Businesses are in limbo - losing investment, losing customers and incurring additional costs with Brexit delay

On Wednesday, we called on UK industry and commerce to factor ‘continued membership of the EU into their medium-term strategy business planning and budgets for 2019’.

Business and commerce should not stand down their no-deal contingency planning for the next six weeks.  They can and should, however, now factor ‘continued UK trading on EU terms’ into medium-term strategy planning and budgeting thought to 2021.

This call is further endorsed by the views expressed in an interview with MakeUK Managing Director, Simon Phipson, and published by Bloomberg.  “MakeUK” is the ‘new name’ for the long-standing EEF – ‘representing over 5000 UK manufacturers’.  

We also included our analysis of the political and constitutional processes going forward in support of the probabilities of the main scenarios.  An outside chance of a no-deal on 1 June and ‘high probability’ that the UK will remain an EU member - or fully operating on EU conditions - until 2021.  A Parliamentary briefing for MPs, published this week, comes to the same conclusion.

Background - Political

EU leaders at the European Council meeting on 10 April 2019 agreed to extend the Article 50 period in order to delay Brexit for a second time.  This could delay the moment of Brexit until 31 October 2019 – providing certainty for the UK while it remains in the EU - and the subsequent transition period.

Before the meeting, President Tusk proposed a flexible extension of up to a year - avoiding a series of short extensions and emergency summits.  The majority of EU leaders supported this idea with opposition led by French President Macron - who proposed a short extension until 22 May instead.

The ‘flextension’

  • allows the UK leaving earlier if the Withdrawal Agreement is ‘ratified’ - on the first day of the month after ratification;

  • provision for UK to leave with no-deal on 1 June if it does not hold EP elections;

  • reference to the UK committing to “act in a constructive and responsible manner during the extension period in accordance with the duty of ‘sincere cooperation’;

  • confirms the UK will remain a Member State “with full rights and obligations”;

  • confirms the UK has the right to revoke its Article 50 notification at any time.

Sincere co-operation

The principle of ‘sincere co-operation’ is set out in Article 4(3) of the Treaty on European Union (TEU) which states that the EU and its Member States shall “in full mutual respect, assist each other in carrying out tasks which flow from the Treaties”, and that they shall ensure fulfilment of obligations arising from the Treaties, facilitate the achievement of the EU’s objectives and refrain from any measure which could jeopardise them.  Member States have previously been taken to the Court of Justice of the EU (CJEU) for not ‘sincerely cooperating’.

The European Council Conclusions and Decision refer to an expectation that the UK fulfil its obligation of ‘sincere co-operation’ - “in a manner that reflects its situation as a withdrawing Member State”.  They state that the UK should “refrain from any measure which could jeopardise the attainment of the Union’s objectives, in particular when participating in the decision-making processes of the Union”.  This is a non-legal request for the to UK behave ‘nicely’ in light of its impending departure.  There is no legal obligation on the UK as a “withdrawing Member State” to behave in a certain way beyond its normal Treaty obligations - including ‘sincere co-operation’.

Transition and the future UK-EU relationship

Unless the relevant dates in the Withdrawal Agreement are amended, a longer Article 50 extension will simply eat into the transition/implementation period ending December 2020.  A further extension of one or two years is possible if the UK and EU agree this by mid-2020.

This shortened transition period means less time to negotiate a future agreement governing UK-EU relations.  The EU has reiterated that these negotiations cannot start until the UK actually ‘leaves’ the EU.

As the UK’s position “evolves”, it might “reconsider” the Political Declaration setting out the framework for the future UK-EU relationship “in accordance with the positions and principles stated in its guidelines and statements, including as regards the territorial scope of the future relationship”.   The wording on territorial scope is thought to be a reference to a future EU-UK agreement not applying to Gibraltar without Spain’s consent.

