DRAFT PROPOSAL FOR A NEW SETTLEMENT FOR THE UK WITHIN THE EU

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1 BRIEFING DRAFT PROPOSAL FOR A NEW SETTLEMENT FOR THE UK WITHIN THE EU FEBRUARY 2016 ON 02 FEBRUARY 2016, THE PRESIDENT OF THE EUROPEAN COUNCIL PUT FORWARD A DRAFT PROPOSAL FOR A NEW SETTLEMENT FOR THE UK WITHIN THE EU HOW FAR DOES THE PROPOSAL GO? The President of the European Council, Donald Tusk, on 02 February 2016 put forward a draft proposal for a new settlement for the United Kingdom within the European Union. The proposal follows the issues raised by David Cameron, the UK Prime Minister in his letter dated 10 November How far does the draft proposal go in addressing those issues? SUMMARY OF THE PROPOSALS The four baskets of the proposal are: 1.Economic governance To fulfil the EU treaties objective to establish an economic and monetary union whose currency is the euro, further integration is needed. Any further measures aimed at deepening of the economic and monetary union, however, will be voluntary for the non-eurozone member states. While the non-participating member states will not create obstacles to further deepening economic and monetary union, the process of further integration will respect the rights and competencies of these non-participating member states.

2 2 Watson Farley & Williams The principles safeguarding mutual respect between member states participating or not in operation of the euro area will include, amongst other things: a prohibition on discrimination, save for certain objective reasons, between natural or legal persons based on the official currency of the member state; a limitation such that the European Central Bank (or the Single Resolution Board or EU bodies exercising similar functions) will have authority over only those credit institutions located in member states within the eurozone, or over those member states that have subjected themselves to the EU s prudential supervision; emergency measures addressed to safeguard the financial stability of the eurozone will not result in budgetary responsibility for member states outside the eurozone. 2. Enhancing competitiveness The establishment of an internal market in which the free movement of goods, persons, services and capital is ensured is an essential objective of the Union, and to secure this objective, the EU must increase efforts towards enhancing its competitiveness. The relevant EU institutions and member states will take concrete steps towards better regulation a key driver to deliver a well-functioning internal market that entails lowering administrative burdens and compliance costs on economic operators (especially SMEs) and getting rid of unnecessary legislation. This essentially will build on the progress already made with the Regulatory Fitness Programme. The European Commission is committed to carrying out an annual review of the Union s efforts to simplify legislation and to avoid over-regulation. Furthermore, the draft proposal asks the European Commission to propose repealing measures that are inconsistent with the principle of subsidiarity, or that propose a disproportionate regulatory burden. 3. Sovereignty The draft proposal recognises that in light of the UK s special situation under the EU treaties, it is not committed to further political integration. It clarifies that references in the EU treaties to the process of creating an ever closer union among the peoples of Europe are primarily intended to signal the EU s aim to promote trust and understanding among peoples living in open and democratic societies sharing a heritage of certain universal values it should not be considered as a reference to an objective of political integration. The proposal reiterates respect for the principle of subsidiarity its purpose is to ensure that decisions are taken as closely as possible to the citizen. According to the proposal, reasoned opinions issued by national parliaments in accordance with the EU protocols governing the principles of subsidiarity and proportionality must be duly taken into account by all EU institutions involved in the relevant decision-making process. There are provisions whereby member states representatives acting as members of the European Council are required to discontinue the consideration of a draft legislative act where a number of national

3 DRAFT PROPOSAL FOR A NEW SETTLEMENT FOR THE UK WITHIN THE EU 3 parliaments object to it on the grounds of subsidiarity. The proposal confirms in this regard that national security remains the sole responsibility of each member state and in exercising their powers, the EU institutions will fully respect the national security responsibility of the member states. 4. Social benefits and free movements The proposal reiterates the importance of respecting the principles of freedom of movement and non-discrimination, while recognising that the social security systems of certain member states may be more attractive than others for the workforce. The proposal recognises that it is legitimate to provide (both at the EU level and at national level) for measures avoiding or limiting flows of workers of such a scale that they have negative effects both for the member states of origin and for the member states of destination. The proposal notes that following adoption, the European Commission will submit proposals for amending existing EU secondary legislation. These will include: with regard to the export of child benefits to a member state other than where the worker resides, giving member states an option to index such benefits to the standard of living in the member state where the child resides; in order to take account of a pull factor arising from a member state s in-work benefits regime, amendment of freedom of movement for workers to provide for an alert and safeguard mechanism to respond to situations of inflow of workers from other member states of an exceptional magnitude. Essentially, a member state will be required to obtain a prior approval from the European Commission and the European Council to restrict access to in-work welfare benefits to the extent necessary. A member state will be allowed to limit the access of EU workers newly entering its labour market to in-work benefits for a period of up to four years from the commencement of employment. Moreover, the limitation should be graduated with the growing connection of the worker with the labour market of the host member state i.e. from an initial complete exclusion it should gradually access to such benefits as the worker integrates into its labour market. COMPARISON WITH UK PROPOSALS While this reform proposal is an important step towards renegotiating the UK s membership of the EU, it does not entirely address the issues raised by the Prime Minister in his letter of last November. 1. Social Benefits The Prime Minister had originally demanded that people coming to the UK from the EU be barred from claiming in-work benefits or social housing for four years. Furthermore, he wanted a ban on people being able to claim child benefit in the UK

