by Emily Straton and Biodun Iginla, Political News Analysts, The Economist Intelligence Unit, London
The right way to do Brexit
Britain can “take back control” from Europe without cutting all ties
AS WE went to press, the cabinet was due to enter an extended session in order to hammer out what kind of Brexit is best for Britain. Ministers are at loggerheads over the relationship the country should have with the European Union. Time is short. With just over a year until Britain leaves the EU, leaders of the 27 other member states, who will meet in March, are frustrated. Britons on both sides of the Leave/Remain divide need to plan ahead. All they get is blather and contradictions.
The government is groping towards a “hard” Brexit, leaving both the single market and customs union. The prime minister, Theresa May, seems to believe that this is the only way to honour the result of the referendum. On that view, a “soft” exit, into an arrangement closer to that of Norway, is unacceptable because it fails to secure the independence of the courts, the freedom to strike new trade deals and the ability to limit immigration. It would render Britain a “vassal state” that, to add insult to injury, would have to pay the EU a vast annual levy.
Yet a closer look at Norway shows that this depiction of a soft Brexit is simply wrong. Mrs May is right to say that Britain will end up with its own model rather than copying anyone else’s. But instead of ignoring other countries, she should learn from them. And Norway, it turns out, is a good place to start.
Their country is outside the EU, but inside the single market, allowing it to trade freely with the continent. For Britain, by the government’s estimate, leaving the single market would mean that GDP 15 years after Brexit would be 3-6% lower than if it stayed in it. (Brexiteers counter this with rosy predictions for a hard Brexit, but their models are based on far-fetched assumptions, such as the total abolition of tariffs.) Norway set up carve-outs to keep control over areas it prized, such as farming and fishing. It agreed to follow most other EU rules, open its borders to EU migrants and make hefty annual payments.
How does that square with Leavers’ demands? Start with the money. Per person, Norway’s contributions to the EU are about three-quarters of what Britain pays now. Rather than going into the central EU budget, most of the cash is tied to particular research or educational programmes, such as the Erasmus student exchanges, or sent to poorer countries in the form of grants that are controlled by Norway, not the EU. A country with $1trn in oil wealth may shrug off such payments more easily than one grappling with a budget deficit. But Britain has already said that it will pay for access to the single market and take part in specific programmes.
Next come EU laws. Mrs May has said Britain must escape the jurisdiction of the European Court of Justice (ECJ). Norway’s trade with Europe is instead governed by the court of the European Free Trade Association (EFTA). As a matter of principle, the EFTA court’s rulings are advisory, and it lacks the power to fine member states that do not comply. Britain could expect to nominate a judge to the court, which it could not to the ECJ. As a matter of practicality, British exporters will have to follow the rules of the single market even if they are not in it.
More important, Norway is not the “vassal state” that Brexiteers claim. It is involved in drawing up EU laws and regulations, particularly in areas such as energy, where it knows the ropes. It has no seat in the European Parliament or Council, but most regulations are passed without a formal vote. Instead they are negotiated in committees where what counts is expertise and knowledge. Both Norway and Switzerland wield influence in Brussels. Britain’s clout would be greater still, especially in areas that matter to it, like finance.
It is the same with free movement of people. At least in theory, Norway might be allowed an emergency brake against a sudden upsurge in migration. In practice Britain could anyway take measures that are available under EU rules, such as restricting property purchases or expelling those who have not found a job after six months. Net migration to Britain is falling and worry about immigrants is subsiding. A majority of all voters, including a third of those who voted to leave, would accept free movement in return for free trade.
In one area, however, Britain would need a closer arrangement. Norway is not part of a customs union with the EU, so vehicles crossing at the border with Sweden and Finland are subject to checks. This would not suit Britain. Its borders are busier than Norway’s and its firms more integrated into European supply chains. Worse, customs controls in Northern Ireland would jeopardise the peace process, and hence the security of both British and Irish citizens. The government has ruled out a customs union with the EU, claiming it would preclude signing trade deals with third countries. That, too, is wrong-headed. The customs union applies only to goods; Britain would still be free to strike deals in services, which the government says is the priority in a longed-for deal with America.
A final benefit is choice. Britain is leaving just as the EU is becoming a looser union of countries moving at different speeds. Euro-zone members are heading for closer integration; others outside it hang back. In a multi-speed Europe, being in the single market and the customs union would put Britain in an outer lane, rather than forcing it off the road altogether. Later, it could move closer or farther away, as it wished. To hardliners, who want out at any cost, this flexibility is dangerous. To pragmatists who accept that the future is uncertain, it is valuable.
