations have begun, and the respective positions of the EU and UK have been published.

The EU budget

23.The Financial Affairs Sub-Committee’s report on Brexit and the EU budget was published on 4 March 2017.11 The question of the ‘Brexit bill’—that is to say, the UK’s settlement of any outstanding financial commitments arising out of its EU membership—remains highly controversial. Our report had three aims: first, to quantify those commitments; second, to establish whether, post-Brexit, the UK would be legally obliged to honour them; and, third, to frame this issue in the context of the wider negotiations on a future UK-EU relationship.

24.Our attempt to quantify the UK’s commitments underlined the complexity of the EU’s budget, which allows disagreement even over the UK’s ‘share’ of that budget—with some witnesses using a gross figure, and others taking into account either the rebate or UK receipts from the budget. Nor are budgetary contributions hypothecated: it is impossible, therefore, to identify a specific UK contribution to, say, the EU’s pension liabilities. Against this backdrop, we could conclude only that it was “possible to arrive at various, widely ranging, figures for any EU claim against the UK”.12

25.On the question of legal liability, we again heard conflicting evidence, and we therefore sought the view of our Legal Adviser. On this basis, we concluded that “as a matter of EU law, Article 50 TEU allows the UK to leave the EU without being liable for outstanding financial obligations under the EU budget and related financial instruments, unless a withdrawal agreement is concluded which resolves this issue”. We further noted that it was “questionable whether an international court or tribunal could have jurisdiction”.13

26.We also emphasised that “the political and economic consequences of the UK leaving the EU without responding to claims under the EU budget are likely to be profound”.14 This conclusion was overlooked in much of the media coverage of our report, but is an essential rider to our assessment of the legal arguments. A refusal by the UK to reach agreement on its budgetary liabilities would preclude agreement on any other issue (including on such matters as citizens’ rights and the protection of the Northern Ireland peace process). It would lead directly to a ‘no deal’ Brexit, poisoning the relationship between the UK and the EU for many years to come. The final paragraph of our report puts this key issue into context:

“But this is more than a negotiation on withdrawal, and more than a trial of strength. It is also a negotiation about establishing a stable, cooperative and amicable relationship between the UK and the EU, so as to promote the security, safety and well-being of all the peoples of Europe. Such a relationship is inconceivable without good will. The Government will need to approach the forthcoming negotiations in that spirit.”15

UK-Irish relations

27.The Select Committee’s report on Brexit: UK-Irish relations16 addressed the impact of Brexit upon Ireland, North and South, and on both east-west and north-south relations. We highlighted the economic consequences of Brexit on both sides of the Irish land border, given the constant movement of goods and people across the border; we also looked at the maintenance of the Common Travel Area—a shared objective of both UK and Irish governments—and the importance of EU support and programmes to maintain the progress made under the peace process. We called on all parties to the negotiation “to give official recognition to the special, unique nature of UK-Irish relations in their entirety, including the position of Northern Ireland, and the North-South and East-West structure and institutions established under the Belfast/Good Friday Agreement”. To this end, we proposed that the UK and Ireland be invited to negotiate a draft bilateral agreement, to be incorporated in the final withdrawal agreement, subject to the approval of EU partners.

28.Outside Ireland, the impact of Brexit upon UK-Irish relations had been almost wholly overlooked during the referendum campaign, so it is gratifying that since our report appeared it has been recognised by both the Government and the EU as one of the top priorities for a withdrawal agreement under Article 50 TEU.17 But this recognition also presents a risk: as ministers have noted, the status of the Irish land border cannot be separated from the longer-term issue of a future UK-EU trade agreement. We regret, in this context, that our proposal for a more flexible, informal bilateral negotiation between the UK and Ireland, subject to the agreement of the other EU Member States, has not been taken up.

UK-EU trade

The main options for trade

29.We published a series of reports looking at the future UK-EU trading relationship. The first of these, Brexit: the options for trade,18 was published in December 2016, before the Prime Minister announced the Government’s intention to leave the Single Market and the customs union and pursue a UK-EU free trade agreement. It was the result of an inquiry conducted jointly by our External Affairs and Internal Market Sub-Committees, and outlined the UK’s current trading relationship with the EU. It evaluated the main options open to the UK post-Brexit: Single Market membership via the European Economic Area; membership of the customs union; a UK-EU free trade agreement; or reliance upon World Trade Organization (WTO) rules.

