RPP Brexit and the EU Budget

Overview

With September now upon us, the discussion around Brexit certainly seems to be hotting up in the UK, with tensions surfacing over "what Brexit means" in practice, across Europe and even globally, with the G20 summit providing the opportunity for many world leaders to discuss this important issue. The Japanese Government this weekend shared significant concerns over Brexit, and its impact on Japanese companies based in the UK. Debate has also continued over whether Parliament in the UK will have a vote over Brexit, with Downing Street announcing that it will not. The fallout across Europe has also continued with disappointing regional election results for Angela Merkel's Christian Democrats (CDU) for the state legislature in Mecklenburg-West Pomerania, one of Germany’s 16 federal states, where they came third behind the Social Democratic Party (SDP) and Alternative for Germany (AfD).

Highlights

  • With the UK cabinet meeting last week at Chequers to discuss Brexit, the subject is certainly back on the UK political agenda with a bang. Although the soundbite of "Brexit means Brexit" wasn't particularly illuminating, there was a little more clarity over how immigration to the UK from the EU after Brexit might be handled. Whilst a points-based system has been favoured by many Brexiteers, including Boris Johnson, this suggestion has been slapped down by the Prime Minister, who believes it won't work. At a G20 summit press conference, Theresa May has said that "What the British people voted for on June 23 was to bring some control in the movement of people from the EU coming to the UK. A points-based system does not give you that control."
  • The UK Parliament will soon start debating Brexit again in much greater detail with Parliament returning from its summer recess. Debates are due to be held in the Lords on Brexit in its Treasury Committee and Brexit Sub Committee. Former Health Minister, Alistair Burt MP, has called for the creation of a Commons Select Committee for Brexit, as a forum for the discussion and questioning of ministers, officials and experts with regards to Brexit. Whilst it is clear that Brexit will be a significant topic for debate in the UK Parliament, the Prime Minister has made it clear that she doesn't believe that Parliament will have a final vote on the subject, however has said that "MPs will have a say on the process leading up to the Brexit". Even this is not certain however as there is currently a legal bid underway to prevent the Government from triggering Article 50 without the prior authorisation of Parliament. It is due to be heard in the High Court in October. Further speculation has been added today, 5th September, by former Education Secretary Nicky Morgan demanding that MPs must be given a say.
  • Over the weekend of the 3rd and 4th September, the Japanese Government published a report into its findings speaking to Japanese companies with operations in the UK about their current position on Brexit and what they would want to see out of the negotiations. The report contained warnings about the possible relocation of the European Medicines Agency and Japanese pharmaceutical companies moving with it, possibly to Sweden. Access to the Single Market was also seen as a concern.
  • On 2nd August 2016, European Commission President Jean-Claude Juncker announced his intention to allocate the new portfolio of Security Union to Julian King. King would work under the supervision of First Vice President Frans Timmermans. With regards to the parliamentary hearing, organised by the EP LIBE Committee, the date will most likely be Monday 12th September in Strasbourg, the LIBE Committee will meet on the evening of the 12th for the hearing and give a recommendation to plenary afterwards. The plenary vote on Commissioner designate King will take place either on Wednesday 14th or Thursday 15th lunchtime and will be conducted by secret ballot, not by a rollcall vote. (Only the Commissioner designate will be subject to that vote, not the college as a whole.)


Written by RPP Head of London Office, Andrew Brown

Brexit and the EU Budget: Who has to pay?

The EU budget for the current period 2014-2020 is set at €1,087 billion. The contributions of the EU Member States consist mainly of a fixed percentage share of national Value Added Tax (VAT) income and Gross National Income (GNI). The main expenditure budget lines are the CAP (Common Agricultural Policy) and the Regional and Cohesion Policy, each accounting for one-third of the total budget. “Brexit” means that the EU is going to lose one of the biggest contributors to the budget, the UK comes second with its payments after Germany and this had been the case for the previous budget period 2007-2013 as well.

The looming question is: What are the options for a reallocation of the EU budget after Brexit?

On the one hand, the reallocation of the contribution of the UK could be arranged according to the member state’s share in total EU-27 GDP (Gross Domestic Product). Thus, it is closely oriented to the current revenue calculations for the EU budget, where a fixed percentage share in GNI is used for that purpose: That would mean that each Member State would have to pay 0,06% more of its GNI in order to compensate for the loss of the UK budget share. In 2015 the UK paid £17.8 billion to the EU with a rebate of £4.9 billion = £12.9 billion net, of which the UK received £4.4 billion from the EU as payments such as for the Common Agricultural Policy. That would mean that the highest additional annual amounts would have to be paid by Germany (approx. €1.9 billion), France €1.4 billion) and Italy (€1 billion). The net recipients Spain, Poland and Belgium would face a reduction in transfers by 0.06% GDP per year.

