Tusk draft package on UK/EU negotiation published – a financial services perspective on the Brexit referendum

02/02/2016

Timetable

The package is still a draft and will be discussed by member states. HMG still hopes to achieve agreement on the reform package at the EU Council meeting on 18/19th February. This would enable it to hold the UK referendum in June this year.


If this is not possible[1] then a June referendum will be less likely and would be impossible without agreement with the EU by March.


The Foreign Secretary[2] said recently that, if necessary, they would wait to get the best deal for the UK (rather than achieving a June referendum with less reform). It is still possible that the target date for the referendum could slip to September 2016.

 

No fundamental reform of UK/EU relationship on offer

It has been clear for some time that the UK will not achieve fundamental reform of its relationship with the EU. There will be no rolling back of the Working Time Directive and other ‘bete noire’ legislation nor will the UK secure a veto/double lock[3] over majority voting or a substantial repatriation of powers.


Both HMG and the EU, however, are clearly putting a great deal of effort and considerable ingenuity into the reform package. The Tusk package is styled as a 'new settlement for the United Kingdom within the European Union’ (although some have already doubted whether the measures justify that description).


Government ministers refer to the ‘high water mark’ of EU integration, for the UK, being behind us and they expect the future direction of travel, will, if anything, be in the other direction. The UK’s European Union Act 2011 was a first step in this ‘high water mark’ approach. It requires a referendum for any treaty change which expands areas of EU competence.


Many polls have shown that a majority support continuing UK membership of a ‘reformed’ EU. The House of Commons European Scrutiny Committee found (in its December 2015 report[4]) that ‘fundamental change’ (a phrase used by the Prime Minister back in March 2015) ‘is not now on the Government’s agenda’ (which now merely sought ‘EU reform’). The Committee concluded - ‘Therefore voters faced with the choice of whether to remain or leave the EU will not have the choice of remaining in an EU with which the UK’s relationship is fundamentally changed.’ Once the final package is agreed, we would expect the EU and other member states to be ‘on message’ in supporting both UK membership and emphasising the steps taken to meet the UK’s special position and concerns. It remains to be seen whether the final package will be sufficient in the eyes of the voters.

 

Key issues for the financial services sector – the Eurozone dilemma

The key issue for the financial services sector is the fear of Eurozone dominance, particularly given that Eurozone states will now command a qualified majority and therefore be able to impose EU legislation on non-Euro members.


Recent contentious issues (well-rehearsed in the current debate) have concerned the Eurozone’s (unsuccessful) attempt to use the European Financial Stability Mechanism (which would have involved UK contributions) to fund a Greek bail-out, the ECB’s location policy for euro clearing (successfully challenged by the UK[5] ), the proposed financial transaction tax (where the UK’s challenge was found to be premature[6]), as well as (unsuccessful) UK challenges to the bonus cap[7] and ESMA’s short selling powers[8] .


The draft decision reflects the negotiation on the seven demands on this issue in David Cameron’s letter of 10th November. They are one of two areas where the draft expressly envisages (but still in square brackets) the possibility of treaty change (see further below).

There are various politically helpful re-statements of UK rights including the retention of sterling. More specifically the decision –

  • Prohibits discrimination against companies based on the currency of their member state and provides for mutual respect between non-Euro and Euro states - Euro area measures shall not constitute a barrier to or discrimination in trade between EU member states. Those in the UK may be surprised by the provisions which emphasise the impossibility of a member state (i.e. the UK) having a veto over the Banking Union or Eurozone integration and the need for non-euro states to facilitate, and not to impede or jeopardise, EMU. There are echoes here of the recent comments by French officials about the limits of concessions for the UK and the need to protect the Eurozone project.
  • The Banking Union shall only apply to Euro states or those who apply to join. Recognition is given to the possibility that the single rulebook may develop with greater uniformity in the Banking Union than for those states outside.
  • Provides that measures to safeguard the Euro area will not involve budgetary responsibility of non-Euro states (although the potential need for reimbursement is recognised and does not apply to administrative costs).
  • The authority of each non-Euro state in preserving the financial stability of that member state is recognised. This is intended to recognise, for example, the role of the Bank of England in this field.
  • The tricky question of the potential conflict between decisions of Euro Group and the broader EU is mentioned with emphasis on the Council’s role in terms of the latter.

The draft envisages that a member state can refer an issue arising under the decision to the European Council. There appears to be no further protection process in the current package itself; indeed the draft refers to such a referral being ‘without prejudice to the normal operation of the Union legislative procedure’.

 

Other issues

The other change that is proving most difficult to agree is the UK’s proposed 4 year period before workers from other member states could claim the ‘in-work’ benefits that are available in the UK. This has been much discussed in the press. The Tusk package does not concede to UK demands, particularly as it gives the EU the final say for emergency measures of this kind (although indicating that such measures would currently be justified). There are also other free movement issues including measures on marriages of convenience.


There is an emphasis on competitiveness and de-regulation which links to the political issue of sovereignty. Here the measures are limited to

  • A red card system (an enhanced version of the current little used ‘yellow card’) which would enable a 55% majority of national EU parliaments to lodge a reasoned objection to legislative proposals. This must be done, however, within 12 weeks. The legislation should then only proceed if the objections are accommodated in a revised proposal.
  • Recognition that the UK is not committed to further EU integration. This is the response to HMG’s concern over the “ever closer union” concept/preamble wording – something the House of Commons Select Committee[9] thought was purely of political rather than legal significance. This is the second measure accompanied by a statement in square brackets that would be reflected in a treaty change (see below).