European Parliament elections

On 8 April, the Government made the Order enabling the holding of the EP elections.  The deadline for delivery of nomination papers and lists of candidates is 25 April for most UK constituencies.  If the UK reaches agreement to leave the EU before 23 May and “exit day” as defined by the EU (Withdrawal) Act 2018 is amended to reflect this agreement, then the legislation allowing EP elections to happen will be repealed and UK participation in the elections will be cancelled.

If UK MEPs are elected on 23 May, they will not take up their seats if both the UK and EU ratify the WA and the UK then leaves the EU prior to 2 July when the new EP sits for the first time.

UK participation in the EP elections means that the planned reallocation of UK MEP seats will not happen.  EU legislation had reallocated 27 of the UK’s MEPs to 14 other Member States.  This reallocation will still take place when the UK leaves the EU, meaning that MEPs for these reallocated seats will be ‘elected’ but will remain in limbo – unable to take up their seats until the UK and its MEPs leave. 

Practical difficulties in ratifying Withdrawal Agreement prior to European Parliament election

UK ratification requires House of Commons approval of the Withdrawal Agreement - and the passage in Parliament of the EU (Withdrawal Agreement) Bill by 22 May.  There are 17 sitting days between 23 April (when the House of Commons returns from Easter recess) and 22 May - although there could be additional sitting days if the Commons sits on Fridays and possibly even weekends.

EU ratification requires the consent of the European Parliament.  If the UK does ratify the Withdrawal Agreement very soon logistical difficulties arise as European Parliament is not scheduled to sit again until 2 July - and this could delay Brexit.  EU law provides that outgoing MEPs remain in office until the new Parliament sits for the first time - and it can be recalled on an exceptional basis.

Election of Commission President

UK MEPs could potentially only be members for a short period.  However, their presence will have an impact on the formation of (and funding allocations) for political groups in the European Parliament - and the election of the its President.

The European Commission President is elected by the European Parliament by qualified majority voting, taking into account the results of the European Parliament elections.  The presence of UK MEPs is likely to benefit the (currently) second-largest political group in the European Parliament - the Progressive Alliance of Socialists and Democrats - the Labour party belongs to this group.  The largest is the European People’s Party - the Conservative party left this group in 2009.

Nomination of a UK Commissioner

The term of office of the European Commission expires on 31 October.  Once a Commission President is elected, Member States put forward their nominations for Commissioners.  Nominations face European Parliament hearings in September and then the EP votes to confirm the composition of the Commission in October.  It is possible that the UK may still be required to nominate a Commissioner even though it is scheduled to leave the EU by 31 October at the latest.   The European Council could agree that the UK does not need to nominate a Commissioner.

Exit Day

The two Article 50 extensions have required that Statutory Instruments be laid by the Government to change “exit day” as defined by the EU (Withdrawal) Act 2018.  This can be done under the Act to align it with any new exit date agreed with the EU.  A Government amendment introduced during the passage of the ‘Cooper Bill’ amended the ‘European Union (Withdrawal) Act 2018’ so that any regulations that change “exit day” will no longer require approval by both Houses under the draft affirmative procedure.  Instead, the Government may make regulations subject only to annulment by either House.  This procedure was followed on 11 April for the extension agreed the previous day. 

Background – Industry and Manufacturing

The latest Brexit delay means more uncertainty, frozen investment and lost customers for UK manufacturers.  That’s the verdict of Stephen Phipson, who represents 5,000 companies as chief executive officer of the MakeUK industry group.

Theresa May’s agreement to accept the European Union offer to postpone Brexit to 31 October leaves companies in ‘limbo’: “There’s no good news here - it’s extended uncertainty.”

MakeUK represents many companies based in leave-voting areas of central and northern England:

  • Smaller and medium-sized manufacturers especially face financial difficulties: “It’s a dramatic moment - there’s just nothing going on” in terms of investment;

  • More than 70 percent of MakeUK’s members have frozen investment as they diverted cash to building up inventories in case a no-deal Brexit strangled supply lines;

  • Those still investing are doing so in warehouses and offices in continental Europe - money that could otherwise have been spent in the UK;

  • Non-critical spending on training, conferences and advertising has dried up as firms “batten down the hatches”.