30.We approached the task with an open mind, and did not recommend any one option above the others. What was clear to us, however, was that “liberalisation of trade … requires states to agree to limit the exercise of their sovereignty”. In other words, there will be “trade-offs between market access and the exercise of sovereignty”. The extent of that trade-off will be a matter for negotiation.

31.We were also clear that the top priority for the Government should be to negotiate the UK’s future trading relationship with the EU, and, in parallel, to negotiate the UK’s schedules at the WTO. Trade agreements with other countries, however important in the longer-term, will “inevitably be contingent on what is negotiated with the EU and at the WTO”. Finally, we highlighted the difficulty of reaching a comprehensive agreement within the two years allowed under Article 50 TEU, and urged the Government to establish “a clear ‘game plan’ for a future transitional agreement”, to reduce instability and build confidence in the economy.

Trade in goods and trade in non-financial services

32.The two sub-committees then embarked on more detailed, separate follow-up inquiries. The External Affairs Sub-Committee looked at trade in goods, and the Internal Market Sub-Committee at trade in non-financial services. Both reports appeared in March 2017, by which time the then Government had announced its intention for the UK to leave the Single Market and customs union, and to negotiate a comprehensive UK-EU free trade agreement.

33.Our report on Brexit: trade in goods19 analysed the likely impact of tariff and non-tariff barriers upon UK-EU trade. We heard detailed evidence from representatives of six major sectors of the economy: chemicals and pharmaceuticals, capital goods and machinery, food and beverages, oil and petroleum, automotive, and aerospace and defence. We described the damaging effect of tariffs upon highly integrated supply chains, and explored the costs that could fall on UK businesses through the imposition of non-tariff barriers, such as rules of origin. While welcoming the Government’s aim, in the forthcoming Repeal Bill, to preserve existing EU laws in force, we again emphasised the need for “a trade-off between the UK’s desire to make domestic laws, and its wish to pursue close trade relations with the EU”.20 We also repeated our call for the Government “to establish at the outset of negotiations a clear strategy for a future transitional agreement”.21

34.The Internal Market Sub-Committee’s inquiry into the impact of Brexit upon trade in non-financial services underlined the heavy reliance of the services sector, which accounts for almost a third of UK exports, upon access to the EU Single Market. In our report22 we noted that certain sectors, such as aviation and broadcasting, were not covered by WTO rules, and that there was no precedent for providing access by means of a free trade agreement. Any UK-EU free trade agreement would thus have to be “uniquely comprehensive”. We also noted the limitations of the forthcoming Repeal Bill, which, while it may preserve existing EU laws in force, “will not, on its own, secure either the mutual recognition of UK and EU standards, or the level of equivalence required to ensure continued trade in services”. We again urged the Government to seek a transitional agreement, to avoid a regulatory ‘cliff-edge’, and concluded that the Government had under-estimated the linkage between trade in services and the free movement of persons. We noted that the EU-27 might “take the view that comprehensive access to the Single Market in services is dependent upon some degree of movement of persons”, and urged the Government to retain “room for manoeuvre” on this key issue.23

Financial services

35.The Financial Affairs Sub-Committee addressed the future of UK-EU trade in another key sector of the economy, financial services. The report24 noted that many financial services providers did not themselves fully understand the extent of their reliance upon ‘passporting’ rights, which allow them, if authorised by regulators in the UK, to provide services across the EU without further authorisation. Such firms may in future have to rely upon the third-country ‘equivalence’ regime. This is “available to a smaller number of activities than those able to use the passport, and entails a potentially laborious equivalence process, which is vulnerable to political influence”.25 We highlighted the unpredictable impact of such a development upon London’s ‘eco-system’ of financial services, which supports not just the UK economy but that of the whole EU, and the risk that, if London loses its pre-eminence as a financial sector, its business will go to New York rather than the EU. We again touched on the need to achieve an orderly transition, and the risk that, in the absence of such assurances, “firms may pre-empt uncertainty by relocating or restructuring, for instance by establishing subsidiaries or transferring staff”.26

Wider UK-EU relations

36.The Government has indicated that, alongside a comprehensive free trade agreement, it wishes to negotiate a continuing UK-EU relationship in areas of common vital interest, such as security. Yet at the same time it has identified ending the jurisdiction of the Court of Justice of the European Union (CJEU) as one of the fundamental drivers of its Brexit strategy. We published two reports exploring the tension between these objectives.

