Where does the past week leave the UK?

Brexit Jigsaw

On 24 May, Prime Minister Theresa May announced her intention to resign as Prime Minister.  She will stand down as leader of the Conservative Party on 7 June (after President Trump’s visit and the D-Day commemorations), and as Prime Minister as soon as the Conservative Party has chosen a successor.  Her tenure in office had been looking increasingly challenged for some time.  The immediate trigger for her resignation was her final attempt to get her Brexit deal done, which included the offer of the possibility of a further referendum.  This proved more than her Party could accept, and the Party would have forced her out of office had she not agreed to resign.

The previous day, 23 May, the UK electorate voted in the European Parliament elections.  The results were announced on 26 May after polling had closed across the EU.  Turnout was slightly up on immediate previous EP elections, but at 37% below the EU average and well below both UK General Election and 2016 Referendum turnout.  The results were:

Share of vote EP seats
Brexit Party 31.6% 29
Liberal Democrats 20.3% 16
Labour 14.1% 10
Green 12.1% 7
Conservative 9.1% 4
SNP 3.6% 3
Change UK 3.4% 0
UKIP 3.3% 0
Others 2.5% Plaid Cymru 1,
NI Parties 3

This represents a notable success for Nigel Farage’s Brexit Party (which was only publicly launched on 12 April), a very bad result for Labour and a catastrophe for the Conservatives (their worst result in modern democratic history).  It also represented a very strong performance for the overtly anti-Brexit parties (Lib Dems, Greens, and Change UK[1], between them secured over 35% of the vote).  The immediate conclusion is that both the main parties have been punished by their electorate specifically for their indecisive stance on Brexit, and the division between those who favour a “pure Brexit” (no deal Brexit unless the EU agrees to a much better deal), and those who favour a further referendum in the hope of reversing the Brexit decision, or indeed an immediate Parliamentary revocation of Article 50, has sharpened in a country that remains deeply divided.  But neither “no deal” nor “people’s vote” secured anything close to a clear majority.  Both Conservatives and Labour have a lot of thinking to do.  In the case of the Conservatives, this will happen during the forthcoming leadership election.

The next Prime Minister…

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Brexit Insight From the EU-27: Poland

PolandUK financial market entities in Poland – A Polish Brexit bill, passed on 15 March 2019, provides a transition period for the business operations of UK financial market entities in Poland, starting from the date of a “no-deal” Brexit. This period will allow businesses to conduct any legal operations needed to cease legal relationships entered into before the day of “no-deal” Brexit, or to establish a legal basis to continue to operate in Poland (i.e. by obtaining the correct permit). The Polish Brexit bill names specific financial market business types and contains details on permitted and forbidden activities within the transition period. The length of the transition period differs depending on business type, but typically does not exceed 12 to 24 months. The approach of the Polish authorities is intended to create a mechanism for UK entities to cease their activities and allow them time to do this. This is a different mechanism from the one applied, for example, in Germany, according to which, the German financial market supervision authority shall grant the extension of passporting rights resulting from EU laws. The Polish Brexit bill seems to be stricter, but creates a clear and transparent set of rules for the contingency of a “no-deal” Brexit, at least with regard to the time aspect of the transition period for the UK firms.

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Brexit Insight From the EU-27: Germany

German legislators have adopted a number of Acts of Parliament in relation to Brexit both on the federal level and on the level of the 16 German states. Some of these regulate the “deal” scenario where the Withdrawal Agreement is ratified by the UK, and some of these regulate the “no-deal” scenario.

The so-called Brexit Steuerbegleitgesetz (Brexit Tax Accompanying Act) was adopted on 25 March 2019 and provides for a number of tax contingency rules in the areas of corporate tax, income tax, real estate transfer tax, inheritance tax and transformation tax, as well as contingency rules for the financial services sector, including banks, insurance companies, pension funds, payment services providers and other financial services providers, as well as special rules for German Covered Bond Banks. The act in particular contains a statutory authorisation for the German regulator BaFin to adopt further regulations, which BaFin will, however, only exercise if and once the UK ceases to be a member state of the EU without a deal.

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Brexit Insight From the EU-27: France

France

The French Parliament authorised the government to take measures – known as orders (ordonnance) – which should otherwise be taken pursuant to law, in order to map out the consequences of a “no-deal” Brexit. The government had either six months or a year to pass those orders, following publication of the law.

