Sunday, June 25, 2017
Britain's Brexit journey could yet end up in Norway
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

One year on from the vote, and a couple of weeks on from an election that threw an almighty spanner into the works, the formal negotiations to take Britain out of the European Union have begun.

There will be plenty of ups and downs over the next 21 months, though the “row of the summer” promised by David Davis, the Brexit secretary, never transpired because the government agreed to the EU’s negotiating timetable of divorce bill and citizens’ rights first, a new deal and new trading arrangements later.

There is, however, a puzzling absence from the negotiating stance of both sides, and even of the politicians pushing for a softer Brexit. Philip Hammond did not mention it in his Mansion House speech, and neither did the 50 Labour MPs, or the London mayor Sadiq Khan, who are pushing for Britain to remain in the EU single market.

I am referring to continued British membership of the European Economic Area (EEA) after Brexit, the so-called Norway option. EEA membership would provide for continued membership of the single market but not the customs union, so freeing Britain to negotiate its own trade deals with the rest of the world.

The idea of post-EU EEA membership used to be very popular, particularly among Brexiteers in the run-up to the referendum. Many argued that Britain would be mad to leave the single market, and would not need to do so, and that the be like Norway – “rich”, “happy” and “self-governing” to quote one – was the thing to aim for. One plus for them, apart from the freedom to conduct trade deals, was that EEA membership does not include agriculture and fisheries, thus sparing us the hated common agricultural and fisheries’ policies. The big minus was that EEA membership meant accepting, with one or two wrinkles, free movement of people.

People like me argued that EEA membership would be inferior to being in the EU. We would be subject to single market rules (most of the “laws” imposed by Brussels), but not be able to influence them. We would still pay the equivalent of an EU budget contribution. There were questions about whether the rest of the EU, while happy to accept the smaller economies of Norway, Liechtenstein and Iceland into the family, would be prepared to do so for Britain, or see us as a cuckoo in the nest. Switzerland like these three is a member of the European Free Trade Association (EFTA), the body Britain helped found in 1960, but its people rejected EEA membership in a referendum in the early 1990s.

Despite these reservations, time has moved on. The Norway option, EEA membership, looks better than most of the alternatives and it is not just me who thinks that.

The Institute of Directors, in its response the chancellor’s speech, said remaining in the EEA on a transitional basis “should be actively considered”. Among City watchers of the Brexit process, it is still seen as among the options, even though the May government is not proposing it. Malcolm Barr of J P Morgan puts a 25% probability on time-limited membership of the EEA, while Brian Hilliard of Societe Generale includes it in his 15% probability of a soft Brexit.

There is a view that Britain’s default position on leaving the EU is to remain a member of the EEA. George Yarrow, emeritus professor of economics at Hertford College, Oxford, argues that as a signatory to the EEA Agreement, Britain would need to formally negotiate its exit from that agreement under Article 127. Others, it should be said, say EEA membership would expire with our departure from the EU, and that is the majority view.

Is EEA membership, either for the short or long-term, an option? The reason few politicians are citing it as a possibility is because of Theresa May’s emphasis, in both her party conference speech last October and her Lancaster House address in January, on controlling immigration. Though emergency brakes on immigration are allowed to EEA members, they are limited in scope and would not be compatible with reducing net immigration to the tens of thousands.

Britain has, for this reason, begun with a negotiating position which rules out continued membership of the single market, and anything close to the existing customs union. The EU has prepared its negotiating position on that basis. Before too long it will be too late for either of those positions to change.

But these things are more malleable than they sometimes appear. The prime minister’s position is more precarious than would have seemed possible even weeks ago. David Davis, the Brexit secretary, has said that EU migration to Britain could stay high for some years. Polls suggest that to most voters staying in the single market has priority over controlling immigration, which is in any case falling.

Charles Grant, director of the Centre for European Reform, thinks that because of the impossibility of negotiating a trade deal with the EU within the remaining 21 months – May’s always unrealistic timetable having been made more so by the weeks she wasted with the election – an EEA-type transitional deal will be struck.

It will not be formal EEA membership, because the EFTA countries will not, for now, want all the hassle of readmitting a member just to see it through the departure lounge. It will satisfy the government’s desire to escape the attentions of the European Court of Justice, EEA disputes being settled by the EFTA court. It is possible that, feeling sorry for poor old Blighty, the rest of the EU would cut a bit more slack when it comes to putting the brakes on immigration.

It is even possible, looking at recent comments from Emmanuel Macron, the French president, about EU migrants undercutting wages and sowing doubt among “the lower middle classes” that EU attitudes to free movement could evolve. A temporary EEA-style arrangement could evolve into a permanent one.

It is only a possibility. One year on from the vote, the negotiation has only just begun. Reading between the lines of Hammond’s speech, the Treasury is as worried by the loss of customs union membership, for its effects on jobs and the economy, as leaving the single market. The chancellor is pushing for something close to continued membership of the customs union, “current customs border arrangements remaining in place”, for a transitional period of four years after March 2019, perhaps longer.

This is what now gets the Brexiteers uneasy. Transitional arrangements will be necessary – they were longer than four years on the way into the European Economic Community four decades ago – but the temporary has a habit of turning into the permanent. Leaving the EU could turn into a very long goodbye.