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Grayling Brussels' Brexit Bulletin - 20 April 2017

20th April 2017


The BREXIT Bulletin: UK election unlikely to ruffle EU feathers


Once Article 50 was triggered, all talk of a possible snap election in the UK appeared to die a death. Theresa May had set the course for Brexit, the 2-year countdown had begun, and there would surely be no time to hold an election – right?
 
Wrong!
 
So why did she make this announcement after triggering Article 50? Was it simply an afterthought, or was this a clever ruse to wrong-foot the opposition?
 
In fact, by calling an election after the triggering of Article 50, she has called the bluff, not just of Labour and the Liberal Democrats, but also of UKIP and the Eurosceptic hardliners in her own party.
 
Had she called it before triggering Article 50, the latter group could still cast doubt on her commitment to, as they would say, “deliver Brexit”. Now, there is no doubt – Brexit will happen, the process has been set in motion, and thus a major argument of the Eurosceptics has been seen off.
 
The EU Institutions have responded with typical “sangfroid”. The elections do not affect the overall timeline for Brexit, and the key markers in the sand, such as agreeing the guidelines for the EU in the negotiations, will continue.
 
Some commentators have suggested that Brussels will be fearing a post-election Theresa May with a larger majority and a reinforced mandate, but in truth there is no reason why they should respond any differently now.

Brussels has been pragmatic from the outset, there is still no desire to do the UK any favours, and each Member State is beholden to its own electorate - in any case, the pressure is still on the UK to ensure it does not leave the EU without an agreement.
 
This election, then, is likely to give May a much-needed boost at home, but the EU is likely to remain unfazed and will stick to its guns in the negotiations.

For a detailed analysis and briefing on the UK election, check out our London team's daily Election Bulletin. An updated version of our Brexit Unit Timeline is also available. 

If you have any suggestions about the Brexit Bulletin or want to find out more about a specific aspect of Brexit, please do let us know. Please visit the Grayling Brussels website, follow us on Twitter @TheEULobby, and don't forget to check out our Brexit Papers
 

This weeks contents:

Sectoral Insight -UK Highlights - EU Highlights - Member State Highlights - 

Sectoral Insight: 

Contributed by Eleanor Flanagan, Grayling PA, Head of New Technologies

Regulating new technologies post-Brexit: The dawn of a more heavy-handed era? 
The policy impact of Brexit on the tech industry is likely to be damaging on both sides of the channel. First, there are strategic implications for the overall tone and direction of tech policies in Europe. Post-Brexit, lawmakers in Brussels and London may be tempted by a more interventionist approach. In the UK, Prime Minister Theresa May will launch her Modern Industrial Strategy, demanding closer collaboration in key industries in exchange for government support. Should the Conservatives stay in power after the General Election, they could also push for greater liability for online intermediaries, reinforced online surveillance powers and law enforcement access to user data - linked to key issues for the Tory party like national security. EU tech policy could take on a more precautionary and conservative spirit in the hands of countries like France and Germany, favouring security and strong user rights over disruptive innovation.
 
Legislation currently being implemented or under negotiation at the EU level will be affected in form and content. One example is the EU’s telecoms reform, in which the UK has little say due to Brexit tensions. This has an impact for whether over-the-top (OTT) services like WhatsApp and Viber will be included in the new EU legislation and indeed future UK law. Britain may well decide to adopt a less restrictive approach to OTT services to encourage investment in the UK. Meanwhile, landmark tech legislation that are important for trading with the Single Market and which have already been adopted by the UK under the auspices of the EU should be less affected. The UK will have to implement the new General Data Protection Regulation (GDPR) by May 2018 (before it exits the EU), and any repeal and subsequent new UK law would need to have virtually the same provisions if the UK is to satisfy strict EU data protection standards and therefore continue to trade with the EU27.  
 
Brexit also means the departure of EU agencies currently based in London, including the European Banking Authority (EBA), and a decline in power of UK agencies like OFCOM (the UK regulator) in cooperating to set and enforce EU-wide regulation. The EBA’s eventual departure is a blow for the UK’s flourishing Fintech industry, given the natural proximity and influence it currently enjoys.
 