On the other hand, various other reallocation scenarios are possible too: It would also be possible to distribute the UK share on the basis of the remaining net contributors, the UK share could also be compensated on the basis of the net recipients, or one could think even of mixing the two: 50% of the UK contribution could be compensated by net contributors and 50% by net recipients. On a “positive” note, the Brexit decision would also open the possibility to re-negotiate the opaque revenue system of the EU budget. The departure of Great Britain would also mean that the famous British rebate (2016: €6.1 billion) would be omitted, but there are also various other lump-sum reductions for the Netherlands (€605 million) and Sweden (€150 million). Austria, the Netherlands, Sweden and Germany benefit also from reduced VAT call rates. But Brexit could also be an opportunity for an overhaul of the EU budget in general. In the past, the UK had often pleaded for a stronger growth-oriented and more efficient use of the budget. Perhaps these ideas could be finally realised in an EU of just 27 Member States.

Should the UK trigger Article 50 at the beginning of 2017, it could leave the EU by 2019, which is two years before the end of the current budget period. The parallel schedule of Brexit and the necessity to establish a new six-year budget plan is quite a challenge for the EU, but it offers also the opportunity to reassess and reform the current EU budget and on the other hand, it seems to be reasonable to arrange some kind of a transitional period between the Great Britain and the EU-27 until 2020 to allow for a phasing-out of financial linkages. We should also remember, that depending on the model negotiated by the UK and EU post Brexit, it is possible that the UK will continue to contribute to the EU budget, as Norway, Iceland and Switzerland all do as members of the European Economic Area (EEA) or European Free Trade Agreement (EFTA). As discussed in our newsletter last week, it may be attractive for the UK to continue to contribute funds to Horizon 2020, for scientific research, and its successors. These contributions, whilst almost certainly less than the UK currently pays, could still be significant and help reduce the budget increases that other countries might have to bear. This may well be an important negotiating point for the UK.

Written by RPP Senior Director of Policy & Advocacy, Thomas Krings

What Next for Cooperation and Collaboration – BREXIT and the vital role of the UK’s NIBSC

Cooperation and collaboration have long been the hallmarks of successful outcomes in the area of healthcare policy making within the EU. Indeed, it can be said that two of the guiding principles of the EU (cooperation and collaboration) and its Member States have been threatened by the BREXIT vote, principles which are at the very heart of EU institutional decision making and will continue to be so in the future.

Throughout its history, British experts and speakers have made an effective contribution and been prominent within the EU institutions; in Committees, multi-stakeholder platforms and expert groups. This presence has been almost pervasively so, thanks to their often good presentation skills and the lingua franca of the Union: English. In pharmaceuticals and particularly biological medicinal products, it is hard to miss the seemingly omnipotent presence of the UK’s Potters Bar-based National Institute for Biological Standards and Control (NIBSC). The Institute is an important international player in developing and maintaining the quality of biological medicines, through developing standards and reference materials, product control testing and carrying out applied research.

In terms of health and economic value, biological medicinal products are a hugely important class of medicine both from a health and an economic perspective. They include vaccines, products extracted from blood, tissues or cells, and those pharmaceuticals made by recombinant technology. Furthermore, their importance is growing; and, according to the NIBSC, they already make up half the top selling pharmaceuticals. This dominance is likely to increase as the extensive pipeline of innovative products currently in development are getting closer to the patient and having nearly reached maturity.

In regards to BREXIT, the NIBSC was one of the first British organisations after the vote to publish a statement assuring its customers and collaborators of “business as usual” for the time being. However, vaccines and blood components could be the first and possibly the most affected pharmaceutical sectors affected by BREXIT vote, with a possible change in the role of the NIBSC also.

The NIBSC has a worldwide reputation for independence, integrity and scientific excellence and, as such, plays an important role in providing scientific advice and expertise to a large number of organisations, including manufacturers of biological medicines, vaccines and blood products, national regulatory authorities, the UK government as well as European bodies (including the Council of Europe which is not to be confused with the EU’s executive branch, the Council of the European Union). It has also provided advice to the WHO in the past.

Indeed, the Institute’s international footprint could help protect it from extreme BREXIT pressures. Contributions from NIBSC scientists, as members of key decision-making bodies at both European and international level, feed into the development of national and international policies, guidelines and regulations that help to ensure the safety and efficacy of biological medicines.

While there is no requirement to use NIBSC, it is a fact that many of the leading manufacturers of biological and recombinant medicinal products see the Institute as a fact of their business life in much the same way as their lawyers or accountants.

The Institute is the UK’s Official Medicines Control Laboratory (OMCL), responsible for carrying out independent official batch release testing of biological medicines as required by EU law. There will be many companies, particularly international ones from outside the EU, that will be watching nervously for new developments in Potters Bar in the coming years.

