James Arnell is a partner at Charterhouse. He writes in a personal capacity.
In this continuation of my series of articles on planning for a no deal Brexit, I will cover contingency planning, including both the methodology I would use to flush out the various issues, and the specific approaches we might take to some of the issues already identified.
Before beginning, there is one important change that I would propose to Government policy to facilitate handling these vital transitional issues: the role of the ECJ.
I agree with the Government wholeheartedly that the ECJ should have no role in the domestic legal system of the UK. In most areas, the UK courts are absolutely the right forum in which to hear disputes. An EU citizen coming to live in the UK, for example, should accept that his or her rights will be protected through the UK courts, and the same vice-versa should apply to UK citizens moving to the EU.
However, there are some areas where continued jurisdiction for the ECJ is defensible and may, pragmatically, be the best route forward.
These areas are those in which there are major and legitimate cross-border interests. Examples include:
- Radioactive materials and the nuclear industry, where Chernobyl serves as a clear reminder that the consequences of nuclear incidents go across borders.
- Network interconnection, where the robustness of the European energy grid is supported by linkages and where the electricity flows need to be managed between domestic networks (allowing much more use of renewables and thinner safety margins on generation capacity).
- And aviation, where a plane falling out of the sky does the same harm no matter where it is from, and so on. My personal view is that allowing a limited role for the ECJ in these areas should be considered, and that this would make the resolution of some of these cross-border issues easier in the timeframe available. While, technically, this assumes a deal, I think we would be pushing at an open door, and that the EU would see the acceptance of ECJ jurisdiction as a major concession.
Moving on to contingency planning more generally, the EU Repeal Bill and the proposed importation of the EU “acquis” into UK law, serves as the ideal framework for the development of contingency plans.
Each department of state should (have already) set up a team to review the EU legislation coming into UK law which applies to its activities. They should also have a clear understanding of what financial flows come from the EU in their areas of activity. Finally, they should know the leading figures outside their department in their areas of activity. Using these three sources, each department should already have a detailed grasp of any threats to the immediate continuity of service and supply which may arise on Brexit.
(UPDATE: DEXEU has confirmed in a 30th April 2018 letter to the Public Accounts Committee, that there are 325 active Brexit workstreams in progress across the government departments. DEXEU has been cagey around the details of these workstreams, but it is clear that they include nuclear materials (BEIS), aviation (DOT), medicines (DOHSC), power interconnection (BEIS). The government has also announced that it will be releasing guidance on contingency plans through the summer.)
To date, all of the papers emanating from government on various Brexit issues have contained platitudes and expressions of the preference to reach a sensible agreement with the EU. I hope and trust that, behind closed doors, there is another set of papers dealing with the specific threats which arise if no such sensible agreement is possible. (UPDATE: this is, one assumes, what the 325 workstreams are covering.)
If the time comes (in December?) for the Government to accept that a FTA is not going to be possible and that a no deal Brexit is therefore the likely outcome, government departments will need to be ready to publish their crisis management plans immediately, to avoid the risk of panic.
(UPDATE: it seems likely that there is a fallback plan, in which the government will offer the EU a free trade agreement composed of the most favourable terms the EU has offered to other third parties (Fraser Nelson, Gulf News, July 20th). This has apparently been prepared by Linklaters, the City law firm, and is ready to go if the talks reach an impasse.
Given that this is unlikely to be offered up until after October, and unlikely to be accepted until the last moment by Brussels and the EU member states, we are likely to face a prolonged period, between October and March, where there will be a real sense of panic. It is all the more important that contingency plans are published in detail, and visible preparations made, to reassure markets, businesses and citizens during the standoff period.)
Every department must have a crisis management plan, and it must have been pre-tested with key figures in the relevant fields to ensure that it is exhaustive and deliverable. The last thing we will need is a media frenzy pointing out all the things which have not been properly considered.