Security and police cooperation

37.The Home Affairs Sub-Committee’s report on Brexit: security and police cooperation appeared in December 2016.27 Two months previously the Secretary of State for Exiting the EU had identified “maintaining the strong security co-operation we have with the EU” as one of the Government’s top four overarching objectives in the negotiations on Brexit. Moreover, the UK’s opt-out from EU justice and home affairs measures means that in this area the UK is only bound by measures, such as the European Arrest Warrant or the Prüm decisions, that the Government, with the approval of both Houses of Parliament, has decided are in the UK’s national interest.

38.In our report we outlined the options for continuing participation in those measures identified by UK law enforcement agencies as their top priorities. In some areas, such as the transfer of Passenger Name Records, there are precedents for EU agreements with third countries. In several areas, though, particularly in respect of data sharing, there are no precedents for third country access. And while Norway and Iceland have concluded extradition agreements with the EU approximating to the European Arrest Warrant, these have taken many years to negotiate and in some cases are not yet in force.

39.At the same time, we warned against approaching negotiations on security cooperation with a “false sense of optimism”, noting that “there will in practice be limits to how closely the UK and EU-27 can work together if they are no longer accountable to, and subject to oversight and adjudication by, the same supranational EU institutions, notably the CJEU”.28 This issue remains unresolved, and towards the end of the session the Home Affairs Sub-Committee launched a short follow-up inquiry, focusing on the European Arrest Warrant, to explore the options for judicial oversight further. This inquiry was paused upon the dissolution of Parliament, but has now been resumed.

Civil justice

40.The Justice Sub-Committee explored another key component of the rights currently enjoyed by UK and EU citizens in its inquiry into Brexit: justice for families, individuals and businesses?.29 The report underlined the reciprocity inherent in the mutual recognition of court judgments across the EU. This mutual recognition means that millions of UK and EU citizens have effective access to justice across the EU, in areas such as family law, employment rights, or contractual disputes.

41.Once it is accepted that the mutual recognition of judicial decisions is desirable, it appears evident, a fortiori, that it must be underpinned by some form of judicial oversight, to settle disputes and uphold common standards. The Government, in evidence to the inquiry, stood fast by its policy that the CJEU should have no jurisdiction in the UK post-Brexit, but left us “unable to discern a clear policy” for putting alternative arrangements for mutual recognition of judgments in place. Indeed, the Minister did not even acknowledge that domestic legislation, such as the forthcoming Repeal Bill, “would not provide for the reciprocal nature” of existing arrangements.30

Domestic policies post-Brexit

42.Brexit also presents an opportunity for the Government to develop distinctive domestic policies in areas hitherto controlled at EU level. In respect of the free movement of EU nationals—a key issue in the referendum campaign—the legal rights conferred upon EU citizens under the treaties will cease upon Brexit, and the Government will need to apply a new system of controls. In other areas, such as the environment, agriculture or fisheries, the Government will need to develop domestic policies alongside the devolved administrations.

43.In all these areas, Brexit presents opportunities: the Government will be able to devise new policies, better reflecting domestic needs and priorities. Our reports sought to identify the opportunities, as well as identifying the continuing inter-dependencies between the UK and the EU, whether economic, environmental or geographical.

