Britain’s Exit from the EU (in its present from) is Almost Certain by Edward Spalton and John Harrison

The EU always was a project which depended on forward momentum and an appearance of inevitability. Professor Tim Congdon likened this to the belief held by Marxists in the scientific nature of their theory and the historical inevitability of its fulfilment. With the wheel falling off the euro currency and the manifest incompetence of the EU’s leaders to deal with it, even true believers are now having doubts about the EU equivalents of those Five Year Plans and bogus statistics of tractor production which destroyed the credibility of the Soviet Union.

The euro is now on life support and there are two possible outcomes. If the life support of IMF, British and other loans is insufficient and the patient dies, then the EU, in its present form, dies with it. Frau Merkel says so and she is in a position to know.

If the euro lives, then within three years the 17 eurozone countries as a caucus will be able to dictate the policy of the whole EU to the 10 states which still retain their own currencies. Mr. Cameron and Mr. Osborne have been urging the eurozone states to form themselves into a common, united, economic government.

Mr. Cameron, having already ceded powers of control over the financial sector to the EU, appears to have woken up to the dangers of this rather late in the day – particularly with regard to the interests of the City of London. The EU is proposing an expanded Tobin tax on financial transactions. Taxing the bankers will be popular but, of course, the tax will end up being paid by the bankers’ clients. They will pass it on, rather like the oil companies do with fuel duty and VAT.

It will not “soak the rich” who will simply move their financial transactions out of its reach. It will hit the smaller savers with money invested in unit trusts, managed funds and pension funds.

Up to now such funds, if well-managed, have provided some shelter from the worst effects of inflation, especially for occupational pensioners in the private sector. If every transaction and share swap is taxed, then that ability is much reduced. It will have a similar type of effect on private pensions as Mr. Brown’s £5 billion per annum tax raid had in earlier years. Like that expropriation, it will be initially “painless”
because the deductions will start small, not appear on anybody’s payslip and will have their effect over years.

If the euro recovers, then regardless of opt outs and derogations, eurozone countries will shortly have the necessary weight to impose this tax which is particularly directed at London where the huge majority of Europe’s financial transactions takes place. From the sudden invention of the Common Fisheries Policy onwards, Britain’s relationship with the EU has been one of repeated surrenders. A British government committed to staying within the EU would have no choice but to accept it eventually. Those investors who could would simply desert London for cheaper dealing on untaxed exchanges.

Mr Cameron is pledging large amounts of Britain’s credit to the eurozone through the IMF, presumably in the hope of reviving the euro. He says so and I think we may believe him. The only conclusion to be drawn is that EU control and taxation of the City of London is the outcome he expects and accepts. His complaints and bluster against the EU’s continual attacks on the City can only be of the “In Europe but not run by Europe” variety with which we have long been acquainted.

So there are two possible outcomes in general outline:

  • The euro collapses and the EU with it, leading to a wholesale liberation of EU states including the United Kingdom. With the acquis communautaire and EU institutions irretrievably discredited and irrelevant, a genuine renegotiation of trade arrangements between states would be possible, provided we have a government willing to play for our side.
  • The euro survives and national interest will compel UK withdrawal from the eurozone-dominated EU unless the government in power is just as prepared and determined to sacrifice the City of London, as Mr. Heath’s government was with the fishermen.

Whilst people may loathe bankers and financiers as much as they do politicians it is likely that public pressure, backed by well-funded information from the City, would not permit that abject surrender. Yet the direction of Mr. Cameron’s present policy of pledging more and more of our credit to prop up the ailing euro seems geared to just that end – even as he protests his intention to defend the City. Putting very serious money on the line for a project whilst protesting against its inevitable outcome (if successful) is not a credible stance.

The EU has long aimed to acquire rights of tax raising without the need to go through the parliamentary processes for contributions from member states. This is called “own resources” and already exists to some extent in customs duties on goods entering the EU from Third Countries. These are collected by HM Revenue and Customs which retains a collection fee for expenses but passes on a fixed proportion to the EU automatically. With the reduction of customs tariffs world wide as a result of WTO agreements, to which the EU is signatory, this is not as fruitful a source of funding as it once was.