The government was authorised to take any measure relating to the control of goods to and from the UK and relating to the administrative status of legal entities established in the UK and carrying out business in France. The orders define the conditions pursuant to which economic activities related to the UK and goods flowing to and from the UK can carry on.

The orders provide, in some instances, pragmatic adjustments to existing French legislation, unusual exemptions, and simplified administrative procedures and shorter delays to allow regularisation of the status of corporates or individuals concerned.

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Brexit Insight From the EU-27: Czech Republic

The Czech government adopted the Act No. 74/2019 Coll., which aims to soften the possible negative consequences of a “no-deal” Brexit. The act is intended to be a temporary measure, and all the instruments within it will last only until the long-term measures are adopted.

The act is to be effective from the day the Treaty on the Functioning of the European Union and the Treaty on the European Union cease to be applicable to the UK and, simultaneously, if no agreement on the terms of the UK’s withdrawal from the EU (i.e. the Withdrawal Agreement) is adopted. Nevertheless, the act sets the deadline to 31 December 2020 at the latest. During this period, British citizens will be guaranteed equal treatment in 18 selected areas as if they were still European Union citizens. The Czech government expects that there will be reciprocity from the British side.

The areas dealt with by the act include regulation of obtaining Czech citizenship; marriage and registered partnership issues; access to the labour market and eligibility for unemployment benefits; income tax; recognition of professional qualifications; and provision of legal services by citizens of the UK and similar.

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Brexit Insight From the US

US PolicyWhile US policymakers are eager to set out trade relations with the UK post-Brexit, the UK cannot begin its own bilateral talks with trading partners until it has formally exited the EU, as the bloc has exclusive competence over trade matters.

Furthermore, the final form of the UK-EU trade relationship will inform how other trade agreements are structured, including a trade agreement with the US. If the UK opts, colloquially speaking, to remain in the EU’s Customs Union, its negotiations with the US would be limited to those areas outside the scope of the union. But in a “no-deal” Brexit, or with changes to the current deal on the Irish border issue, the UK would not be part of the EU’s Customs Union, allowing it to negotiate with greater freedom with new trading partners.

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An EU Analysis of Brexit

EU Brexit AnalysisThe EU-27 member states have been very carefully observing the UK domestic political manoeuvering and posturing this year. The predominant view in the EU-27 is that a managed “deal” scenario is far more preferable to a potentially chaotic “no-deal”. At the same time, precautions have been taken to prepare for a “no-deal” scenario. The EU-27 are not willing to renegotiate the Withdrawal Agreement for fear of neverending negotiations with the UK. They have instead pointed to further clarifications and changes to the Political Declaration.

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A Glimpse of the Mood in UK Politics

Parliament BuildingsThe mood in the Conservative Party is bleak. Many of the political challenges with Brexit can be traced back to the 2017 election. Prime Minister Theresa May lost her majority and was only able to retain power by making a deal with the Democratic Unionist Party (DUP) from Northern Ireland.

The arithmetic in Parliament is such that if even a small number of Conservative members of Parliament (MPs) defy their own government, then (alongside the opposition) they can block any progress on almost any matter. For this reason, those at more extreme wings of the Conservative Party, whether for a hard Brexit and or for no Brexit at all, have been able to stall all progress.

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Brexit: What Are the Options for the UK Now?

Procedurally, the UK has three options:

  1. Ratify the Withdrawal Agreement (wiBrexit Clockth possible accompanying changes to the Political Declaration on the future relationship with the EU) before 22 May, and cancel participation in the European Parliament elections
  2. Ratify the Withdrawal Agreement (with possible accompanying changes to the Political Declaration on the future relationship with the EU) before 30 June, and ensure that when the new European Parliament session opens on 2 July, there are no UK members of the European Parliament (MEPs)
  3. Take longer over the process, accepting that the UK will elect MEPs who will take their seats in the European Parliament, and run toward the 31 October deadline agreed with the European Council

The only realistic route to either of the first two outcomes lies in the talks between the government and the Labour Party (Labour). Like the government, Labour can accept the Withdrawal Agreement – and the debate between them is over the future relationship and how any agreement would bind a (potentially more pro-Brexit) successor to the Prime Minister.

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