Fisheries

44.In the Energy and Environment Sub-Committee’s report on Brexit: fisheries31 we addressed one of the most disliked and, arguably, least effective EU instruments, namely the Common Fisheries Policy (CFP). It was clear from our inquiry that few stakeholders in the UK will regret the passing of the CFP, and that many saw Brexit, after which the UK will be responsible under international law for managing its Exclusive Economic Zone, reaching up to 200 nautical miles from the coast, as “an opportunity for the UK to adopt a new fisheries management regime, tailored to UK conditions”.32 But fish do not respect national boundaries. We therefore warned that “failure to recognise that shared stocks require shared management could lead to overfishing and over-exploitation of these stocks”, and urged the Government to continue to cooperate with the EU and to adopt a “science-based approach” to determining fish quotas. We also noted that UK-EU trade in fish and fish products is vital to the UK fishing industry, and urged the Government to ensure that the sector is included as a priority area within negotiations on free trade agreement.

Environment and climate change

45.The Energy and Environment Sub-Committee’s inquiry into environment and climate change explored the complex interlinking of UK and EU environmental policies.33 EU environmental law covers issues as varied as biodiversity, chemicals regulation, and recycling targets, while its climate change policies cover matters including energy efficiency of appliances, law carbon technologies and emissions trading. We noted the concerns of stakeholders that environmental protections would be weakened post-Brexit. We also concluded that the forthcoming Repeal Bill, which is intended to ensure continuity, by transposing existing EU environmental regulation into domestic law, will not in itself be able to replicate the enforcement regime currently provided by the EU institutions. We therefore urged the Government to introduce an “effective and independent” domestic enforcement regime, underpinned by strong judicial oversight, post-Brexit.

46.We also considered the wider, international implications of Brexit. Climate change is a global issue, which demands global action, and hitherto the UK’s participation in that action has largely been coordinated through the EU. Post-Brexit the UK will need to reassess how it can meet its climate change obligations in the most cost-effective way, including whether it continues to participate in the EU Emissions Trading Scheme. It will also need to establish new alliances, if it is to preserve its status as “a global leader on climate action”.34

Agriculture

47.The Energy and Environment Sub-Committee’s report on agriculture was published immediately before the dissolution of Parliament on 3 May.35 Despite recent reforms, the Common Agricultural Policy (CAP) has been much criticised as costly, bureaucratic and ineffective, and there is no doubt that Brexit presents an opportunity for the UK “to review and improve its agriculture, environment, and food policy, better meeting the needs of the agriculture sector, the environment and consumers”.36 But achieving this outcome will be challenging. The EU is the UK’s biggest trading partner in food and agricultural products, and there is no prospect in the short term of offsetting this with increased trade with third countries. Maintaining the economic viability of the UK farming sector, while avoiding the temptation to cut costs by lowering standards (which could in turn lead to the imposition of non-tariff barriers to trade with the EU), will therefore require the Government “to balance the sometimes conflicting needs and expectations of farmers, consumers and trading partners with respect to quality and costs”.37

48.This inquiry also exposed the tensions within the UK that may arise as a result of the repatriation of competences currently exercised at EU level (including over agriculture), but which are devolved under the terms of the devolution settlements. While we supported the devolution of agriculture policy, which allows the devolved administrations to tailor policies to the varying needs of farmers and the land, we noted that maintaining the integrity of the UK single market will demand continuing coordination across the UK, and also that farming policies will have to respect future international trade agreements.38

Migration

49.The Home Affairs Sub-Committee’s report on UK-EU movement of people considered the options open to the Government in setting a post-Brexit immigration policy for EU nationals.39 We noted that the restoration of national control over immigration policy—a key objective of the Government—would not in itself lead to a reduction in net migration. At present almost three-quarters of EU national migrants come to work, or to look for work, and the main drivers for such migration are therefore economic. We warned that a simple extension of the ‘points based system’ that currently applies to non-EU nationals could impose significant costs upon employers, leading to labour shortages in some sectors. We therefore concluded that there might be “benefits to the UK in offering preferential treatment to EU nationals compared to non-EU nationals in the UK’s future immigration regime”—not least, because such an approach might help to secure reciprocal preferential treatment for the many UK nationals seeking to live and work in the EU.

The Overseas Territories and the Crown Dependencies

50.Finally, two short reports by the Select Committee shone a light on territories that will be profoundly affected by Brexit, but whose interests barely figured in the referendum campaign.