Two other EU revenue raising proposals are being given serious consideration

  • A “carbon tax” on emissions from factory chimneys with the supposed benefit of “saving the planet” from climate change. The EU already dictates much of environmental policy, including targets of carbon dioxide which member states are allowed to emit. The EU also operates a notoriously corrupt carbon trading scheme.
  • A tax on financial transactions at a low percentage (0.1% and upwards is mooted). This is expanded from the original idea of the Tobin tax which applied only to spot currency deals. Some 70% of the EU’s financial transactions take place in London. The tax is advocated as a brake on the “greed” of financiers and on the volatility of markets. In practice it would simply be an added dealing cost which would be passed on to buyers of shares, bonds and currencies. It would also discriminate against currency transfers between eurozone and non eurozone countries within the EU, giving credible extra financial pressure for joining the euro.

It is noteworthy that two Liberal Democrat euro-fanatics are ministers with responsibilities in this field – Chris Huhne who is Minister for Energy and Climate Change and Danny Alexander who is Chief Secretary to the Treasury.

The attempted creation of a single economic government amongst eurozone members with the active support of HM Government and the impending change in EU voting procedures in three years time, which will give that eurozone group permanent outright control of all major EU decisions, provide the backdrop against which the independence struggle and any referendum campaign will take place.

The Monetary Mess

By locking incompatible economies onto the same currency, the existence of the euro is making worse a mess which already existed. It began in the Seventies at about the time Britain joined the EEC and was triggered by President Nixon’s decision to take the US dollar off the gold standard. Under the Bretton Woods system which stabilised the post war currency system, the major currencies were pegged within a small range of variation to the dollar, which was pegged to gold. Every so often, adjustments were made. Britain had to devalue on several occasions because of balance of payments difficulties.

Some people will remember Prime Minister Harold Wilson assuring us that this did not mean that “the pound in our pocket” had been devalued! When the dollar came off the gold standard it was decided that currency exchange rates would “float” and go up and down against each other according to market circumstances. In fact, this represented another devaluation for sterling. Criticising the change from the opposition benches, Mr Wilson remarked “..and the pound floated – like a brick!”. He always had a good turn of phrase.

Freed from the restrictions of the Bretton Woods system, British and other governments relaxed controls on credit, allowing the banks to become the de facto issuers of currency.

The independently owned banks used to have the right to issue bank notes. The government realised that printing bank notes can lead to inflation so it passed the Bank Charter Act of 1844 which prohibited* them from that and gave the sole power to the Bank of England to issue bank notes.

That worked fine until the advent of computers when banks became empowered to issue currency again. The liquidity ratios allowed them to lend £8 for every £1 they held in deposits. So if you deposited £1 in your account they could lend me £8. I could then pay that to you to buy your vastly inflated produce and you pay it into your account. They have now got another £8 on which they can lend me £64 and so it goes on. This is how the banks have built up bigger assets/liabilities than the countries in which they are domiciled.

Governments have been happy to turn a blind eye to this ballooning catastrophe because – guess who borrows the most money? Got it in one! The governments themselves! That is why Gordon Brown was so desperate to get the banks lending again in 2008.

But shouldn’t this vast increase in money supply have increased inflation over the last twenty years? Of course it should have, but the monetary effect was negated by the massive importation of cheap goods from the Far East. In other words China postponed the impending doom approaching the Western world.

Back to banks. What happens when the loans they made go sour? Well, first point, due to a change in accounting regulations they only have to report bad debts when insolvency proceedings commence – unlike the rest of us who have to write off as soon as we suspect the debt is bad. So the banks can and do keep bad debts off their balance sheets by throwing good money after bad. Ultimate, of course, those companies go under. As the average lending ratios are now 33:1 instead of the 8:1 I mentioned earlier, it only required bad debts of 3% of their total assets to wipe out their capital entirely, and most banks are in that situation.

