Brexit Negotiation Games

The UK has voted by a slim majority to leave the European Union.  How is this going to happen?  What will be the negotiation strategy of the UK, on the one hand, and the European Union, on the other hand?  The ensuing ‘Brexit Negotiation Games’ will be heavily influenced by Article 50 of the Treaty on European Union (TEU).  This provision sets out the legal process for withdrawal from the Union.  The process is initiated by a Member State’s notification to the European Council of its intention to withdraw (Art 50(2)).  Following such notification, a ‘withdrawal agreement’ shall be negotiated between the Council (of the European Union) and the respective Member State.  The agreement shall also set out the future relationship of that State with the Union.  It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.  ‘The Treaties [TEU and TFEU] shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in [Art 50(2)], unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period’ (Art 50(3)).  For the purposes of these provisions, the UK shall not participate in the discussions of the European Council or Council representing it or in decisions concerning it (Art 50(4)).  A qualified majority shall be defined in accordance with Art 238(3)(b) TFEU.  Such majority requires at least 72% of the members of the Council representing the participating Member States, comprising at least 65 % of the population of these States.  At least 72% of 27 Member States (without the UK) means at least 19 Member States.  Germany’s population comprises 18.30%, France’s 14.97%, Italy’s 13.70%, Spain’s 10.47%, and Poland’s 8.57% of these 27 Member States.  No agreement can be concluded against the vote of Germany and France and any one of these three other Member States acting together.

What is the interest of the UK, and what might be its negotiation strategy against this background?  The referendum vote is not the legal declaration required by Art 50(2) TEU.  It is a political mandate to issue that declaration and negotiate a Brexit agreement.  Assuming that the UK government in fact plans to follow this mandate, it would be prudent to wait some time before formally initiating the process.  The UK might even attempt to negotiate a Brexit agreement in the shadow of a non-declared wish to exit and issue that declaration only once the agreement has been finalized.  It would be prudent to wait some time before issuing the Art 50(2) declaration because, for domestic political reasons, a new government under a new leadership should be negotiating Brexit given that the current one has favoured remain, and it takes some time to accomplish a cabinet reshuffle and sort out the domestic political upheaval.  It might be considered clever to postpone the formal exit request as long as possible given that this declaration triggers the two-year negotiation period.  The UK clearly has an interest to negotiate Brexit on the most favourable terms, i.e. to conclude an agreement that secures as many benefits of the internal market for the UK as possible while minimising the costs associated with this.  However, if it formally declares its wish to leave and no such agreement can be negotiated and agreed (which will be difficult), it will be out without an agreement – the worst possible outcome.  Hence, it does not come as a surprise that Mr Cameron has announced that he will not resign immediately but only in October and that the Brexit negotiations will need to be led by his successor.

At first sight, it appears that the Union cannot force the UK to issue the formal exit declaration required by Art 50(2) for the start of the Brexit negotiations.  The Union appears powerless.  But the UK cannot force the Union to negotiate in the shadow of a non-declared desire to exit either, and the Union has made already clear that it is not going to do this.  What is more, any Brexit agreement will need the consent of the European Parliament and a qualified majority in the Council.  A qualified majority in the Council against the vote of Germany and France realistically cannot be obtained.  So the UK faces the prospect of Brexit without an agreement if it antagonises the larger remaining Member States and/or the European Parliament.  In fact, on 25 June, the foreign ministers of the six founding Member States of the Union pressured the UK to formally initiate the process speedily, and on 26 June Mr Schulz, the president of the European Parliament, called upon Mr Cameron to do so on occasion of the next Council meeting on 28 June.  Further, on 27 June, the German chancellor Ms Merkel is meeting with Mr Hollande and Mr Renzi, representing the most simple ‘blocking coalition’ for any deal negotiated with the UK.  If these three leaders prompt the UK to come forward with an exit declaration in the near future, they are sending a strong strategic signal: if you wait until October or even longer, you should not hope to convince us of a withdrawal agreement that is favourable to you.

Hence, it appears that the UK finds itself in a precarious position.  Mr Cameron might have once more overplayed his hand in suggesting that the Article 50(2) declaration can and will wait.  On the other hand, the political turmoil in the UK is significant enough already.  What will happen to the country if indeed Mr Cameron reverses his decision and comes forward with the declaration soon, possibly already on the next Council meeting on 28 June?  All the bargaining leverage is on the Union’s side, and it does not seem like the Brexit negotiations will leave room for a lot of potential cherry-picking on the UK’s part.

The strategic picture is complicated by the fact that the interests of the remaining Member States are not homogenous.  Export-oriented countries such as Germany that have more to lose from the UK being cut off the internal market have an interest in concluding a withdrawal agreement that gives the UK and themselves a ‘good deal’.  However, it is difficult to see how such cherry-picking can be accomplished.  Surely any deal will be scrutinised in detail by all interested parties.  Giving the UK a special deal is almost impossible without setting undesirable incentives for other Member States to free ride on any such deal.  And while Germany, France and other larger Member States may be able to block any deal that is not in their interests, they cannot force a deal tailored to their interests on the other Member States.  Remember that 65% in terms of the population is the required majority.  Everybody knows this, and ex ante this works as a commitment strategy that again weakens the UK bargaining position: the Union will not cut a deal that is not acceptable to a broad majority of the remaining Member States.  And if there is no deal, there is exit without a deal.

Finally, the ensuing negotiations are interesting also because they are going to involve agents.  The Union already has announced that its negotiation team will be lead by a Belgian diplomat, Mr Seeuws.  Mr Seeuws was chief-of-staff to Mr Van Rompuy, Mr Tusk’s predecessor as chairman of EU summits, until 2014. He is an experienced negotiator and also a strong advocate of deeper EU integration.  This sends a clear signal to the UK also with respect to what sort of ‘withdrawal agreement’ to expect: not one that weakens the Union, e.g. by cherry-picking elements.  Even more important, Mr Seeuws does not represent one of the large Member States with more economic and political power.  This gives Germany and France in particular more flexibility in the negotiations and is less prone to being viewed as an expression of ‘bully politics’ than if, like in the Greek bailout negotiations, it would have been Ms Merkel or Mr Schäuble, the German Finance Minister, who had been designated as the lead negotiator.

I think it is fair to say that the Brexit vote is seen by a majority of non-British citizens as being bad for Europe, but bad for the UK in particular.  Right now, it appears that the negotiation table is not laid out such that the dire consequences of the vote could be much improved for the UK.  Simply put, the rules of the ‘exit game’ put the UK in a very weak bargaining position: if a ‘withdrawal agreement’ is not backed by a broad majority of the remaining Member States, the UK faces Brexit ‘pure and simple’.  It will find itself outside of the Union with the right to apply for re-entry according to Article 49 (Art 50(5)).  It will be in a club with Turkey. 

Horst Eidenmüller is the Freshfields Professor of Commercial Law at the University of Oxford.