Gibraltar

51.Gibraltar is the only British Overseas Territory to be part of the EU (and the only one whose citizens had a vote in the referendum), and in the referendum 96% of votes cast in Gibraltar were to remain in the EU. It benefits substantially from access to the EU Single Market in services, and its economy relies heavily upon the 10,000 workers who cross into Gibraltar daily from the neighbouring region of Spain. Gibraltar thus faces an uncertain future, and we stressed that the UK Government has “a moral responsibility to ensure Gibraltar’s voice is heard, and its interests respected, throughout the Brexit process”.40

52.The Committee plans to hold an evidence session on the impact of Brexit on the other Overseas Territories early in the new session.

The Crown Dependencies

53.The Crown Dependencies (The Isle of Man and the Bailiwicks of Jersey and Guernsey41) are part neither of the UK nor the EU, yet enjoy a unique relationship with the latter thanks to Protocol 3 to the UK’s Treaty of Accession—in simple terms, they are part of the customs union and are essentially within the EU Single Market for the purposes of trade in goods. Protocol 3 will cease to have effect upon UK withdrawal from the EU, meaning that the Crown Dependencies’ special relationship with the EU, as currently constituted, will come to an end. Our report42 urged the Government to ensure that the Crown Dependencies are kept fully informed of the progress of Brexit negotiations, and stressed the Government’s constitutional obligation to ensure that their interests are properly represented.

Key themes

54.Our Brexit work continues, with several inquiries being paused when the general election was announced. But certain common themes are already clear.

The need for an agreement

55.The Prime Minister and ministerial colleagues have on a number of occasions argued that ‘no deal is better than a bad deal’. It is clear to us, from almost all the evidence heard across 17 inquiries, that ‘no deal’—the breakdown of negotiations under Article 50 TEU and the automatic termination of the UK’s EU membership after two years—would be disastrous for the UK and for millions of individual UK and EU citizens. It would also severely harm the EU, which would lose privileged access to an important export market, and to Europe’s and the world’s largest centre of financial services. It would mean an end to cooperation on internal security, putting lives at risk from terrorists and other criminals, and would diminish both the UK and the EU on the wider international stage.

56.Some may argue that the possibility that the UK could avoid meeting its outstanding commitments to the EU budget—the ‘Brexit bill’—would be a benefit of ‘no deal’. We believe, in contrast, that the issue of the ‘Brexit bill’ only underlines the vital interest that both sides have in conducting a fair and constructive negotiation, leading to a comprehensive and lasting agreement.

A pragmatic balance

57.There is no doubt that many stakeholders, particularly those representing industry and both the financial and non-financial services sectors, would prefer the UK to remain a member of the Single Market. This would give them stability and certainty, avoiding the creation of new tariff and non-tariff barriers to trade, facilitating the continuing free movement of labour and access to skills, ensuring consistency between UK and EU regulatory standards, avoiding time-consuming paperwork at the customs border, and so on. The previous Government, though, ruled out Single Market membership, on the grounds that it would entail continuing adherence to EU law and the jurisdiction of the CJEU, and would fail to give effect to the electorate’s wish to ‘take back control’.

58.Underlying the Government’s decision is the need to strike a balance: privileged access to markets comes at a price, which is set out in the terms of any free trade agreement. As one witness reminded us, when it comes to trade agreements, “There is no free lunch”43—there is always a trade-off between liberalising trade and the exercise of national sovereignty. The new Government will need to compromise on sovereignty, and it will need to justify such compromises to Parliament and to the wider public. This will require courage, tempered with pragmatism.

Transition

59.Given that continuing Single Market membership has been ruled out, the economy will need to adapt. That process of adaptation will take time, and a transition period—what the Prime Minister has called “a phased process of implementation”—will be needed.

60.Moreover, the vast weight of the evidence heard by the Select Committee and the sub-committees suggests that it will not be possible to achieve the Government’s aim of negotiating a comprehensive free trade agreement within the two years allowed under Article 50 TEU, three months of which have already passed. The best that can be hoped for is that the ‘framework’ of the future UK-EU relationship can be agreed within that time, paving the way for more detailed negotiations, which will probably take some years to complete.

