The New Settlement for the United Kingdom within the European Union

The protracted renegotiation of the terms of the UK’s relationship with the EU at the European Council summit paved the way for the UK referendum. 

As anticipated, the renegotiation of the terms of the UK’s relationship with the EU at the European Council summit in Brussels on 18-19 February 2016 proved fractious, but ultimately paved the way for a UK referendum on 23 June 2016.

The summit

The European Council, made up of the Heads of State or Government of the 28 EU Member States, finally reached agreement on the matters raised by the UK following 15 hours of discord.

The four “packages”

David Cameron’s four demands for a reformed EU related to:

  • economic governance
  • welfare payments for non-UK EU citizens
  • competitiveness, and 
  • sovereignty

There were additional calls from Belgium and France for a “self-destruct” clause, confirming that no further concessions would be forthcoming from the EU, effectively excluding a second negotiation and referendum and dissuading other EU Member States from seeking concessions on membership. Ultimately, this was not included in the text of the draft Decision, which the Heads of State or Government declared to be legally binding and which will take effect if the UK announces that it will remain a member of the EU following the referendum.

As expected, the economic governance and social welfare issues proved particularly intractable.

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Economic governance and specific protection for the City of London
  • David Cameron’s aims were to obtain explicit recognition that the “single” currency is not the only currency in the EU and to ensure that States outside the Eurozone are not materially disadvantaged, forced towards further financial union, or required to contribute to Eurozone bailouts. In addition, the UK wanted to ensure that financial supervision and macro-prudential regulation remain the responsibility of the national institutions of non-Eurozone Member States. The Eurozone Member States, in contrast, were concerned that Member States outside the single currency could seek to stymie the process of further integration of the euro area.

    The draft Decision prevents Member States that are outside the euro from creating obstacles to deepening monetary union or impeding legislation directly linked to the functioning of the euro area or from taking steps to jeopardise the achievement of economic and monetary union. It also provides that legislation must respect the rights of Member States whose currency is not the euro and prohibits discrimination against individuals or businesses based on the currency of the State in which they are based, requiring that any differing treatment to be based on objective reasons.

    In terms of prudential regulation, the draft Decision confirms that, to ensure financial stability and a level playing field across Europe, the single rulebook must be applied by all credit institutions and other financial institutions. The single rule book refers to the set of harmonised prudential rules that apply throughout the EU as part of the banking union project. Its aim is to provide a unified regulatory framework for the EU financial sector in order to complete the single market in financial services.

    However, the draft Decision recognises that, as the Eurozone integrates further, substantive EU law measures adopted to safeguard financial stability may need to be applied more uniformly to members of the Banking Union than the equivalent rules that are applied to non-Eurozone Member States by their individual national authorities. The original (02 February 2016) text of the draft Decision referred to “different” sets of Union rules potentially being adopted in secondary law. Following interventions by Member States such as France, Germany, and the Netherlands, the draft Decision states only that “specific” provisions within the single rulebook and other relevant instruments may be necessary for non-Eurozone States - but that these must preserve the level playing field within the internal market. Nonetheless, this provision opens up the possibility of differences in banking regulation developing between the euro and non-euro Member States.

    Allocating responsibility for ensuring the financial stability of non-euro States proved impossible to resolve through technical discussions held by the sherpas (a group of high level officials and close advisers of the decision-makers) ahead of the summit. The Bank of England has had sole responsibility for ensuring financial stability in the UK to date and the UK has consequently sought to ensure that this independence and oversight over the City of London is maintained. The provisions establishing who is responsible for supervising and setting the rules for financial institutions on the basis of liability to pay when something goes wrong proved particularly contentious. The UK’s position was that its authorities should be in control where its tax payers foot the bill. Other Member States argued that the EU paid for UK problems arising from the financial crisis, and that pan-European supervisors were more appropriate.