So what happens then? First, the loss is sustained by the bank’s shareholders, then they borrow on the inter-bank market and lastly the government’s unwritten guarantee comes into play to protect the nation’s savers as ours did with Northern Rock, Royal Bank of Scotland et al. There you have a situation where the banks got into trouble because they had lent too much, largely to governments, and under Gordon Brown’s “Save the World” strategy, the governments took all the debt back onto their own balance sheets.

Now you have the problem where the sovereign states are buckling under the amount of debt they are carrying. So the solution is for the European Central Bank to create £2,000 billion of extra cash to bail out the governments.

But wait a minute! Who are the unwritten guarantors these new £2,000 billion of debts? Well, actually they are those very same sovereign governments which are insolvent anyway.

It will probably have the same effect as throwing a tanker load of petrol onto a fire to try to dowse it. Stand well back, if you can!

As a Dutch colleague remarked recently, it is likely that most of us will become considerably poorer as a result of this massive, immoral mismanagement. The question is whether we will be poorer serfs within the European Union which entrenches the system beyond democratic reform in perpetuity, or poorer free men in our own countries with a chance of fighting our way back.

Article 50 And Withdrawal

Not so long ago, it seemed unlikely that any country politically was willing to contemplate leaving the European Union. Nothing illustrates this better than the fact that all of the treaties pre-Lisbon were silent on the question of withdrawal. There were a number of theories for this; partly it would have been contrary to member states’ commitment to “ever closer union”, partly it could have encouraged members to make the outcome more likely and partly that the process of leaving is a significant legal challenge best left unspecified in a treaty – a legal challenge made more complicated the longer member states remain within an ever integrating Union.

So in the absence of a specific provision for exit, international treaties are usually covered by Article 56(1) of the Vienna Convention on the Law on Treaties which states:

1. A treaty which contains no provision regarding its termination and which does not provide for denunciation or withdrawal is not subject to denunciation or withdrawal unless:

a) it is established that the parties intended to admit the possibility of denunciation or withdrawal; or
b) a right of denunciation or withdrawal may be implied by the nature of the treaty. Interestingly, and perhaps ironically, these provisions of the Vienna Treaty did not cover EEC /EU Treaties before Lisbon. The spirit and terms of those treaties as epitomised by “ever closer
union”, with the long-term goal of full political and economic integration, meant the “right of denunciation or withdrawal” was never implied. Quite the opposite in fact. Thus it could’ve been argued therefore that exit of the EU was not specifically allowed under international law.

Crucially this was reinforced, by virtue of its absence as a clause, that the Vienna Treaty also does not list sovereignty as a means of automatically absolving countries from their treaty obligations. There is no legal defence within the Vienna Treaty for a country who wishes to withdraw unilaterally from its obligations as it sees fit. This became especially true due to the nature of EEC/EU Treaties. The European Court of Justice has a well-established interpretation that EU treaties are permanently binding on the Member States and limit their sovereign rights as per Flaminio Costa v ENEL [1964] ECR 585 (6/64) – (my emphasis):

“By creating a Community of unlimited duration, having its own institutions, its own personality, its own legal capacity and capacity of representation on the international plane and, more particularly, real powers stemming from a limitation of sovereignty or a transfer of powers from the States to Community, the Member States have limited their sovereign rights and have thus created a body of law which binds both their nationals and themselves … The transfer by the States from their domestic legal system to the Community legal system of the rights and obligations arising under the Treaty carries with it a permanent limitation of their sovereign rights”

However the problems and arguments with Article 56(1), and pre-Lisbon, are now largely moot points, as the Lisbon Treaty explicitly makes provision for the voluntary secession of a Member State from the EU and this provision comes via Article 50. Therefore exit from the Lisbon Treaty, and subsequently from the EU, is instead covered by Article 54 of the Vienna Convention on the Law on Treaties (my emphasis):

The termination of a treaty or the withdrawal of a party may take place: (a) in conformity with the provisions of the treaty; or (b) at any time by consent of all the parties after consultation with the other contracting States.

