27 June 2017

Egmont Institute: Why the future role of the European Court of Justice is a tricky topic for Brexit

From Day one after Theresa May’s speech to the Tories conference, it was clear that the European Court of Justice would become a tough nut to crack in the Brexit negotiation. The perception of this is now rising.

[...]First, the ECJ role must be distinguished between the Brexit agreements (plural here essential). The negotiations will produce at least three agreements, and possibly more. (A) The Article 50 agreement must define all elements of the exit (financial aspects, status of the migrants, transitory rules,…). (B) The future trade relationship will need to be defined, but this will take a lot of time. (C) As this will take time, we will need a transitory agreement. (D) There could very well be agreements about other things. Each time there is a need to define a system of disputes settlement.

Recently, I explained that the EU demands for the Article 50 Agreement were excessive, especially concerning the ECJ. After 2019, the UK will be outside the EU and we have presently no external agreement that grants a direct competence to the ECJ – especially for such topics. Having the ECJ dealing with the implementation of this agreement is for the UK worse than the status quo and looks a lot like judicial imperialism. Additionally, this is far from the general philosophy of Article 50. Exit means exit – for both sides of the negotiation. And, to be fair, would the EU accept the reciprocity principle, and have UK courts dealing with the protection of UK migrants residing in the EU Member States ? All this could finally produce a fine legal mess. Some efficient alternative solutions can be found.

The debate about the ECJ’s role becomes quite different for the future trade relationship. Here, the UK applies to reconnect with the EU in selective ways. It must thus accept to compromise, including on the ECJ. The more the UK wants to access the single market, the more it must compromise. Basically, this applies the same way to the transitory trade agreement and the definitive one. For simplicity sake, let’s focus on the former.

Access to the single market can be based on already known models or new ones. The more the UK wastes time to define a clear position, the more it will have to accept a known model, because there simply won’t be time any more to define others. Time is becoming an essential factor, because many precious months have already been lost by the UK side, and essential decisions not yet been taken. Going on like this, by the way, invisibly strengthens the hard Brexiteers’ hand because it progressively closes, just for technical reasons, the door to any kind of deal.

Furthermore, the ECJ’s role is itself an important time factor, in two ways that are little understood. ECJ’s Opinion 2/15 has provided new guidance about the scope of an exclusively EU trade agreement (meaning without added ratification of the Member States) in the Lisbon Treaty framework. It does not however provide guidance about the compatibility of the new generation trade agreements with EU Treaties (and is very explicit about that). This applies particularly to the creation of new judicial organs in external agreements, an area where the ECJ has always been extremely touchy (see the 2013 Opinion on the EU adhesion to the ECHR). Should the transitory trade deal establish such a judicial organ, there is a high possibility that a new ECJ Opinion would be asked. This would create a huge risk since it would add an additional delay in an already very tight schedule, and the opinion would well be negative.

It will be remembered that Belgium had announced in October 2016 that such an opinion would be asked about the CETA settlement of disputes system. This would have been a way to obtain important precisions in due time, and thus reduce this risk. Most unfortunately, the Belgian authorities seem unable to manage anything efficiently. So, after eight months, those questions have not been asked yet. This could be regretted by all involved parties later.

These are difficult choices, but not complex ones. The negotiation could already have begun. It can still rapidly progress. All turns around one precise question, that no one wants to answer precisely, yet now requires a clear position. Do the conditions for a deal established by Theresa May in the Lancaster House speech and repeated in the Tory Manifesto (no budget contribution, no free movement of people, no ECJ role) still apply or not ? If they do, then the participation to the single market is blocked[4]. If they do not, by far the easiest trade transitory solution would be to use the EEA (whose judicial system is already validated and functioning). In this case, the ECJ’s competence remains indirect and limited. Other options are riskier since they are not validated and functioning.

Even if the Lancaster House conditions still apply, as I indicated in 2016, a path towards the customs union still exists, certainly for a transitory phase. This solution is more limited in scope of course, but simpler to organize, and would offer multiple benefits[5]. It would already diminish strongly the workload in the Brexit negotiations. There would thus be more time to try to negotiate alternative solutions for services. It would simplify tremendously the transition tasks for trade in the UK ministries. Many people speak about the WTO solution, but they have not made any complete inventory of its prerequisites. Furthermore, remaining in the customs union would be a substantial political concession to the 48 % in the Brexit referendum. And, last but not least, it would already stabilize a huge part of the economy : industry and agriculture, their investments, their jobs, and their services providers. It would thus be a huge positive factor in a huge destabilization period. Until now insufficient attention has been given to the concrete multiple impacts for business of abandoning the customs union. Business cannot seriously organize itself while waiting endlessly for a decision. Furthermore, botched last minute solutions for trade can become extremely costly for enterprises. If a clear perspective is not offered now on this, the economic damage (beginning with delayed investment) will grow.

It is also important to rapidly define a strategy because an additional problem could still arise. The existing mechanisms for settlement of disputes in EU trade agreements are quite old (there are new ones, but not yet into force, and not yet submitted to the ECJ). They were imagined decades ago for willing partners of limited economic weight. The UK does not belong to the same category. It is thus possible that some Member States will want to get additional security in that regard. To give an example, the alignment of UK regulations on EU banking regulations in the EEA could generate more problems than with Norway. The same could happen in the framework of the customs union (though it would be less complex).

This indicates, by the way, that a collateral consequence of Brexit could be a re-examination of the present EU trade arrangements (including on judicial aspects). The EU must thus also pay attention to this linkage. Again it is extremely important to have a long term vision. What will be accepted in the framework of Brexit will later become a precedent not only for future applications of Article 50 TFEU, but also for future trade agreements. [...]

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