Flag symbolizes Brexit; Source: istockphoto.com/melis82

© istockphoto.com/melis82

Overview

Following ratification of the Withdrawal Agreement by the European Union and the United Kingdom, the United Kingdom left the European Union on 1 February 2020. In principle, nothing changed for companies and citizens on that day. The Withdrawal Agreement provides for a transition period in which EU law continues to apply in and to the United Kingdom in principle, but without any participation by the United Kingdom in EU institutions. The transition period ends on 31 December 2020. It is no longer possible to extend this period. That would have required a joint decision by 1 July 2020. The United Kingdom allowed this deadline to pass. That means that, from 1 January 2021, the United Kingdom will no longer be part of the Single Market and the Customs Union.

The EU and the United Kingdom began on 2 March 2020 to engage in negotiations on the future relations between the EU and the UK. The negotiations are being conducted for the EU by the European Commission on the basis of a mandate with negotiating directives, which were issued by the Member States on 25 February 2020.

The Withdrawal Agreement and the Political Declaration

On 29 March 2017, the UK government formally notified the European Union of its intention to withdraw from the EU.

On 19 June 2017, the United Kingdom and the European Commission took up negotiations on the United Kingdom’s withdrawal from the European Union and in November 2018 agreed on a Withdrawal Agreement and a Political Declaration setting out the framework for the future relationship.

At a special meeting of the European Council (Article 50 TEU) on 25 November 2018, the EU Heads of State and Government endorsed the Withdrawal Agreement and adopted the Political Declaration setting out the framework for the future relationship. On 17 October 2019, the chief negotiators of both sides agreed on a slightly modified package, which was endorsed by the Heads of State and Government at the European Council (Article 50 TEU) on 17 October 2019. The UK Parliament approved the Withdrawal Agreement Bill on 22 January 2020; the European Parliament approved the Withdrawal Agreement on 29 January 2020, followed by the Member States represented in the Council on 30 January 2020. The Withdrawal Agreement was signed on 24 January 2020 by European Commission President Ursula von der Leyen, Council President Charles Michel and UK Prime Minister Boris Johnson.

Essential elements of the Withdrawal Agreement are grandfathering arrangements for the rights of EU citizens living in the UK and British citizens living in the EU and the fulfilment of the UK’s financial obligations under the current Multiannual Financial Framework. The rights of all EU citizens living in the United Kingdom until the end of the transition period, and the rights of the Britons living in the EU will be comprehensively protected until the end of their lives; they can continue to live, work, study and receive welfare benefits in the UK and the EU respectively. According to the revised Protocol on Ireland/Northern Ireland included in the Withdrawal Agreement, Northern Ireland shall be part of the customs territory of the United Kingdom after the transition period, while having a special customs partnership with the EU where the EU customs code will basically be applied. Furthermore, all relevant EU internal market rules will continue to apply in Northern Ireland. The necessary controls will take place and customs duties will be levied at the entry points of the island of Ireland in Northern Ireland. This solution is to guarantee both peace on the island of Ireland and the integrity of the EU internal market.The Agreement also contains governance rules to ensure effective implementation and enforcement of the Agreement.

You can find an overview of the contents of the Withdrawal Agreement here (in German).

The revised Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom provides for an economic partnership and a security partnership. As regards the economic partnership, the aim is to conclude a comprehensive Free Trade Agreement. In view of the geographic proximity and the close ties between the EU and the UK, robust and comprehensive arrangements are to be adopted in order to guarantee a level playing field. As regards the security partnership, the aim is comprehensive and close cooperation on internal and external security based on reciprocity. The details of the future relationship will be negotiated after the United Kingdom’s withdrawal from the EU.

The transition period

The Withdrawal Agreement provides for a transition period from 1 February 2020 until 31 December 2020. This period can be extended once by a maximum of two years by virtue of a joint decision of the EU and the UK on application from the United Kingdom. This decision would have to be taken by 30 June 2020. However, the United Kingdom stated in June 2020 that it would not apply for an extension. During the transition period, EU law will in principle continue to apply to the UK, as do the rulings of the European Court. The UK will also remain a member of the EU Single Market and Customs Union during this period. However, the UK is no longer participating in the EU institutions and can only take part in their meetings in very restricted exceptional cases at technical level without voting rights.

The negotiations on the future relationship

On 2 March 2020, the EU and the United Kingdom commenced talks on the future relationship.

To this end, the Member States granted the European Commission a mandate with negotiating directives on 25 February 2020 for the talks, on the basis of the Political Declaration of 12 November 2019. The EU aims to maintain the closest possible partnership with the UK. The mandate and the negotiating directives are based on the Political Declaration and cover all the fields which the EU believes need to be regulated in the future relationship. These include goods, fisheries, services, energy, transport, space flight, individual mobility, research and development programmes, internal security, foreign and security policy, culture and education, and a level playing field for business. There is also a chapter on the governance of the future relationship which envisages an overarching dispute settlement mechanism and overarching dialogue formats, as well as a single administrative instrument for all aspects of the future relationship. Regarding the future economic partnership, the EU is aiming at a free trade area without tariffs, charges, fees, quotas or other restrictions for all sectors. The aim is a level playing field oriented to the current EU aquis. On the basis of the mandate, the European Commission published a draft agreement on the future relationship.