For the first time in an EU treaty there is an exit clause and one that is backed up by international law. One should note at this point that Article 50 does have two areas of a lack of clarity particularly for the EU – for example over the issue of more than one member wanted to withdraw at the same time, especially if there was a mass exit, and more importantly it contains no special provisions on the requirements for the withdrawal of a Member State which has adopted the euro. However these are concerns which should not affect the UK, so this piece will concentrate on a UK exit only.

One overlooked factor with Article 50 is that it actually contains two choices of withdrawal not one; it allows for a negotiated agreement where the Member State in question and the EU agree terms but it also recognises a unilateral right of withdrawal – a Member State simply hands in their notice and serves out their two year notice with no desire for negotiation whatsoever. This is clearly defined by Article 50 (3):

The Treaties 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 paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

The unilateral right of withdrawal has the added benefit of acting as a longstop – as a negotiating tool – that prevents the EU from imposing impossible conditions upon a Member State with the intention of trying to stop their exit.

So in practice, should the UK want to change its relationship with the EU, Cameron would, using the Royal Prerogative and as per Article 50 (2) notify the European Council via President Van Rompuy of our intentions. Then, as per Article 50 (2), there would begin a period of

In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European 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.

Though it’s left unsaid with Article 50, any country leaving would necessitate a new EU treaty as it would require amendments to the founding treaties. Though there is no precedent to draw on regarding a country leaving the EU under Lisbon, we can find an imperfect example with Greenland in 1985 who left the then EEC which required a treaty – unsurprisingly called The Greenland Treaty of 1985, documented by Hansard 20th July 1984. It’s worth noting Teddy Taylor’s comments at the time, about how very complex the whole process of leaving was:

First, my hon. Friend the Minister will agree that, judging from the papers that he and the Department kindly made available to us, the formula adopted to arrange Greenland’s withdrawal from the EEC is a highly complicated one. There is a very good reason for that. There is no clear procedure in the treaty for the withdrawal of a part-member state or indeed a member state. In view of our experience with Greenland, is there not a case for saying that the Common Market should consider its rules and treaties with a view to providing a clear arrangement for the withdrawal of member states which wish to withdraw, if other member states agree?

Post EU and the Lisbon exit clause means the Greenland example is no longer really relevant; instead a better example of how we leave may lie with the process of accession treaties. Similar to Article 50 the accession clause in Lisbon – Article 49 –also does not mention specifically the need for a new Treaty. Yet if a country applies to join the EU a new treaty is ultimately required for precisely the same reasons as leaving – that it requires amendments to the founding treaties. A recent example is the Treaty of Accession 2011 concerning Croatia’s accession to the EU which comes into force 1st July 2013.

Under Article 49 a country formally applies for membership, then begins a period of negotiation mainly based on whether the country wishing to apply is able to sufficiently execute EU law. This is a process which only ends when both parties agree that Acquis Communautaire has been sufficiently implemented, then a treaty of accession will be signed, which must then be ratified by all Member States of the EU, as well as the EU itself, and the applicant’s country.

This process would be remarkably similar to Article 50 but obviously for opposite intentions. The UK would formally notify intentions to leave, negotiate, and then sign the resulting treaty

which is ratified by the EU and all Member States. Those countries wishing to join the EU have the option of saying no by changing their minds if the terms aren’t right, those countries wishing to leave have the option of saying no by not accepting the withdrawal agreement if the terms aren’t right.

One quirk with Article 50 though is as a member of the EU – the European Council and the Council of the EU – the UK would ending up sitting on both sides of the negotiating table regarding the new treaty. So this is where Article 50 (4) comes in (my emphasis):

The member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.

This is entirely logical otherwise the UK would end up negotiating with itself. This exclusion is entirely consistent to Article 49 where accession countries are also absent from the European Council and the Council…by virtue of not yet being EU members.

In summary Article 50 allows us to fulfill our international obligations, abide by our EU treaty agreements and allows for an orderly exit with minimum of disruption particularly with regarding trade.