(UPDATE: there is little evidence that these plans have been “road tested” with the business community, although there are signs that the government is testing new IT systems in some areas. A more transparent testing process would be advisable. Preparation must not only be done, it must be seen to be done.)
The key test for any action proposed in these plans must be: can this be done without any cooperation from the EU?
A very healthy dose of pragmatism will be required, and the solutions may be uncomfortable in some cases. But it is essential to get departmental staff into this mindset. It must become a mantra.
In many cases, this unilateral action will prove to be unnecessary, particularly if the breakdown in discussions about trade and money is not unnecessarily acrimonious. Even if we cannot agree a Brexit deal, the EU and the UK will need to cooperate to some extent to avoid unnecessary and serious complications for their citizens. But, nevertheless, having the unilateral backup plan is vital.
In some areas, there has already been speculation about problems:
- Nuclear materials.
- Power interconnection and supply.
(UPDATE: the other very substantial preoccupations which have emerged are around the capacity of ports and around data protection rules and data sharing. I address these later.)
Taking each of these in turn:
These are currently under the purview of Euratom, from which we have announced that we will leave, simultaneously with leaving the EU (Article 50 triggers departure from both). The Government has been firm in its assertion that leaving Euratom will not threaten security of supply of nuclear materials for medicine and the power industry. If this is correct, so be it.
However, if there are doubts, then remaining within Euratom, at least for the moment, does not seem to me to be an unreasonable interim step. The ECJ jurisdiction related to this treaty is limited, and scope exists for our immigration rules to create specific carve-outs to allow movement related to this activity. It may be sensible to accept this as part of a broader package of cross-border security cooperation. It takes one issue off the table.
The UK is a member of the ECAA, which is policed by the ECJ. If we leave the ECAA, our airlines will need to do some contortions to allow them to continue to operate between the UK and the EU, but it looks to be manageable. Easyjet has created an EU airline based in Vienna as a contingency, and IAG (BA) has its Iberia subsidiary.
Issues will instead arise on flights between the UK and other markets outside the EU which are currently permitted because there are arrangements between the ECAA and those markets. The counterparties for crisis plans for aviation are therefore outside the EU, which complicates matters and again argues for early discussions. Clearly, it is in the interests of the EU to maintain flows of UK tourists and business travellers into the EU, and it is in their interests to maintain rights for their airlines within the UK, so sense should prevail in discussions with the EU.
But here again, our determination to accept no jurisdiction for the ECJ seems to me to be misplaced. Air transport again seems to me to be an area where ECJ jurisdiction is defensible. So, my approach would be to seek continued membership of ECAA, with continuation of rights to fly to those non-EU markets. My fallback plan would be to seek to agree a memorandum of understanding with the US protecting existing traffic rights, with a view to renegotiating that deal over a defined timeframe, and perhaps as part of a wider UK-US trade deal. I think it unlikely that the US carriers would want to lose access to the UK, so such an MOU should be achievable quickly.
The European Medicines Agency is leaving the UK after Brexit. The system whereby drugs produced under a license from any member state will be accepted in any other member state will no longer apply. The EMA has issued guidance to companies, stating that they will have to relocate their licenses to entities within the EU, relocate their quality management resources, relocate their batch preparation facilities and so on. The cost of these changes has been estimated by the pharmaceutical industry to amount to about £500 million.
On the face of it, therefore, there is a substantial problem. However, the UK imports £18 billion of pharmaceutical products from the EU, while we export £11.5 billion to the EU. Neither the UK nor the EU are in the business of poisoning their citizens. A pragmatic solution should therefore be possible, whereby the EMA accepts products from the UK and the UK accepts products from the EU, at least for an interim period, to avoid disruption to supply.
If this is not possible, then safety stocks will need to be built up on the EU side of the Channel by our exporters. On our own side, I would propose that we continue to recognise drugs which have come from the EU, to reduce unnecessary costs and to ensure continuity of supply.
