The UK’s Economic Relationship with the European Union: Transitional Arrangements

Written evidence submitted by Professor Kenneth Armstrong,

Professor of European law and Director, Centre for European Legal Studies, Faculty of Law, University of Cambridge

 

Executive Summary

 

 

The UK and EU Positions

  1. in her speech in Florence on 22 September 2017, the Prime Minister Theresa May made clear that the UK Government would seek an interim ‘implementing’ framework based on Article 50 pending the conclusion and entry into force of a desired ‘deep and special partnership’ agreement once the UK has left the EU. The Prime Minister stated:

The framework for this strictly time-limited period, which can be agreed under Article 50, would be the existing structure of EU rules and regulations.

  1. In its Guidelines to the Union’s negotiator, the European Council cautiously accepted the possibility of the negotiation of an interim framework as part of the Article 50 withdrawal negotiations:

To the extent necessary and legally possible, the negotiations may also seek to determine transitional arrangements which are in the interest of the Union and, as appropriate, to provide for bridges towards the foreseeable framework for the future relationship in the light of the progress made

  1. The ‘negotiating directives’ agreed by the Council to guide the Commission’s negotiations with the UK state:

Any such transitional arrangements must be clearly defined, limited in time, and subject to effective enforcement mechanisms. Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply.

However, a distinct mandate to negotiate an interim framework will only form part of the second phase of negotiations between the UK and the EU, once the European Council is satisfied that sufficient progress has been made in the first phase of discussions. The UK Government is hopeful that negotiations can move to this second phase following the European Council meeting in early December 2017.

  1. The aim of any interim framework would be to bridge the gap between the UK’s departure from the EU – when the existing EU treaties will cease to apply to the UK – and the negotiation and conclusion of any type of agreement between the UK and the EU to govern its future trade and cooperation.
  2. In the absence of any substitute legal framework, the default position would be the application of World Trade Organisation (WTO) rules that would not only see the re-imposition of tariffs in trade but would also be less effective both in terms of the continuing elimination of non-tariff ‘regulatory’ barriers and also in respect of mechanisms of enforcement. Agreeing an interim framework would aim to avoid this default position and to maintain access to the Single Market on conditions comparable to those that existed prior to the UK’s withdrawal. Both sides have an interest in avoiding the default WTO position.
  3. While the aim of the European Union (Withdrawal) Bill is to domesticate the existing EU regulatory acquis, this is not a legal basis upon which to secure reciprocal market access which necessarily must take the form of a WTO-compliant international agreement between the UK and the EU. In the absence of an agreement to the contrary, future UK governments would be free to adopt rules that diverge from the acquis. Maintaining convergence during a transitional period may be expected by the EU in return for continuing market access and to avoid the application of regulatory controls across the Ireland-Northern Ireland border.
  4. Nor can the EU Withdrawal Bill ensure the mutual recognition of the outcome of administrative and regulatory processes – e.g. approvals or licences – undertaken to apply the domesticated acquis to firms and businesses operating in regulated markets governed by EU rules. In terms of cross-border trade between the UK and the EU, these domesticated EU rules need an EU administrative and institutional ‘operating system’ on which to ‘run’. There remains a need for an agreement – including an interim framework – to maintain continuity in operations in regulated spheres including banking, financial services, chemicals and pharmaceuticals.
  5. Although there are similar interests on both sides in seeking a transitional framework to maintain arrangements in a form comparable to the position pre-exit, there is an asymmetry in the positions insofar as one of the stated reasons for seeking an ‘implementation period’ is that the UK government recognises that it needs more time to prepare for life outside the EU. The Secretary of State for Exiting the EU, David Davis made that clear in his evidence to the Exiting the EU Select Committee on 25 October 2017. This means there are two rather distinct forces that may determine how long a transitional period might last:

The Legal Basis for an Interim Framework

  1. Article 50(2) TEU is the legal basis for the Union to ‘negotiate and conclude an agreement [with the withdrawing state], setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. While it is clear that this provides legal authority for the Union to manage the UK’s departure from the EU in terms of winding down its membership, the legal problems emerge the more that the parties seek to use Article 50 TEU as a legal basis to manage a future UK-EU relationship at the point that the UK ceases to be a Member State.
  2. The key legal issue is the extent of Union competence under Article 50 TEU. The EU has no inherent legal powers and so must act within the limits of the powers attributed to it by the Member States through the treaties. That also means ensuring that the correct legal basis is chosen for any instrument not least because the legal basis must reflect the division of competences between the EU and its Member States in any given sphere of cooperation. The legal basis also determines the procedural rules that apply to the negotiation, conclusion and ratification of any agreement.
  3. Article 50 appears to be cast in particularly wide terms. The Article 50 negotiating directives agreed by the Council state that:

The Agreement will be negotiated and concluded by the Union. In this respect, Article 50 of the Treaty on European Union confers on the Union an exceptional horizontal competence to cover in this agreement all matters necessary to arrange the withdrawal. This exceptional competence is of a one-off nature and strictly for the purposes of arranging the withdrawal from the Union.

  1. Merely because the EU and UK agree that Article 50 could be a legal basis for an interim framework is not itself decisive. The choice of legal basis and any limitations on its use are matters of law. The Court of Justice has jurisdiction to handle disputes concerning whether the EU has the correct legal basis for its actions and whether it has complied with all necessary substantive and procedural limits on its exercise of power.
  2. As the EU has also made clear, while the Union does have an exceptional competence over all matters necessary to arrange the withdrawal, this cannot affect the respective powers of the EU and its Member States vis-à-vis the negotiation of a future trade and cooperation agreement between the UK and the EU:

The exercise by the Union of this specific competence in the Agreement will not affect in any way the distribution of competences between the Union and the Member States as regards the adoption of any future instrument in the areas concerned. 

  1. There is, therefore, a legally grey area as regards what is legally possible as an interim framework that is consistent both with the extensive competence of the Union to deal with the past, and the division of competences between the Union and the Member States in respect of a future agreement.

Options for an Interim Framework

  1. There are four main options for an interim legal framework:
  1. Of these options, a ‘stand-still’ interim framework would appear to be the most legally plausible.

A Stand-Still Interim Framework

  1. Article 50 is clear that the treaties shall cease to apply to the UK upon the entry into force of the withdrawal agreement. Nonetheless, it is legally plausible for the agreement to contain a derogation that ‘saved’ certain of the provisions of the treaties – including any secondary acts for their application – for a time-limited period.
  2. One way of achieving this would be to have a date for the entry into force of the agreement as a whole – on which date the UK would cease to be a Member State – but, as a derogation, specify a later date for the entry into force of the agreement when applied to certain provisions of EU law specified in the agreement or a specific Protocol on Transition. The effect would be to create a body of ‘saved EU law’ for a time-limited period. This would parallel similar sorts of transitional arrangements that are written into accession treaties and which provide a phased application of EU obligations after initial membership.
  3. The advantages for the EU are clear. The direct source of substantive obligations would not be the Article 50 agreement itself but would instead continue to be the EU treaties. The EU would likely insist that existing structures for interpretation, enforcement and dispute resolution would continue to apply. Provisions could be inserted into the agreement that would cause the derogation to cease either because the parties are in a position to move to a new relationship or because the relationship has broken down. It would preserve the essence of the character of the Article 50 process namely to bring about the cessation of the application of the treaties to the withdrawing state albeit in a more phased approach rather than as a singular event.
  4. There would be limits to this strategy. It could not extend to a total saving of the provisions of the treaties as that would be tantamount to a deferred withdrawal. Nonetheless, it could be considered to be the most legally secure form of interim framework consistent with the wide competence conferred on the Union under Article 50 precisely because it would not create a new legal instrument containing substantive obligation but rather merely preserve or save certain existing obligations.
  5. From the UK perspective, this type of stand-still would be a compromise. It would be important to be able to say that the UK was no longer a Member State and that the continued imposition of EU law was limited to a set of specific obligations and on a time-limited basis. It would also be important that the UK – like the EU – had the option to terminate the derogation upon giving an appropriate period of notice.