The European Union and the Council of Europe

Though not directly affected by the UK's decision to leave the EU, the UK's membership of the Council of Europe is a confounding factor that could keep the UK integrated into certain EU activities long into the future.

The UK is one of the ten founding members of the Council of Europe (CoE) which was founded in 1949 in London and now comprises 47 member states. The legal basis of the relationship between EU and CoE is complicatged to say the least, but of relevance to pharmaceuticals are certain responsibilities of the CoE delegated from the EU. These include, but are not restricted to, the European Department for the Quality of Medicines (EDQM), the Official Control Authority Batch Release procedures (OCABR) and the European Pharmacopoeia.

Unravelling and sorting through this legal and constitutional minefield will keep the lawyers busy.

Written by RPP Healthcare Director, Charles Waller

BREXIT – The Economic Impact

The economic fallout of Brexit in the UK since the EU referendum result has been mixed, particularly ahead of the G20 Summit in China. Now that the UK Parliament is returning and the political process both in Britain and in Europe is gearing up again and gathering momentum, questions have been asked about the future direction of where the Prime Minister will take the forthcoming negotiations with the EU and other Member States.

Recent key indicators have shown that some of the worst economic predictions spoken of during the referendum campaign have not been borne out in the weeks that followed the end of the campaign.

On the 5th September, the Purchasing Managers Index (PMI) for the UK services sector reported a figure of 52.9 – anything above 50 means growth – rebounding from July's seven-year low of 47.4. The consensus forecasts estimated August's reading would have been around 50. This positive economic news has seen the £ soar to a seven-week high after better than expected manufacturing and construction data lifted the pound last week to a one-month high. This morning's result saw the £ 0.62pc to $1.3376 against the $, its highest level since 15th July when it touched $1.3481. We should remember that on the 23rd June the £/$ was 1.49036, and that this devaluation of the £ has potentially acted as a significant stimulus to the UK economy, especially from an export and tourism perspective.

On Tuesday 23rd August, a survey of manufacturers by the Confederation for British Industry reported a rise in exports to their highest level in two years. Overall, the UK’s manufacturing output is expanding at a much faster rate than in the spring and posted the joint biggest rebound in 25 years, whilst Eurozone manufacturing growth has hit a three-month low in August, although the economy there is still expanding. This pattern of activity has also seen the IMF announce, on the 1st September, that the financial turmoil triggered by Brexit had appeared to subside.

The mixed picture continues in regards to consumer spending. So far, the Brexit vote seems to have had minimal impact with regards to consumer confidence in the UK after Brexit. UK consumers spent more on credit cards in July compared with June, according to the British Retail Consortium (BRC), with 168 million credit card purchases during the month, a higher figure than the previous six month’s average. UK industrial output grew at the fastest rate for 17 years in the April to June quarter, up 2.1% compared with the first quarter of the year. One negative effect from Brexit is the fact that company pension funds have recorded bigger deficits, largely down to falling Government bond yields. It could therefore be said that the older generation in the UK have felt the impact of Brexit more so than the young and middle aged.

On a day to day basis, particularly for those people travelling abroad over the summer, the impact of Brexit can be felt through the fluctuating exchange rate with the Pound and other currencies, particularly the Euro. This has had a negative impact on those people travelling abroad over the summer but has been very positive for UK based companies exporting around the world. The long term consequences of the exchange rate remain unclear but an Office for National Statistics survey, published in August, showed that in the period leading up to and immediately following the referendum there was no significant sign of uncertainty around Brexit affecting UK inward investment or GDP. Interestingly, as of the 25th August, net migration to the UK stayed at a near-record level of 327,000 for the year to March, 2016, showing that the country still remains an attractive destination for those seeking work.

Overall, given that Article 50 of the Lisbon Treaty (which would start the negotiations on Brexit) has not yet been invoked by the UK Government, reaction to the referendum result has not led to repercussions that had been predicted by some members of the Remain campaign during the election period. However, it is still early days with regards to the overall expected timeline for Brexit, from the start of the negotiations and the triggering of Article 50 to the conclusion and final UK withdrawal. Also, the announcement that Theresa May, during a Cabinet Summit at Chequers, the Prime Minister's official country residence, on the 31st August, will put immigration and the curtailing of the freedom of movement within the EU at the forefront of her negotiations may also hamper the recent good news on the UK economy as companies speculate whether or not the UK will stay in the Single Market. On that same day, Lloyds Bank released a survey outlining how British business were less confident about their future in the wake of the Brexit referendum.

The pattern of events we have seen so far has been mixed but we will need so wait a little longer to get a clearer picture.

Written by RPP Healthcare Director Advocacy & Policy UK, Mark Walker