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Published: 24 June 2016
Sector: Energy

The legal implications of Brexit

A majority of the British population has voted in the referendum on the 23rd of June 2016 that the United Kingdom should leave the European Union. 

This is an unprecedented decision in the history of the European Union.

Now starts a time of legal insecurity and we face huge amount of change, for the United Kingdom, for trade relationships with the European Union, including customs regulations and control, for European Union regulation, in particular in the energy and financial services sectors, and for trade relationships with other countries. 

The right of a Member State to withdraw from the European Union was introduced for the first time with the Lisbon Treaty. Article 50 of the Treaty on European Union (TEU) does not set down any substantive conditions for a Member State to be able to exercise its right to withdraw, but outlines only procedural requirements. The British Prime Minister will need to notify the Council of the wish of his country to withdraw. The United Kingdom does not need to make that notification immediately following the vote result, which may mean a period of uncertainty. The TEU provides for the negotiation of a withdrawal agreement between the EU and the UK, defining in particular the exiting UK’s future relationship with the Union. If no agreement is concluded within two years, the membership of the UK will end automatically, unless the European Council and the United Kingdom decide jointly to extend this period. 

The legal consequence of concluding the withdrawal agreement with the European Union is the immediate end of the application of the EU Treaties and related Protocols to the United Kingdom. EU law will no longer apply in the United Kingdom, although any national acts which implement or transpose EU law – ranging from equality laws and health and safety in the workplace through to harmonised motor vehicle regulations - would remain valid until the United Kingdom Parliament decides to amend or repeal them. A withdrawal agreement would need to address the phasing-out of EU financial programmes and other EU norms.

In consequence, it will be awkward for the United Kingdom and the European Union to decide during the withdrawal period on any legislation or decision which provides for a longer time horizon than the realistic withdrawal date.

There are some pathways for the settlement after notification:

Option 1: UK joins the European Economic Area (EEA), a solution adopted by all but one (Switzerland) of the EFTA states that did not join the EU. 

The EEA has an existing trade agreement, which provides, among other things for access to the EU market and free movement of labour. The EEA currently consists of just one bigger country, Norway and two rather small countries - Iceland and Liechtenstein. 

Option 2: The second option is to try to emulate Switzerland, the remaining EFTA country. Switzerland is not in the EEA but has more than 20 major and 100 minor bilateral agreements with the EU.

Option 3: The third option is to seek to establish a customs union with the EU, as Turkey has done, or at least to strike a deep and comprehensive free-trade agreement. 

Option 4: The fourth option is to rely on normal World Trade Organisation (WTO) rules for access to the EU market, but is this an easy path?

Option 5: The fifth option, preferred by many Brexit supporters, is the hope for the negotiation of an specific UK – EU agreement which would give them more rights than Norway or the other EFTA or EEA States such as Switzerland or Iceland and an opt-out over the controversial issue of free movement. A reality check puts a big question mark for such a more favourable treatment of the United Kingdom over Norway, for example.

A withdrawal agreement could contain provisions on the transitional application of EU rules, in particular with regard to rights deriving from EU citizenship and to other rights deriving from EU law, which would otherwise extinguish with the withdrawal. But again, a positive negotiation mood would be needed. When it comes to the cornerstones of exclusive EU competence, the United Kingdom will now need to adopt national legislation in order to replace all these rules.

The areas of exclusive EU legislative competence are outlined in Article 3 of the Treaty on the Functioning of the European Union and cover most important sectors for the United Kingdom:

- Customs union

- Competition rules necessary for the functioning of the internal market

- Common commercial policy 

- Concluding international agreements: when their conclusion is required by a legislative act of the EU; when their conclusion is necessary to enable the EU to exercise its internal competence; in so far as their conclusion may affect common rules or alter their scope.

In consequence the United Kingdom will need to negotiate new trade deals with the EU and with each of the 53 countries that currently have free-trade deals with the EU.

For more of our thoughts around Brexit read here.

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