During the referendum campaign, the Treasury commissioned a report which outlined three main alternatives to EU membership. There was membership of the European Economic Area – the “Norway option”; there was the possibility of a bilateral free trade agreement, similar to Switzerland or Canada; and there was the option to form no agreement and fall back on WTO trading rules.
When confronted with this choice during interviews, Brexit campaigners would usually shake their head and give an answer that seemed to imply that the UK would be able to negotiate a bespoke deal which would enable Britain to keep all the bits it likes about the EU, while jettisoning aspects it’s not so keen on. Right. Brushing past the fact that it’s actually rather difficult to achieve the simultaneous having and eating of cake, there’s a bigger, more practical issue with that approach. Bespoke trade deals take a long time – six years in the case of Canada, which still has yet to be ratified by the 27 remaining EU member states – and, thanks to the two-year time limit set by Article 50, time is not something Britain has in abundant supply. Furthermore, Whitehall simply lacks the manpower for such a mammoth task: the British Government has about 40 trade negotiators, who would be pitted against the 550 employed by the EU.
an “off the shelf” deal seems to be the best choice
So, with it being unlikely that a bespoke deal could be reached within the time limit, and given that we would like to avoid the calamity of leaving without reaching any form of agreement, an “off the shelf” deal seems to be the best choice. After leaving, Britain could rejoin the European Free Trade Area and trade with the EU via the EEA. By joining the EEA, Britain would maintain its crucial, tariff-free access to the European single market. As the UK is already a contracting party to the EEA Agreement, there is no legal obstacle to this.
Other than single market access, another pivotal advantage of EEA membership is that UK-based banks would retain their “passporting” rights to operate in the EU. This will allow them to continue serving European clients, and London – the powerhouse of the British economy – would not be cut adrift.
However, there is one sector that is not included in the EEA agreement: agriculture and fisheries. Considering that 60% of British food exports go to the EU, the high tariffs protecting European farmers pose a serious threat to their British counterparts. Yet, it is difficult to imagine a way to overcome this barrier to food exports without re-joining the EU.
Another issue with EEA membership is that it would involve Britain leaving the EU Customs Union. Quitting the customs union would not preclude the UK from the single market, but it would increase administrative costs to trade, form-filling and delays at border checkpoints.
While belonging to the EEA would enable free trade with Europe to continue, it would not allow Britain access to the free trade agreements that the EU has made with over 50 other countries. However, once it leaves the EU the UK will be free to unilaterally forge new trade deals across the world. Moreover, since the EU is only as open as its most protectionist member state, a more liberal-minded Britain may be able to form new bilateral trade links more rapidly than the bloc as a whole – just look at the timeliness of TTIP, or the EU-Canada deal.
A further benefit of EEA membership is that it would allow the UK to continue its participation in EU science and education programmes, such as the Horizon 2020 research programme or the Erasmus+ student exchange scheme. This means that leaving the EU will not automatically bar British universities from receiving valuable European research grants, or prevent British students from studying abroad on the continent.
Most of the politics is done long before it gets to the voting stage
A criticism regularly levelled against Norway’s economic arrangement with the EU is that it must follow all the rules, yet gets no say in implementing them. This isn’t quite true. Norway receives no vote, but that doesn’t mean that it is out of the room when decisions are made. As former Norwegian State Secretary of Local Government and Regional Development, Anne Tvinnereim, explains: “it is true that we are not there when they vote, but we do get to influence the position. Most of the politics is done long before it gets to the voting stage”. Furthermore, because regulations are increasingly being made at the global level, the EU is becoming less and less relevant to international trade regulations. In fact, many EU regulations do not come from Brussels at all, but are simply handed down from global bodies such as the International Organisation for Standardisation (ISO).
But what of the membership cost? During the referendum campaign, Remainers often claimed that Norway’s per-capita financial contributions to the EU budget are almost as high as the UK’s. That may be true, but one must remember that Norway’s GDP per-capita is also much higher than Britain’s, and that, since EEA member states make contributions based on their relative economic size, the UK’s per-capita contributions would be smaller than Norway’s. Furthermore, Norway voluntarily participates in common international aid projects such as the Norway Grants, amounting to €180m per annum, which are intended to aid the post-Communist economic rehabilitation of eastern European countries.
To estimate a counterfactual cost of the UK’s EEA membership, we should take Norway’s mandatory payments, which are its contribution to the EFTA budget – equivalent to roughly £9.2m – and the money given to the EEA grants – equivalent to around £175m – and scale them up by a factor of five to account for Britain’s larger economic size. This yields a figure of approximately £920m, which is substantially lower than the UK’s current net financial contribution to the EU budget of £8.5bn. Indeed, even if Britain were to fully plug the £4.5bn hole left by removing EU spending in the UK, the Treasury would still be better off. Now these are only back-of-the-envelope calculations, and they don’t include the costs of joining the various EU science and education programmes (although countries receive money back from these), but it does appear that joining the EEA will be significantly less expensive than full EU membership.
Being part of the EEA would also entail the free movement of people. This means that British nationals would retain their right to live and work on the continent, and, more importantly, the UK would maintain its supply of hard-working, mostly young and well educated, EU migrants who are so vital to its economy. Yet, free movement within the EEA is not quite as unrestricted as within the EU. Article 112 of the EEA Agreement states that members may limit the flow of immigration if it causes “serious economic, societal or environmental difficulties” to arise. Essentially this is an emergency brake to limit the kind of surges in immigration that the UK has experienced in recent years. Therefore, free movement within the EEA allows the UK to enjoy the best of both worlds: it can enjoy the vast array of benefits immigrants bring to the economy, while maintaining sufficient control in order to prevent public services and infrastructure being overwhelmed.
For all the advantages the EEA offers, there remain some drawbacks: exporters will face higher customs charges and farmers will face steep tariffs on their European exports. Furthermore, Britain will lose its vote on EU laws and regulations but, as Norway demonstrates, that does not mean it will lose all its influence. Fundamentally though, Britain has voted to leave the EU and therefore it will be impossible to recoup the benefits that are exclusive to full membership.
Looking forward, the EEA is Britain’s best post-Brexit option
Nonetheless, by joining the EEA, Britain will be able to maintain the close economic relationship with the continent that is so vital to its prosperity. British businesses can preserve their access to the European single market and UK-based banks will retain their passporting rights, allowing them to continue serving clients based across the Channel. British universities can continue participating in EU science networks and access European research grants. British citizens will still have the right to live and work in Europe and the inward flow of hard-working European migrants will continue to play an integral role in the UK economy. At the same time as enjoying all these benefits, Britain will be free to strike new trade agreements with countries from across the globe, and its financial contributions to the EU budget will be substantially lower. But above all, EEA accession would end the uncertainty posed by Brexit and undo much of the damage wrought on financial markets these past few weeks. Businesses would be given the clarity needed to resume hiring and make investment decisions, enabling the economy to regain its lost footing. Looking forward, the EEA is Britain’s best post-Brexit option.
** Note: all sterling conversions were done at exchange rates prevailing on the 27th July 2016