Provisional Association or Trade Agreements

  1. A very different approach would be to seek to create a new substantive legal instrument as a substitute for the rules contained in the EU treaties. Even if in substance the rules were identical and amounted to a ‘drop and drag’ of current EU rules into a new instrument, from the perspective of EU law, the source of the norms governing the UK’s interim relationship with the EU would cease to be the treaties and would instead be the new international agreement.
  2. From a UK perspective this might seem like a more desirable approach as it would be clear that the original EU treaties no longer applied to the UK. Moreover, if the Court of Justice were to be given jurisdiction over the agreement the UK could maintain that this was not the direct jurisdiction of the Court under the original treaties but an agreed and specific jurisdiction to which it had consented.
  3. However, this approach would be problematic from an EU perspective both politically and legally. Politically, it would not be consistent with the negotiating directives given to the Commission as it would not amount to a prolongation of the Union acquis but rather its partial replication under a new legal instrument.
  4. Legally, the creation of a new legal instrument based on Article 50 TEU that is in substance either a provisional trade agreement or a provisional association agreement dramatizes the issue of the limits of what is possible under Article 50. Indeed, if the powers of the Union to adopt an interim framework under Article 50 are limited, it might be considered necessary to seek support from additional legal bases like Article 207 TFEU (common commercial policy) or Article 217 TFEU (association agreements).
  5. However, an EU legal instrument cannot have multiple legal bases if that would give rise to either procedural conflict – where the different legal bases operate under different procedural conditions – or would engage provisions based on different distributions of competences as between the Union and the Member States. For example, association agreements require the unanimous agreement of national governments (and the consent of the EP) and, because of their tendency to mix issues of Union and national competence, have also entailed domestic approval and ratification requirements. By contrast, Article 50 TEU simply requires a qualified majority vote in the Council and the consent of the EP with no EU law requirement of domestic approval.
  6. In other words, the thicker a withdrawal agreement becomes in terms of creating a new legal instrument containing a transitional framework with detailed and substantive rules and norms governing a post-exit UK-EU relationship – even on a time-limited basis – the more that it is open to legal challenge on competence grounds. A Member State, the Commission, the Council or the European Parliament could seek an Opinion from the Court of Justice under Article 218(11) TFEU as to the compatibility of such an agreement with the treaties. If the Opinion is adverse, the agreement cannot enter into force. What is not clear is whether the Article 50 TEU two-year window for reaching a withdrawal agreement would simply then expire or whether the Court would have the capacity to stop the clock.
  7. It is worth noting, however, that as the example of the EU’s response to the economic and financial crisis illustrates, whenever issues as to the competence of the Union and its institutions have been raised before the Court of Justice, the Court has not been in a rush to find that the Union lacked the power to do what it wanted to do. Moreover, in situations where the EU is granted a wide discretion to act, the Court tends to adopt a standard of ‘marginal review’ that requires an applicant to show that the EU has made a ‘manifest error of assessment’ in its appreciation of the limits of its powers. However, where the Court has been more forthright is in protecting its own jurisdiction to interpret Union law and so what might be more decisive is whether the Court would find fault with the interpretation and dispute-resolution mechanisms created under a new legal instrument.

Deferred Withdrawal

  1. Under Article 50, it is possible for the parties to agree to extend the Article 50 TEU process and so defer the point at which the UK would withdraw from the Union. This requires the unanimous consent of the governments of the EU27.
  2. Notwithstanding that the UK Government has amended the EU Withdrawal Bill to set 29 March 2019 as ‘exit day’, this only has domestic legal implications in determining the date at which EU law will be domesticated in UK law. It in no way inhibits the operation of Article 50 in legal terms including the power to extend the Article 50 process and to defer withdrawal.
  3. While a deferred withdrawal from the EU could usefully deal with the UK’s wish for time to prepare for life outside the EU, it is not obvious that this alone would give the EU a strong reason to agree to extend the Article 50 process. In any event, it would only delay departure rather than create a bridge between exit and a future deep and special partnership.