Phipson reported on his discussions with Business Secretary Greg Clark on how to persuade manufacturers to invest through the period of limbo.  “It’s particularly difficult” in the case of Japanese companies with U.K. operations given the country’s new trade deal with the EU.

Japanese firms including Honda Motor Co., Nissan Motor Co. and Panasonic Corp. have scaled down their ambitions in Britain amid uncertainty over Brexit.  “Why would you invest in the U.K. if there’s the possibility of a 10 percent tariff going forward and you’ve now got this tariff-free arrangement with the EU directly?”

Inventory-building has also constrained the ability of companies to invest.  Many manufacturers have built 60-90 day stockpiles at the request of customers expecting trade disruption following Brexit - originally scheduled for 29 March.  There’s no sign of companies unwinding stocks after the latest extension, and that comes at a cost.

“That cash is sitting in warehouses, in some cases in seagoing cargo containers in their car parks because they’ve got no warehousing,” according to Phipson. “They’ve been operating for years on just-in-time delivery systems and people aren’t used to holding stocks.”

Over the past three months in particular, half of manufacturing output has been on building inventory.  This stores up problems for their suppliers as companies eventually run down their inventories.

Potentially most damaging is the effect of uncertainty as European customers postpone purchases and seek alternative suppliers until the future is clarified.

Phipson concluded that while 10 to 15 percent of his members would be happy with a no-deal Brexit - the majority want it avoided.  He reported that in the past two months, the proportion of members supporting a revocation of the Brexit process increased to 66 percent from 20 percent.  Manufacturers are saying “reach a deal now to stop this uncertainty so that we can get out of this cycle - and if you cannot do it, stop the process and go back to it when you’ve got a plan.”

Historical Note

The first Article 50 extension

The first extension of Article 50 was agreed on 21 March and provided for an extension until 22 May if the UK-EU Withdrawal Agreement (WA) had been approved by the House of Commons by the original Brexit date of 29 March.  Alternatively, it provided for an extension of Article 50 until 12 April if the WA was not approved, by which point the European Council expected the UK to “indicate a way forward”.   The WA was rejected for a third time by the House of Commons on 29 March.

On 2 April, the Prime Minister proposed talks with the Leader of the Opposition to agree a deal enabling the UK to leave the EU by 22 May.  This would involve approval of the WA and an agreed approach to the future UK-EU relationship.  If an agreed approach is not possible, the Government would seek to agree with the Opposition on a number of options to be put to the House of Commons and the Government would be ready to “abide” by the decision of the House.  The plan envisaged that the WA would be approved and legislation to implement it would be passed by Parliament by 22 May in order to avoid UK participation in the European Parliament (EP) elections.  Mrs May said the plan would require a further extension of Article 50. The Labour party leader agreed to talks and these are ongoing.

After votes enabling non-government MPs to control the agenda of the House of Commons on specific days, the Cooper bill obliging the Government to seek another Article 50 extension passed its various Commons stages in one day on 3 April.  It took longer to get through the House of Lords, but eventually received Royal Assent on 8 April.  

On 5 April, the Prime Minister wrote to the President of the European Council Donald Tusk seeking a further extension of Article 50 until 29 June.  She said she accepted the EU’s view that if the UK were still a Member State on 23 May, it would be required to take part in the EP elections.  She said that while it was beginning preparations for the poll the Government wanted to agree a timetable for ratification of the WA before the election date in order to cancel participation.  Mrs May referred to the ongoing talks with the Labour party to agree a unified approach and the alternative plan of putting different options to the House of Commons.

References

Commons Briefing papers CBP-8549

https://www.bloomberg.com/news/articles/2019-04-17/u-k-manufacturing-chief-sees-no-good-news-in-brexit-extension

https://www.makeuk.org/news-and-events/News/2019/04/06/Make-UK-Brexit-Solution

John ShuttleworthComment