On 19 May 2020, the United Kingdom published its own draft texts containing its ideas for the future relations. You can find the drafts here.

How will the negotiations proceed?

Under the constraints of the Covid-19 pandemic, the EU (represented by the Commission) and the United Kingdom have been holding regular rounds of negotiations since March 2020. Five rounds have taken place so far, most recently from 20-23 July 2020. It has not yet proved possible to overcome substantial differences. At the high-level conference on 15 June 2020, the Presidents of the European Council, the European Commission and the European Parliament agreed with Prime Minister Boris Johnson to step up the talks. Intensive use is to be made of the remaining months in the transition period: a further formal round of negotiations will take place from mid-August until the end of August 2020, and in addition to this the two leaders of the negotiations, Michel Barnier and David Frost, have been holding weekly discussions in a small group since the beginning of July 2020.

The intensified negotiation mode is intended to create the best possible conditions for a successful conclusion to the talks within the prescribed tight schedule. You can find an overview of the negotiations here.

What will companies have to expect from 1 January 2021?

The transition period set out in the Withdrawal Agreement ends on 31 December 2020. It is no longer possible to extend this period. That would have required a joint decision by 1 July 2020. The United Kingdom allowed this deadline to pass. That means that, from 1 January 2021, the United Kingdom will be a “third country”, and in particular will no longer be part of the Single Market and the Customs Union.

The conclusion by the end of the year of an agreement on the future relationship will thus fundamentally change the relationship between the EU and the United Kingdom, and will be fundamentally different from British membership of the Single Market. This applies for example to the customs formalities which will then be required. The EU Member States, their companies and citizens therefore certainly need to prepare for the consequences of the end of the transition period – irrespective of whether or not it proves possible to conclude an agreement on the future relationship.

In order to provide assistance with this, the European Commission published a “readiness communication” (in German) in preparation for the end of the transition period. In addition to this, the European Commission is currently revising the more than 100 sector-specific communications to stakeholders which it published during the negotiations with the United Kingdom on the basis of Article 50, and updating them where necessary. The updated readiness notices (in German) on individual dossiers (e.g. tariffs, including preferential rules of origin, data protection, industrial products, chemicals, etc.) are intended to help the public administration, companies and citizens to prepare for unavoidable changes which will take place after the transition period, irrespective of the outcome of the negotiations.

The EU aims to maintain a close partnership with the UK. We are convinced that a successful agreement is possible on the basis of the Political Declaration. Nevertheless, it is important for us to make preparations for all possible scenarios of the outcome of the negotiations. This includes preparations for the eventuality that no agreement is reached.

Further information for businesses

Information from the UK about Brexit can be found here.

Background information

The United Kingdom in the European Union

The United Kingdom joined the European Union on 1 January 1973, together with Denmark and Ireland. This brought the number of Member States to nine. The United Kingdom comprises Great Britain (England, Wales and Scotland) and Northern Ireland. With around 65 million inhabitants, the UK accounts for 12.8 per cent of the total EU population. On 23 June 2016, UK citizens voted in a referendum to leave the European Union.

Current economic relations with the United Kingdom

The United Kingdom is Germany’s seventh most important trading partner (trade volume in 2019: €117.24 billion). For Germany, the UK ranks fifth in terms of exports and eleventh in terms of imports. In 2019, the volume of German exports to the United Kingdom totalled €78.89 billion. UK imports amounted to €38.35 billion.

Around 2,267 German enterprises employing approx. 439,000 people were doing business in the United Kingdom in 2018 (source: Deutsche Bundesbank). German investors in the United Kingdom include Siemens, Bosch, BMW, VW, Daimler, RWE, E.ON, Deutsche Post, Deutsche Bank, Deutsche Bahn, Linde, Lidl, Aldi, Bayer, BASF and Heidelberg Zement. In 2018, German direct and indirect investment in the United Kingdom totalled €137.7 billion.

More than 1,500 UK firms employing a total of around 303,000 members of staff were operating in Germany in 2018 (source: Deutsche Bundesbank). In 2018, UK direct and indirect investment in Germany totalled €32.7 billion, focussing on the manufacturing industry, the chemical sector and the oil industry (including BP, Shell, GKN, Rolls Royce).

Possible impact of the withdrawal on the German and European economies

Brexit will have economic repercussions for the EU Member States and especially for the United Kingdom. The extent of this impact will much depend on the shape of future relations between the EU and the UK.

A study by the ifo Institute commissioned by the Federal Ministry for Economic Affairs and Energy contains an initial assessment of the economic impact on the German and European economies. The findings of the study show that even in the most unfavourable scenario, the impact of Brexit on the EU economy, and the German economy in particular, ought to be manageable in the long term. That said, there may well be some sectors that are hit harder by these developments.