EFTA/EEA

  1. The issue of whether the UK should seek to rejoin EFTA and to utilise the EEA agreement for access to the Single Market does not directly engage the issue of what is legally possible under Article 50 as this would be pursued outside of that process. Moreover, the UK Government has made clear that this is not an option that it wishes to pursue either as an interim strategy or as a medium term landing point for the UK outside of the EU. There is also the issue of how to transition to such an EFTA/EEA model and legal concerns have been raised.
  2. It has been said that the correct legal route would be for the UK to seek to re-join the European Free Trade Association and only once its candidacy was accepted and the UK joined EFTA could it then seek to become a party to the EEA Agreement in the terms laid out in Article 128 of the EEA Agreement. That provision requires an agreement between the contracting parties and the state joining the agreement and for the agreement to be ratified by the contracting states in accordance with their own procedures. This would suggest a hiatus in the ability of the parties to utilize the EEA agreement as a transitional legal framework.
  3. However, when Bulgaria and Romania joined the European Union on 1 January 2007, an EEA enlargement agreement was signed with the two new countries on 25 July 2007, but the agreement did not enter into full force following ratification until 9 November 2011. But that did not mean that the EEA agreement did not apply during this four year hiatus. Because on 7 July 2007, the EU entered into an exchange of letters with the participating EFTA states to ensure the provisional application of the agreement pending formal ratification. If an exchange of letters is enough to provisionally apply an agreement that would see Bulgaria and Romania become parties to the EEA Agreement, the same could be true for the UK if it sought to use the EEA Agreement on a transitional basis, not least as the UK is currently a contracting party to that agreement together with the EU.
  4. Nonetheless, it is better to understand this option is a medium to long-term alternative to either a trade or association agreement with the EU, rather than as an interim framework.

Implementing Transition

  1. A key and relatively unexplored issue is how to implement an interim framework in UK law. The European Union (Withdrawal) Bill envisaged that an Article 50 withdrawal agreement would be implemented in UK law via powers delegated to Ministers and devolved administrations (Clause 9 and Schedule 2, Part 3). It now seems more likely that separate primary legislation will be introduced to give a withdrawal agreement a statutory footing.
  2. If an interim framework is agreed as part of the withdrawal agreement, and if it took the form of a standstill saving of existing provisions of EU law that will continue in force notwithstanding the entry into force of the withdrawal agreement then two options present themselves.
  3. Instead of repealing the European Communities Act 1972 as is intended under the EU Withdrawal Bill, it might be thought possible for the relevant saved provisions of EU law to continue to have domestic effect via the 1972 Act. This would not be without its difficulties given that the UK would no longer be a Member State and the treaties in general would have ceased to apply to the UK. In other words, the very circumstances which gave rise to the obligations under EU law and to which the 1972 Act gave domestic legal effect would no longer be present.
  4. The alternative approach would be to replicate the approach of the 1972 Act in a new Bill and for saved provisions of EU law to have effect in a wholly analogous manner to how they had been given legal effect under the 1972 Act. Importantly, this constitutional consistency would be both familiar to the UK courts and to the EU itself.
  5. The EU has a clear interest in understanding how the UK will ensure that it can continue to give domestic legal effect to its obligations under an Article 50 withdrawal agreement, particularly given its dualist constitutional tradition and the principle of the sovereignty of Parliament. Replicating the known constitutional device of the 1972 Act would likely be acceptable to the EU.

December 2017

Acknowledgements

This evidence includes ideas developed in collaboration with colleagues at the University of Cambridge, including especially Professors John Bell and Mark Elliott, Dr Paul Daly and Dr Kirsty Hughes. For further elaboration of some of the ideas presented here please see:

Armstrong, Kenneth and Bell, John and Daly, Paul and Elliott, Mark, Implementing Transition: How Would it Work? (October 13, 2017). University of Cambridge Faculty of Law Research Paper No. 57/2017. Available at SSRN: https://ssrn.com/abstract=3052328

Armstrong, Kenneth, Implementing Transition: Legal and Political Limits (November 1, 2017). University of Cambridge Faculty of Law Research Paper No. 50/2017. Available at SSRN: https://ssrn.com/abstract=3066703

Daly, Paul and Armstrong, Kenneth and Hughes, Kirsty, Brexit and EU Nationals: Options for Implementation in UK Law (November 24, 2017). Available at SSRN: https://ssrn.com/abstract=

The Author

Kenneth Armstrong has held the Professorship in European law at the University of Cambridge since 2013. He was previously Professor of European Union law at Queen Mary, University of London. He is Director of the Centre for European Legal Studies, Faculty of Law, University of Cambridge and editor-in-chief of the Cambridge Yearbook of European Legal Studies. His book, Brexit Time: Leaving the EU – Why, How and When? was published by Cambridge University Press in 2017.

 

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