The government is groping towards a “hard” Brexit, leaving both the single market and customs union. The prime minister, Theresa May, seems to believe that this is the only way to honour the result of the referendum. On that view, a “soft” exit, into an arrangement closer to that of Norway, is unacceptable because it fails to secure the independence of the courts, the freedom to strike new trade deals and the ability to limit immigration. It would render Britain a “vassal state” that, to add insult to injury, would have to pay the EU a vast annual levy.
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Think again
In 1994 Norwegians voted against joining the EU, by the same narrow margin as Britain chose to leave it in 2016. Whereas the debate in Britain has been dominated by hardliners, Norwegians took that as a cue to compromise (see article).Their country is outside the EU, but inside the single market, allowing it to trade freely with the continent. For Britain, by the government’s estimate, leaving the single market would mean that GDP 15 years after Brexit would be 3-6% lower than if it stayed in it. (Brexiteers counter this with rosy predictions for a hard Brexit, but their models are based on far-fetched assumptions, such as the total abolition of tariffs.) Norway set up carve-outs to keep control over areas it prized, such as farming and fishing. It agreed to follow most other EU rules, open its borders to EU migrants and make hefty annual payments.
How does that square with Leavers’ demands? Start with the money. Per person, Norway’s contributions to the EU are about three-quarters of what Britain pays now. Rather than going into the central EU budget, most of the cash is tied to particular research or educational programmes, such as the Erasmus student exchanges, or sent to poorer countries in the form of grants that are controlled by Norway, not the EU. A country with $1trn in oil wealth may shrug off such payments more easily than one grappling with a budget deficit. But Britain has already said that it will pay for access to the single market and take part in specific programmes.
Next come EU laws. Mrs May has said Britain must escape the jurisdiction of the European Court of Justice (ECJ). Norway’s trade with Europe is instead governed by the court of the European Free Trade Association (EFTA). As a matter of principle, the EFTA court’s rulings are advisory, and it lacks the power to fine member states that do not comply. Britain could expect to nominate a judge to the court, which it could not to the ECJ. As a matter of practicality, British exporters will have to follow the rules of the single market even if they are not in it.
More important, Norway is not the “vassal state” that Brexiteers claim. It is involved in drawing up EU laws and regulations, particularly in areas such as energy, where it knows the ropes. It has no seat in the European Parliament or Council, but most regulations are passed without a formal vote. Instead they are negotiated in committees where what counts is expertise and knowledge. Both Norway and Switzerland wield influence in Brussels. Britain’s clout would be greater still, especially in areas that matter to it, like finance.
It is the same with free movement of people. At least in theory, Norway might be allowed an emergency brake against a sudden upsurge in migration. In practice Britain could anyway take measures that are available under EU rules, such as restricting property purchases or expelling those who have not found a job after six months. Net migration to Britain is falling and worry about immigrants is subsiding. A majority of all voters, including a third of those who voted to leave, would accept free movement in return for free trade.
In one area, however, Britain would need a closer arrangement. Norway is not part of a customs union with the EU, so vehicles crossing at the border with Sweden and Finland are subject to checks. This would not suit Britain. Its borders are busier than Norway’s and its firms more integrated into European supply chains. Worse, customs controls in Northern Ireland would jeopardise the peace process, and hence the security of both British and Irish citizens. The government has ruled out a customs union with the EU, claiming it would preclude signing trade deals with third countries. That, too, is wrong-headed. The customs union applies only to goods; Britain would still be free to strike deals in services, which the government says is the priority in a longed-for deal with America.
A final benefit is choice. Britain is leaving just as the EU is becoming a looser union of countries moving at different speeds. Euro-zone members are heading for closer integration; others outside it hang back. In a multi-speed Europe, being in the single market and the customs union would put Britain in an outer lane, rather than forcing it off the road altogether. Later, it could move closer or farther away, as it wished. To hardliners, who want out at any cost, this flexibility is dangerous. To pragmatists who accept that the future is uncertain, it is valuable.
And think a third time
A regime akin to Norway’s, fortified by a customs agreement, does not honour every promise made in the heat of the Brexit campaign. We know of no deal that could. But it would mean doing what Britain voted for: leaving the EU. This newspaper argued against that course. Now that the country is set on it, it needs a proven, workable model for being out of Europe’s political project but in its economy. Norway would be a good place to start.
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