4 4 Watson Farley & Williams and send it back to families in other EU member states. The draft proposal does not go as far as a total ban on in-work benefits for four years, and instead provides for a graduated limitation of these benefits to take into account the growing connection of the worker with the labour market of the host member state. Furthermore, on child benefits the proposal would not end the practice of sending child benefits overseas, but only limit the amount. 2. Economic governance The Prime Minister had demanded an explicit statement that the EU had more than one currency, that taxpayers in non-eurozone countries should never be liable for operations to shore up the eurozone, and that any change decided by the eurozone (for instance creation of a banking union) should not be mandatory for noneurozone member states. While President Tusk s proposals promise a mechanism that would give necessary reassurances on the concerns on non-eurozone member states, it states that these cannot constitute a veto. It confirms, however, that British taxpayers can never be liable to support the eurozone. 3. Sovereignty The proposal arguably does not meet the UK s demands in their entirety. The Prime Minister had demanded an end to the UK s obligation to work towards an ever closer union in a formal, legally binding and irreversible way. He further wanted to enhance the role for national parliaments, strengthen the EU s commitments to subsidiarity and a clear statement that national security remained the sole responsibility of member states. The proposal has clarified that treaty references to ever closer union should not be considered as equivalent to the objective of political integration and have reiterated a strong commitment to the principle of subsidiarity. The proposal has further proposed a red-card system, which would allow national parliaments in certain circumstances to be able to veto EU legislation. It is not clear how the red-card mechanism will work in practice, however on paper it is closer to the Prime Minister s demands. 4. Competitiveness The proposal seems to have addressed these concerns raised by the Prime Minister. NEXT STEPS The permanent representatives of the European Council are due to have their first discussion of the proposal on 5 February and will aim to have an agreement of all member states at the February meetings of the European Council on 18 and 19 February. If the European Council does decide to accept this proposal, it is not expected that it will introduce any substantive changes to the proposal. If a compromise is reached in the European Council meetings, the Prime Minister would then take it to the British public. We can already see that the value of these proposals (if adopted) will be hotly debated between the opposing camps in the Brexit debate. Whether or not the Prime Minister succeeds will be known only after the referendum.

5 DRAFT PROPOSAL FOR A NEW SETTLEMENT FOR THE UK WITHIN THE EU 5 There are three possible outcomes: 1.the proposal is adopted as it is without any changes, and the UK votes to stay in the EU on that basis; 2.the proposal is adopted with some changes, and the UK votes to stay in the EU on that basis; 3. irrespective of what proposal is adopted, the UK votes to leave the EU. In each of the above scenarios, it remains to be seen what changes there will be to how business is done in the UK. FOR MORE INFORMATION Should you like to discuss any of the matters raised in this Briefing, please speak with a member of our team below or your regular contact at Watson Farley & Williams. JEREMY ROBINSON Partner [email protected] SIMON KAVANAGH Partner [email protected] VINEET BUDHIRAJA Associate [email protected] Publication code number: v1 Watson Farley & Williams 2016 All references to Watson Farley & Williams, WFW and the firm in this document mean Watson Farley & Williams LLP and/or its Affiliated Entities. Any reference to a partner means a member of Watson Farley & Williams LLP, or a member or partner in an Affiliated Entity, or an employee or consultant with equivalent standing and qualification. The transactions and matters referred to in this document represent the experience of our lawyers. This publication is produced by Watson Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson Farley & Williams. This publication constitutes attorney advertising. wfw.com