The ‘treaty change’ conundrum

At least one UK parliamentary committee has stressed that fundamental reform (and several of HMG’s specific objectives) require changes to the EU treaties. Treaty change has never been feasible ahead of a referendum which has to take place by the end of 2017 at the very latest.


A twin track approach has been taken in the negotiations. New emphasis is being put on existing mechanisms to achieve some of HMG’s goals – for example working with existing arrangements on de-regulation and subsidiarity. In other areas HMG recognises that eventually treaty change[10] is required or desirable, but the draft decision appears to have limited this to the two issues explained above. Here the draft envisages that the substance of the decision on these two points would be incorporated into the treaties when they are next revised ’in accordance with the relevant provisions of the Treaties and the respective constitutional requirements’[11] of the Member States.

There is a problem here – how to give legal effect to the declaration on these points in the period before treaty change occurs and the uncertainty over treaty ratification (given that national parliaments and voters in national referenda may reject the treaty changes). There are potential precedents[12] but the House of Commons Select Committee[13] concluded that these were more about agreeing the meaning or effect of treaty provisions rather than about changing them.


It concluded that ‘It should be made clear to the voters that any such agreement would be consistent with the existing EU treaties only insofar as it is limited to interpreting or supplementing them. It cannot substantively alter the EU Treaties.’ This view represents a conundrum - either nothing has really changed or the changes are significant and their legal status is questionable/open to challenge on the basis that EU, and perhaps domestic law requirements, for treaty change are being overridden.

We will report again when the final UK/EU package is agreed. We will also report on other aspects of Brexit and the EU reform agenda. You can find further material about Brexit and EU reform on the RegZone Brexit page. This includes a news stream (updated daily) of official publications on this topic (from the UK Parliament, HMG, EU etc.) and a broader ‘reading list’ of materials that we are using in our research and analysis on this issue.





[1] There were fears that the pressing migration crisis might be a priority at the February Council meeting.

[2] The Foreign Secretary gave evidence on 26th January to the House of Lords European Union Scrutiny Committee. The Foreign Secretary recognised the difficulty of matters slipping into next year because of the elections in France and Germany

[3] Certain decisions of the EBA currently require a majority of Eurozone states and a majority of non-Eurozone states – a double majority/lock. Some have suggested this principle might be applied more broadly but this would not be acceptable to the EU.

[4] House of Commons Select Committee, Fourteenth Report of Session 2015-16: UK Government’s renegotiation of EU membership: Parliamentary Sovereignty and Scrutiny, (page 42) 9 December 2015.

[5] T-496/11 UK v ECB (ECB location policy case). The UK made an application for annulment with regard to the European Central Bank’s (ECB) location policy for central counterparties (CCPs) and challenged the competence of the ECB to adopt the policy. The location policy required CCPs clearing a certain volume of Euro a day to be located in the Eurozone. The UK’s challenge was found to be admissible even though the UK was not party to Eurozone arrangements. It was held that the ECB had no power and no competence to make policy; the policy was annulled.

[6] C-209/13 UK v Council (financial transactions tax (FTT) case). The UK made an application for annulment with regard to a Council decision authorising 11 Member States to use an enhanced cooperation procedure to set up the FTT. The UK’s grievances were that adoption of FTT produces extraterritorial effect and it would impose costs on non-participating Member States. The UK’s application was dismissed. The court viewed the UK’s action as premature – the UK’s arguments were directed at elements of a future tax.

[7] C-507/13 UK v Parliament and Council (CRD IV/Bonus Cap Case). The UK challenged the lawfulness of bonus cap provisions in CRD IV/CRR. The UK argued it was disproportionate; that it would undermine the legal certainty of existing contracts; and expressed concerns regarding disclosure and data protection. Advocate General Jääskinen said the UK pleas should be rejected; the UK dropped the case.

[8] C-270/12 UK v Parliament and Council (Short Selling Regulation (SSR) case). The UK challenged discretionary powers conferred to ESMA under Art 28 SSR; it was argued that this goes against EU principles. The UK’s challenge was dismissed. The court held that Art 28 of the Regulation did not confer any powers on ESMA that went beyond powers granted to ESMA when it was created and was compatible with EU law. However, the Advocate General (here) agreed with the UK on one point: ESMA’s delegated powers did not amount to internal market harmonisation and that Art 28 of the SSR should be annulled.


[9] House of Commons Select Committee,Fourteenth Report of Session 2015-16: UK Government’s renegotiation of EU membership: Parliamentary Sovereignty and Scrutiny, (page three) 9 December 2015.

[10] It is assumed that when the treaty is eventually amended there will be no need for a second UK referendum under the European Union Act 2011 because none of the expanded areas of EU competence (e.g. relating to the Eurozone) will apply to the UK. This would take the matter outside the scope of section 4 of the Act (see subsection (4) (b)

[11] This refers to national requirements for treaty change to be subject to referendum. In addition in Germany, for example, the constitutional courts, notably the court at Karlsruhe, have been active in testing the legitimacy of EU arrangements under the federal constitution.

[12] These involved two Decisions taken following the rejection, in referenda, of the Maastricht Treaty by Denmark and the Lisbon Treaty by Ireland. Decisions were taken and registered as an international treaty with the United Nations, pending incorporation in the EU treaty at a later stage. Doubts have been expressed as to whether this sort of mechanism would work where substantial treaty change was required, as distinct from the Dutch and Irish case which were arguably about interpretation.

[13] House of Commons Select Committee, Fourteenth Report of Session 2015-16: UK Government’s renegotiation of EU membership: Parliamentary Sovereignty and Scrutiny, (page 42) 9 December 2015.