    The draft Decision allocates responsibility for measures taken to preserve the stability of a non-Eurozone Member State (including supervision and resolution of financial institutions and markets and macro-prudential responsibilities) to its national authorities, at its own expense, subject to the requirements of group and consolidated supervision and resolution. There are three provisos to this. The first is where the single rule book applies, the second is where mechanisms of financial oversight intended to prevent or mitigate systemic financial risks in the EU apply, and the third is where existing EU powers to take action to respond to the threats to financial stability take precedence.

    These points will be enshrined in a future Treaty change. Any Member State will also have the right to escalate an issue relating to the application of the Decision to the European Council for discussion.

Social Welfare
  • The second tricky issue was the UK demand to restrict EU migrants’ access to both in-work and out of work benefits until they have been resident in the UK for four years, and for a period of thirteen years in total, and to halt the “exporting” of child benefit to other Member States. These issues were of concern in particular to the central European “Visegrad” group consisting of the Czech Republic, Hungary, Poland and Slovakia, together with Bulgaria and Romania, whose citizens are likely to be most affected.

    The agreement is that following a UK vote to remain in the EU, the Commission would submit proposals for amending existing EU legislation. The amendments would provide

    • an option to index the child benefits exported to another Member State where a child resides, to the conditions in that Member State, initially limited to new claims, but from 01 January 2020, to all claims
    • for an emergency brake (alert and safeguard mechanism) to deal with inflows of workers from other Member States of “exceptional magnitude over an extended period of time”
      • where essential aspects of the social security system of the destination State is affected, or
      • which leads to serious, and persistent difficulties in its employment market, or puts excessive pressure on its public services.

    Following a notification to the Commission, the Council could authorise the destination Member State to restrict the access of newly arrived EU workers to non-contributory in-work benefits for up to four years, initially completely, but gradually increasing, and for an overall period of seven years.

    The duration of the emergency brake was (predictably) a matter of fierce debate at the summit meeting and was reduced to the length of time (seven years) that other EU Member States were able to limit access to their labour markets after the 2004 EU enlargement. It cannot be extended. In a separate Declaration that is part of the Settlement documents, the Commission confirms that in its view, information provided to it by the UK shows that the type of exceptional situation for which the emergency brake is intended to cover already exists in the UK. Consequently, the UK “would be justified in triggering the mechanism in the full expectation of obtaining approval”.

    Notwithstanding the provision in the preamble to the draft Decision that the views expressed by the President and members of the European Parliament, there is no mechanism here for the Parliament to be consulted when an application for an emergency brake is made.

    The proposals themselves, however, will be subject to the ordinary legislative procedure. This will require the terms to be agreed by the Parliament (where further controversy could be triggered) and by the Council.

Competitiveness and Sovereignty
  • The remaining two issues proved less contentious.

    Competitiveness

    Competitiveness refers to reducing the burden of excessive regulation and extending the single market. The draft Decision sets out the commitment of the EU institutions and Member States to strengthen the internal market, take concrete steps to reduce regulation, and pursue an active and ambitious trade policy.

    Sovereignty

    Issues relating to sovereignty cover resistance to the concept of “ever closer union” expressed in the founding treaties; the red card procedure under which national parliaments could act together to veto legislative proposals; and recognition that national security is a matter for individual Member States, while recognising the benefits of acting as a bloc on issues affecting the whole of the EU.

    “Ever closer union”

    The draft Decision recognises that in light of the specific situation of the UK under the Treaties, is not committed to further political integration into the EU. When the Treaties are next amended, it will be made clear that the references to ever closer union do not apply to the UK.

    The “red card” procedure

    National parliaments will be able to issue reasoned opinions challenging legislative proposals on the basis of subsidiarity and proportionality within twelve weeks of receiving the draft. Where those opinions represent more than 55% of the votes allocated to the National Parliaments, the Council will include an item on its agenda for comprehensive discussion of the opinions and of the consequences to be drawn from them. Unless the draft is amended to accommodate the concerns expressed, Council will discontinue its consideration of the draft legislation.

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