61.Thus ‘transition’ will be more than an implementation phase: the two sides will need to adopt a bridging arrangement, ensuring stability and allowing the UK and the EU to continue to trade, and their economies to grow, pending the final settlement of the terms of the comprehensive agreement. There was little sign that the previous Government had seriously considered this requirement; it is vital that the new Government engages more seriously with the need for transition.

Timing

62.The Government has sought to link agreement on the withdrawal agreement—the terms of the ‘divorce’—with agreement on the future UK-EU relationship. As the Prime Minister put it in her letter triggering Article 50, “we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU”.44

63.The European Council, in contrast, has insisted on phased negotiations, beginning with the key elements of the withdrawal agreement, which include providing certainty to citizens and businesses on the “immediate effects” of UK withdrawal (in particular its impact on ‘acquired rights’), and settling “the rights and obligations the United Kingdom derives from commitments undertaken as a Member State” (in other words, the ‘Brexit bill’). Only when “sufficient progress” has been achieved on the withdrawal agreement will the European Council mandate the Commission to open the next phase of negotiations, on the framework for the future UK-EU relationship.45

64.Our reading of Article 50 TEU falls somewhere between these two positions. Article 50(2) TEU requires that the withdrawal agreement should “take account of the framework” of the withdrawing Member State’s “future relationship with the Union”. How detailed that “framework” will be is unclear. The prospect of a comprehensive free trade agreement being negotiated in full within two years is remote, but we recall that in our 2016 report on The process for withdrawing from the European Union, published ahead of the referendum, expert witnesses, including a former Judge of the CJEU, interpreted the wording of Article 50 as requiring coordination between the withdrawal agreement and the negotiations on a future relationship.

65.The Secretary of State for Exiting the EU, Rt Hon David Davis MP, was quoted on 14 May as describing the sequencing of negotiations as “the row of the summer”.46 In the event, when formal negotiations began on 19 June the two sides agreed to focus initially on citizens’ rights and the financial settlement.47 There could, however, still be disagreements as negotiations proceed, and both sides will need to show flexibility to avoid unnecessary sources of delay.

Devolution and the UK ‘single market’

66.The issue of devolution has come up repeatedly during our inquiries. The UK, like the EU, is a political Union, made up of diverse nations and regions: frustration with the perceived centralising bureaucracy of Brussels could easily be translated into frustration with Westminster and Whitehall. Brexit thus needs to deliver more flexible policy-making, better reflecting the needs and interests of the nations and regions of the UK. But it also needs to acknowledge that any ‘single market’—whether at EU or UK level—requires a level of coordination if it is to function efficiently.

67.The White Paper on what was at that point known as the ‘Great Repeal Bill’ acknowledged this tension. It described the Government’s determination to ensure that “the effective functioning of the UK single market is maintained … that no new barriers to living and doing business within our own Union are created as we leave the EU”. But it also set out the Government’s commitment to “work closely with the devolved administrations to deliver an approach that works for the whole and each part of the UK”.48 Keeping these objectives in balance will be an immense challenge, and is the subject of the Select Committee’s forthcoming report on Brexit: devolution.

1 European Union Committee, The EU referendum and EU reform (9th Report, Session 2015–16, HL Paper 122)

2 European Union Committee, The process of withdrawing from the European Union, (11th Report, Session 2015–16, HL Paper 138)

3 European Union Committee, Scrutinising Brexit: the role of Parliament (1st Report, Session 2016–17, HL Paper 33)

4 European Union Committee, Scrutinising Brexit: the role of Parliament (1st Report, Session 2016–17, HL Paper 33) and Brexit: parliamentary scrutiny (4th Report, Session 2016–17, HL Paper 50)

5 European Union Committee, Brexit: parliamentary scrutiny (4th Report, Session 2016–17, HL Paper 50), para 19

6 Letter from Rt Hon David Davis MP, Secretary of State for Exiting the European Union to Lord Boswell of Aynho regarding European Union Committee Brexit: parliamentary scrutiny report, dated 20 December 2016: http://www.parliament.uk/documents/lords-committees/eu-select/Government-response-brexit-parly-scrutiny.pdf

7 Council of the European Union, ‘Guiding principles for transparency in negotiations under Article 50 TEU’, 22 May 2017: http://data.consilium.europa.eu/doc/document/XT-21023–2017-INIT/en/pdf [accessed 22 June 2017]