Going forward, the UK and EU’s regulatory systems around medicines may well diverge, and therefore there will be additional costs for companies (and therefore health systems) in future as a result of these changes. Making drug development cheaper and speedier in the UK, giving an incentive for drugs companies to develop the UK market as a stepping stone to other markets, seems to me to be an opportunity which will more than outweigh these additional costs.
Power Interconnection and Supply
The UK’s membership of the EU gives it membership of the IEM (the Internal Energy Market). This regulates the energy markets of countries within the UK and seeks to harmonise them. One particularly important aspect of this for the UK is interconnection: the import and export of electricity through interconnectors. These are important between the UK and continental EU but also between the UK and the Republic of Ireland.
Integration of the grids allows real-time management of flows to ensure that electricity is moving when needed in each direction and allows cost and carbon efficiency to be improved. There is no inherent threat to interconnector access but, in the absence of integration, power flows will no longer be optimised and this will lead to an increase in cost for UK consumers (and EU consumers).
It should be possible to agree bilateral arrangements and to continue to coordinate energy policy via associate membership of various EU bodies (ACER, ENTSO-e) without remaining part of the IEM. Given the UK’s wind asset, which will represent an important source of renewable power deliverable to Europe when the UK is in surplus, and given Hinkley Point, it should make sense for the EU to agree specific arrangements for interconnection, and we may well decide to maintain harmonisation in other respects. At least, there does not appear to be a serious short term issue here.
There has been considerable speculation around the capacity of our ports (and those of our neighbours) to absorb the extra customs work required if there is a WTO Brexit. In my previous article, I suggested changes to our tariff regimes to reduce the range of goods on which tariffs are paid, which will reduce the load increase on tariff processing systems. The need for physical checks will remain.
In the short term, a pragmatic approach on our side is simply to check a lower proportion of shipments, to allow things to keep moving. We will, in other words, wave the lorries through. As for EU ports, I suggested in my previous article that the government should be seeking to agree capacity expansion in the Dutch ports NOW, and if necessary helping to fund it.
Those who fear long tailbacks of lorries in the UK seeking to enter Europe should consider several factors: first, most road transport is provided by non-UK EU drivers. Extensive delays will hurt EU-based haulage businesses. They will lobby to prevent this. The governments of countries and regions neighbouring the UK do not want their economies to be devastated by a halt in EU-UK goods flows. Xavier Bertrand, president of Hauts-de-France has been lobbying the French government to break with the EU negotiating rules and deal urgently with Dover-Calais issues because he fears for his region’s economy. The Dutch and Belgian ports have announced increases in capacity and will seek to grab market share of UK trade if the French ports “lock up”. And, within the UK, there is scope for substantial displacement of traffic from Dover to other ports.
In short, it does not seem likely that there will be a catastrophic problem, but further investment in resources on both sides of the border do need to be expedited now.
Data protection rules and data sharing
We have now implemented GDPR in the UK, and it might therefore be thought that our data protection regime would easily qualify as an “adequate” third party regime, allowing EU and UK companies to share data. However, this requires a finding of adequacy by the EU, which might not be forthcoming, particularly given the extensive investigatory powers our government has (similar powers in the US have been found to be in breach of EU principles).
We may therefore need to accept a watering down of the Government’s investigatory powers in the short term, in order to achieve the status of “adequacy” under EU law. Many privacy campaigners would no doubt welcome this but it does represent a trade off between national security and national economic interest.)
I expect plenty of comments to this article to point out that, with so many areas of cooperation, we should not be leaving in the first place. It is inevitable that an article on the issues arising from Brexit will focus on those areas where we are most closely tied in to the EU. There are indeed many areas where, had we not joined the EU, we would have sought to negotiate bilateral agreements. We should seek to do this on a pragmatic basis even if we cannot agree a FTA, but we should also face the reality that this may not be possible or may take too long, and plan accordingly.