In the longer term, Brexit raises key policy questions including data transfers between the EU and the UK, which will depend on the data protection regime adopted by the UK. A question mark hangs over intellectual property rights, notably patents and trademarks, which benefit from unified EU systems. UK-based and EU businesses are also vocal about the importance of foreign talent acquisition for a thriving tech sector, which is very much at risk in the politicised negotiation over free movement of people.  
 
The Grayling View 
From an investment and innovation perspective, Brexit is a huge blow to new technologies investments in the EU, as the UK produces many tech "unicorns" and is especially important in European leadership and innovation in FinTech. From a policy standpoint, the UK’s departure threatens to do more harm than good on both sides, though there is a chance that the new competition dynamics between the EU27 and the UK for foreign tech investment may encourage a more business-friendly approach to regulation. Either way, the sector faces sustained economic, investment and political uncertainty, particularly for businesses currently headquartered or operational in the UK. 
 
Meanwhile, new “champion” countries for the digital sector in Brussels will need to be identified in the UK’s absence. Poland is reportedly keen to fill the gap, while Estonia is doing its best to lure UK-based academics and entrepreneurs into becoming “e-residents” with the hope of continued access to EU funding and markets after Brexit.
 
 The highlights from the UK

May announces General Election for 8 June
On 18 April, in a surprise announcement, Theresa May called a snap General Election for 8 June. Her move was backed by both the Labour Party and the Liberal Democrats, although the polls suggest that the Conservatives are likely to win an increased majority, as they lead 2nd placed Labour by 17 percentage points. Parliament is expected to break up on 3 May. In the EU the response to the election announcement has been rather mooted, with EU officials insisting that the timing for the Brexit negotiations will be unaffected by this election. Indeed, the EU is currently in the process of agreeing its own Brexit negotiation guidelines.
 
The Grayling view
If a snap election was going to be held, this is the perfect time to do it. May knows that the opposition parties are either in internal disarray (Labour) or still recovering from the last election in 2015 (Liberal Democrats), and as we noted above in the introduction, Eurosceptic parties have had the wind taken out of the sails now that Article 50 has been triggered. Elections are never clear-cut, but it does seem that May will strengthen her majority in Westminster, which will strengthen her resolve to “deliver Brexit”, although this alone should not necessarily alter how the rest of the EU behaves in the negotiations, given their pragmatic approach up to now and the fact that they, too, have electorates to satisfy.
 

IMF upgrades UK and Eurozone growth forecasts 
Neither set of figures are particularly good, but they are being welcomed as an indication that Europe is finally recovering from the effects of the 2008 financial crisis and 2010 sovereign debt crisis. The IMF expects the Eurozone to grow by 1.7% and for the UK by 2%.
 
Proverbial ‘green shoots’ are however complicated by the persistence of underlying risks and attached uncertainties. The medium term drags on Eurozone growth remain sluggish productivity growth and ageing populations in the ‘core’ and crippling rates of unemployment in the periphery. The UK faces the same structural challenges, although for the UK Brexit represents an additional black hole of uncertainty. Aggressive monetary easing last year and the sharp sterling depreciation following the referendum both served to artificially boost demand. Indeed, the IMF recorded a delayed reaction to Brexit in consumption and investment decisions which have largely remained consistent with levels seen immediately prior to the referendum.
 
The Grayling View
For businesses, the key requirements remain to keep markets open, governments responsive, and systems stable. European governments face pressures to increase protectionism, limit innovation, and intervene in industrial activity; persistent and vigilant multilateral engagement remains the order of the day.
 
However, there is a risk that voters in the UK may link positive growth rates to Brexit, and thereby hand May a stronger mandate for a ‘hard’ Brexit on 8 June. For the fragile Eurozone, Brexit’s uncertainties are compounded by its draining of resources from efforts to rebalance the currency area, the need for which is highlighted by the ongoing 3rd Greek Bailout negotiations. 

 


The highlights from Brussels

Preliminary drafts of the Commission’s negotiating directives
In leaked preparatory documents for the Commission’s negotiating mandates, the EU’s negotiating position has become clearer. The text obtained by Politico indicates that a negotiating mandate will be initially issued for the first phase of the negotiations, covering the Divorce Agreement. Subsequent revisions and updates will be made to the mandate as the European Council’s guidelines, on which they are based, evolve and as negotiations move towards the second phase.
 
