If Article 50 enabled Brexit, does this mean that exit clauses make secessions from a political union more likely? Drawing on a new study, Martijn Huysmans and Christophe Crombez demonstrate that exit clauses which incorporate penalties for the seceding state can lead to more efficient exit decisions. They argue that further research into exit clauses might help enable efficient exits from political unions such as the EU and mitigate the problem of violent secessions from federations.
Conceptually, an exit clause with appropriate penalties for leaving can enable what is known as ‘efficient breach’. This means breaking a contract in a case where, adding up the benefits and harms to all parties, it is efficient to do so.
In a union like the EU, exit would be efficient if the costs of staying to a given member exceeded the benefits to the rest of the union if the member remained. This could happen if material conditions have changed such that centralised policies hurt the member more than the benefits of its membership to others in the form of economies of scale in government and trade.
Theoretically, to enable efficient exit, one should impose a penalty for leaving. The penalty should be equal to the lost benefits for the remainder of the union, plus the transaction costs of implementing the exit. In a recent study, we demonstrate this more formally in a model with two periods, and an alternative model in continuous time – where exit is possible at any time, so long as it has not happened yet.
Theresa May signing the UK’s letter of notification setting out the United Kingdom’s intention to withdraw from the European Union, Credit: Number 10/Jay Allen (Crown Copyright)
While the EU is not a federal country, federations may offer a relevant point of comparison. Looking at federal constitutions past and present, none have exit clauses with penalties, but several do have exit clauses. For instance, the two-island federation of Saint Kitts and Nevis allows Nevis to secede by a two-thirds majority. Under the Good Friday agreement, the devolved United Kingdom allows Northern Ireland to join a united Ireland.
Historically, the 2003 State Union of Serbia and Montenegro allowed for secession after a three-year waiting period. Montenegro exercised this option in 2006, after obtaining more than the requisite 55% in a referendum. While the clause did not contain an exit payment, the fact that the three-year waiting period was respected and no violence occurred suggests that exit clauses with conditions may effectively enable smoother exits from political unions.
Article 50 allows for a costless exit
Ever since it came into force with the Treaty of Lisbon, Article 50 allows any EU member state to leave the EU. If no agreement is reached two years after notification of the intent to leave, the EU treaties cease to apply. While the UK triggered Article 50 in March 2017, it has since successfully requested multiple extensions to this two-year period.
Article 50 does not specify an exit penalty. The EU has argued that the UK should pay a settlement, but this is related to prior commitments. An explicit exit penalty could have imposed the payment of membership fees for a number of years after the exit without any benefits. An obligation to pay back the administrative costs of exit on the EU side could also have been included.
Since the UK’s exit from the EU clearly seems inefficient, one may blame Article 50 as making exit from the EU too easy. And indeed, considering the theory we have developed, not specifying an exit penalty (or other conditions such as a supermajority referendum) would lead to socially inefficient exit decisions.
Through exit clauses with penalties for leaving, political unions such as the EU could enable efficient exit decisions. In the real world, while some federations have exit clauses, none specify penalties. So, no direct empirical proof of this claim is available. However, the Brexit case does seem to illustrate that costless exit clauses lead to inefficient exit decisions. Furthermore, the issue of violent secession in federal countries is clearly serious enough to justify more research into exit clauses.
For more information, see the authors’ accompanying article at Constitutional Political Economy.
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Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics.
Martijn Huysmans – Utrecht University
Martijn Huysmans is an Assistant Professor in the School of Economics at Utrecht University, where he conducts research on the Political Economy of the EU and teaches in the PPE program. He obtained his PhD in Applied Economics at the University of Leuven. He is on Twitter @MartijnHuysmans
Christophe Crombez – KU Leuven & Stanford University
Christophe Crombez is a Professor of Political Economy at KU Leuven, Faculty of Economics & Business, and a Senior Research Scholar at the Stanford University Europe Center. He is on Twitter @crombez
An interesting argument, but I would say it contradicts the Coase theorem. If the remaining members don’t want a member to leave then they can always increase the benefits to the member wishing to leave such that they choose to stay. What you suggest seems to be more about who pays the cost of exit rather than the efficiency of the outcome.
I think the idea is basically sound. You get an efficient secession if both sides want the secession to happen. A penalty on exit is a bit like a tool for adjusting the incentives (the larger the penalty, the more the remaining states will be rewarded and the more they’re likely to want the secession to be completed efficiently – it’s taken as a given in this framework that the seceding state wants to leave). Increasing benefits for a seceding state to encourage them to stay is really just a different side of the same coin (this is implying costs on the remaining states that will in turn encourage them to want the state to leave).
The problem is it doesn’t really work with Brexit. The delays in Brexit have stemmed from the fact half of the UK doesn’t want to leave rather than from the EU wanting the UK to stay. The framework is built on an assumption that if a state wishes to secede then it will be doing so on the basis of some overwhelming practical rationale and anticipated benefits, and that there will be some stable consensus around this strategy. It becomes quite complicated in situations where the benefits are unclear, there is no widespread consensus on leaving and a majority of elected representatives think it’s an objectively bad idea to begin with. Brexit is really a story about a division in British politics leading to deadlock, it’s not strictly about relations between two rational actors (the UK and EU).
One would have thought, if the EU leaders had wanted to let go of the UK, they would have been amenable and accommodating. The EU, the part remaining if or when the UK leaves, has not been happy to see the UK go, by and large. The EU leadership has been absolutely hostile to the idea of the UK leaving the club. The UK Parliament, equally obvious, has also, almost to a man, woman, Lord and Lady, been exceedingly unappreciative of the UK electorates’ choice in the Brexit referendum. Time and again, obvious facts, not denied, are blithely ignored when certain pro-EU arguments are made, especially pro-EU federalisation arguments. This issue will not go away any time soon, even if the UK electorates get sick of it. The English electorate is pro-Leave, and likely to remain so for quite some time. Even if most EU member states in Western Europe will never vote Leave, the Visegrad nations is another matter. The EU federalisation movers and shakers need to pull a very pretty bunny out of the hat to raise their levels in the popularity stakes.
Last, but not least, the last sentence is all wrong. Brexit is not about the division in British politics and a dead-lock, but about the incompatibility of the EU (German-French) way of doing things with the core of the British, essentially English, sociopolitical system. Most of all, the last bit of that sentence is really, really off the mark. Neither the EU (leadership)nor the UK (leadership) as political actors, are rational. History will vouch for that, even as it is absolutely clear now to people who are not smitten with the EU federalisation project.