March 28, 2017    4 minute read

Article 50: What It Means for the EU

The Future of Europe    March 28, 2017    4 minute read

Article 50: What It Means for the EU

Theresa May made it clear that Brexit will be a hard one, meaning a clean break from the European Union, regaining control of the borders and leaving the European single market.
Significant uncertainty weighs on the calendar of negotiations: Nicola Sturgeon has proposed a referendum on Scottish independence from the United Kingdom. Theresa May has already rejected the proposal.

What the Lisbon Treaty says:

  • Article 50 of the Treaty on the European Union provides a voluntary and one-sided withdrawal mechanism;
  • The EU country that decides to leave shall notify the European Council, which has its own guidelines for the conclusion of an agreement. Such an agreement shall be concluded on behalf of the European Union by the Council, after approval from the European Parliament;
  • The Treaties shall cease to apply to the country in question from the date of entry into force of the withdrawal agreement or two years after the notification of the withdrawal. The Council may decide to extend this deadline;
  • Any country that has left may apply to rejoin, going through a new application process;
  • The agreement shall be concluded by the EU Council and it will lay down the procedures for the exit, including a framework for future relations. The agreement must be approved by the Council, after approval by the European Parliament.

Consequences

It is difficult to translate into figures the trade effects of a European Union exit, but they will be important. The normal WTO tariffs (i.e., the rates that WTO members such as Britain, the US and the EU apply to exports among themselves) are low.

But, as seen in Europe and North America, guaranteed access to markets produces relevant effects because it encourages long-term investments to sell products or services in more countries. The elimination of this guarantee, in the long run, will impact trade negatively, although there should not be any sort of trade war. Another result will be that Britain will become less productive.  But, for the moment, all the talk will focus on the financial impact: a market meltdown and recession in the UK. For those who say that the UK has not suffered any real damage from the Brexit process, one has to remember that UK economy is doing better than expected because it has not left the EU yet. However, the country saw a significant drop in the pound, £100bn extra borrowing (meaning more debt) and there is the effect of the Bank of England’s quantitative easing to consider. Last, but not least, bankers are ready to flee from London to Frankfurt, which is now the cheapest financial centre in the EU.

On the Political Side

2017 can be the year of “truth” for Europe, with elections in France, Germany and possibly Italy. This year will show whether there is still an EU project. In France, Marine Le Pen has the clear intention of pursuing anti-euro policies and holding a referendum on a possible Frexit.

Center-right candidate Francois Fillon has seen a significant drop in the polls following the scandal involving his wife, while Macron and Le Pen have 43% and 32% chances of winning, respectively. Looking at today’s France, surely the threat of terrorism is an element that can shift the political balance. A new attack would move the debate further to the right, clearing the way for a challenger that focuses on the contrast between immigration and security.

The Germen Perspective

In Germany, SPD candidate Martin Schultz had an immediate positive effect for his party in the polls, rising as the main preference (50%) against Angela Merkel (34%). In recent weeks, several analysts have pointed out that a series of factors could make the final result a little more uncertain: among them, the rise of consensus for the AFD, the leading German party of the radical right; the party was formed in 2013 and has achieved good results in their first regional elections. Nothing has, therefore, been decided yet, but Merkel, until recently favoured for victory, is likely to miss a fourth term.

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