For phase two, on the future relationship, the directives are likely to stipulate that they can only be finalised and concluded when the UK becomes a third-country. However, the EU will look to agree an overall understanding with the UK on the future relationship, provided progress is made on the divorce. This will form the basis of any talks on transitional arrangements and as such they will not be discussed during the first phase.
 
Controversially, the negotiating directives will also require the UK to bear the costs related to its withdrawal in Euros, the most high profile examples are those associated with the relocation of EU agencies. On the settling of disputes arising from the agreement, the Commission’s position is that the jurisdiction of the ECJ should be maintained; if any alternative is to be considered it must have “equivalent guarantees of independence and impartiality”.
 
The Grayling View
This early version of the directives is consistent with the text of the draft guidelines, the finalised version of which will provide its basis, notably concerning the EU citizens' rights to stay in the UK. Indeed, consistency and unity between the institutions is becoming the defining feature of the negotiations on the EU’s part. Where the preparatory document does differ from the draft guidelines is in its level of granularity, the most politically controversial elements are the specifics on a dispute settlement mechanism and the UK’s costs being denominated in Euros. Sterling’s volatility since the referendum makes this an unsavoury prospect for the UK. 
 



The highlights from EU Member States 

Baltic States - Security and Citizenship
Estonia is reported to be looking to attract UK academics and the FinTech sector through its groundbreaking ‘e-residency’ programme. ‘E-residency’ which costs €100, could help individuals establish companies in Estonia, which would also benefit from the country’s efficient tax regime. 

In parallel, the Lithuanian Parliament is to debate a legislative revision that would allow its UK-based citizens to retain Lithuanian citizenship should they choose to seek the British equivalent. 

On a visit to Latvia on 21 February Brexit Secretary David Davis emphasised the similar voting records of the UK and Latvia in the European Council. Latvian Foreign Minister Edgars Rinkēvičs has called on negotiators to focus on finding common ground and on protecting residents’ rights.

The Grayling View
The UK has expended significant energy in attempting to woo the Baltic States, leveraging the rights of citizens resident in the UK. Estonia, Latvia and Lithuania are also the most receptive to May’s indication that she may seek to leverage the UK’s security umbrella; 800 British military personnel are currently being deployed to Estonia under NATO to deter Russian aggression.   

The Lithuanian President has warned that the bill tabled by 114 MPs could be unconstitutional, with the warning that she may exercise her veto, although 71 MPs could override this. Legal action would inevitably result before the Constitutional Court. Similarly, Estonia’s nascent ‘e-residency’ programme would also likely prompt legal proceedings, which would wind up at the European Court of Justice, the outcome of which is unclear.
 



Dates for your diary

24 April 2017 - Member State ministerial meeting
29 April 2017 - EU Summit
23 April and 7 May 2017 - French Presidential elections
4 May 2017 -  UK Local Elections
8 June 2017 - UK General Election
11 June - 18 June 2017 - French Legislative Elections
1 July 2017 - Estonian Presidency of the Council
24 September 2017 - German Federal elections
End of October 2018 - Negotiations expected to end
Autumn 2018 - Spring 2019 - Likely Scottish independence referendum
March 2019 - UK expected to leave EU

 


Grayling Brexit Unit

Our Grayling Brexit Unit brings together the very best consultants from across the Grayling network and includes those who have direct experience of working alongside the leading political figures charged with negotiating Brexit in London and Brussels.

The Grayling Brexit Unit is here to support, guide and inform the success of your business and identify how the political dynamics will change as a result of Brexit in both London and Brussels. We are your Brexit experts.

No task is too big, too complex, or too ambitious - please contact Robert Francis Tel +32 2739 47 34 (robert.francis@grayling.com) in our Brussels team or Jonathan Curtis (Jonathan.Curtis@grayling.com) in London for more information, and check out our brochure.

 


 #Brexit Papers 


Brexit Organigram
The 'Great Repeal Bill'
Brits working in the EU institutions
Article 50

Sir Julian King - The Last UK Commissioner
David Davis – UK Brexit Secretary.
Sir Keir Starmer – Shadow Brexit Secretary.
Sir Tim Barrow – UK Permanent Representative.
Michel Barnier – EU Chief Negotiator.
Sabine Weyand – Barnier’s Deputy.
Guy Verhofstadt – EP Brexit Lead
 

Robert Francis

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