8 European Union Committee, Brexit: acquired rights (10th Report, Session 2016–17, HL Paper 82)

9 Ibid., para 122

10 HC Deb, 13 March 2017, col. 41, Rt Hon David Davis MP, Secretary of State for Exiting the EU

11 European Union Committee, Brexit and the EU budget (15th Report, Session 2016–17, HL Paper 125)

12 Ibid., para 97

13 Ibid., paras 135–136

14 Ibid., para 137

15 Ibid., para 205

16 European Union Committee, Brexit: UK-Irish relations (6th Report, Session 2016–17, HL Paper 76)

17 See Theresa May MP, Letter to Donald Tusk triggering Article 50, 29 March 2017: https://www.gov.uk/government/publications/prime-ministers-letter-to-donald-tusk-triggering-article-50/prime-ministers-letter-to-donald-tusk-triggering-article-50 [accessed 22 June 2017] , and European Council, European Council (Art. 50) guidelines for Brexit negotiations, adopted 29 April 2017: http://www.consilium.europa.eu/en/press/press-releases/2017/04/29-euco-brexit-guidelines/ [accessed 22 June 2017]

18 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)

19 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)

20 Ibid., summary

21 Ibid., para 307

22 European Union Committee, Brexit: trade in non-financial services (18th Report, Session 2016–17, HL Paper 135)

23 Ibid., para 292

24 European Union Committee, Brexit: financial services (9th Report, Session 2016–17, HL Paper 81)

25 Ibid., para 39

26 Ibid., para 109

27 European Union Committee, Brexit: future UK-EU security and police cooperation (7th Report, Session 2016–17, HL Paper 77)

28 Ibid., para 38

29 European Union Committee, Brexit: justice for families, individuals and businesses? (17th Report, Session 2016–17, HL Paper 134)

30 Ibid., para 97

31 European Union Committee, Brexit: fisheries (8th Report, Session 2016–17, HL Paper 78)

32 Ibid., para 24

33 European Union Committee, Brexit: environment and climate change (12th Report, Session 2016–17, HL Paper 109)

34 Ibid., para 155

35 European Union Committee, Brexit: agriculture (20th Report, Session 2016–17, HL Paper 169)

36 Ibid., para 21

37 Ibid., para 152

38 Ibid., paras 189–191

39 European Union Committee, Brexit: UK-EU movement of people (14th Report, Session 2016–17, HL Paper 121)

40 European Union Committee, Brexit: Gibraltar (13th Report, Session 2016–17. HL Paper 116), para 110

41 Comprising Guernsey, Alderney and Sark.

42 European Union Committee, Brexit: the Crown Dependencies (19th Report, Session 2016–17, HL Paper 136)

43 Dr Ulf Sverdrup, Director, Norwegian Institute of International Affairs—see European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 3

44 Theresa May MP, Letter to Donald Tusk triggering Article 50, 29 March 2017: https://www.gov.uk/government/publications/prime-ministers-letter-to-donald-tusk-triggering-article-50/prime-ministers-letter-to-donald-tusk-triggering-article-50 [accessed 22 June 2017]

45 European Council, European Council (Art. 50) guidelines for Brexit negotiations, adopted 29 April 2017: http://www.consilium.europa.eu/en/press/press-releases/2017/04/29-euco-brexit-guidelines/ [accessed 22 June 2017]

46 Henry Mance, ‘David Davis warns Brexit timetable will be ‘row of the summer’’, Financial Times (14 May 2017): https://www.ft.com/content/01396086–38ae-11e7-821a-6027b8a20f23 [accessed 19 June 2017]

47 European Commission, Terms of Reference for the Article 50 TEU negotiations, agreed 19 June 2017: https://ec.europa.eu/commission/sites/beta-political/files/eu-uk-art-50-terms-reference_agreed_amends_en.pdf [accessed 20 June 2017]

48 Department for Exiting the European Union, Legislating for the United Kingdom’s withdrawal from the European Union, Cm 9446, March 2017, paras 4.3, 4.4: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604516/Great_repeal_bill_white_paper_accessible.pdf [accessed 22 June 2017]



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