14 June 2017

Following the UK’s snap election, where the governing Conservative party lost its parliamentary majority, analysts are suggesting that the Prime Minister may be forced to “soften” her Brexit stance. While the concepts of “hard” and “soft” Brexit are unhelpful in their ambiguity, “soft” Brexit is typically connected with continued Single Market membership. This is most obviously obtainable via a European Economic Area (EEA) style arrangement – also known as the Norway model.

The EEA is an agreement between the EU itself and its member states, and three members of the European Free Trade Association (EFTA) – Norway, Iceland and Liechtenstein. As EEA/EFTA states, these three countries enjoy virtually full access to the EU’s single market. However, they are not members of the EU’s Customs Union, and they do not participate in EU agriculture, fisheries or regional policies. Importantly, EEA membership means they must apply the ‘four freedoms’ of goods, services, capital and people, both with the EU and among themselves.

What would an EEA-style Brexit mean on key issues?

Given talk of a possible EEA-style Brexit model, it is worth revisiting the fundamental elements of the EEA agreement and how this tallies with the government’s objectives for a Brexit deal.

Immigration: Non-EU EEA members are required to accept the free movement of people, including non-discrimination towards EU citizens in terms of accessing benefits. The agreement also sets clear principles for the coordination of social security rights and the mutual recognition of professional qualifications. In this sense, continued EEA membership would guarantee all the rights of EU nationals currently resident in the UK (and vice versa), as set forward by the EU Commission. However, it would largely prevent the government from achieving its ambition to reduce EU immigration in the future and control the UK’s borders. In limited circumstances, the EEA can apply safeguard measures temporarily to suspend immigration if there is evidence it is causing sustained economic or social pressures. But while these measures can be invoked unilaterally, the EU is also permitted to adopt “proportionate rebalancing measures” in return.

Liechtenstein does offer a precedent of an EEA nation applying a bespoke immigration regime. For instance, in the late 1990s, Liechtenstein implemented safeguard measures against free movement while it negotiated a permanent arrangement for immigration from the EEA. It now issues residence permits for nationals from Norway, Iceland and the EU, and it applies specific domestic rules on facilitating family reunification. However, Liechtenstein’s unique circumstances – including its population of only 37,500 and its size of 160 square kilometres – do not apply to the UK.

EU legislation: Non-EU EEA members are required to adopt EU legislation in all policy areas covered by the EEA agreement (including certain ‘flanking’ areas such as social and employment policy), despite minimal input in the decision making process. This is because they lack formal representation in the EU institutions, meaning they have no voting rights and limited (informal) means of securing amendments. While these EEA members do retain veto rights, this only allows them to refuse domestic implementation – it does not prevent EU member states from enacting it. Use of this veto could therefore lead to regulatory divergence with the EU, effectively locking non-EU EEA states out of the single market.

Judicial sovereignty: The EFTA court is the judicial authority in charge of policing the EEA agreement, not the European Court of Justice (ECJ). EFTA court oversight is distinct from that of the ECJ in that national courts of last resort are not obliged to make reference to the EFTA court on questions of European law (unlike in the EU); nor are preliminary rulings by the EFTA court binding on states in the same way as those of the ECJ (no direct effect or primacy). EFTA rulings then often have to be solved politically. However, in order to prevent legislative divergence within the EEA, homogeneity rules “essentially bind the EFTA court to follow relevant ECJ case law,” according to the President of the EFTA court, Carl Baudenbacher. He adds, “The EEA agreement is closer to supranational [Community] law than to public international law.”

Trade: Unlike the EU, the EEA is not a customs union. Non-EU members of the EEA are therefore able independently to negotiate trade deals with third countries. This can be done either collectively as an EFTA agreement, or by individual member states. However, EEA membership does reduce their flexibility to negotiate wide-ranging free trade agreements, particularly in services. This is because non-EU EEA states must uphold the technical standards and regulations (for instance in data protection, or financial services) set by EU/EEA legislation, meaning that in many cases they are unable to negotiate more liberal agreements on non-tariff barriers.

Payments: Non-EU EEA countries do not pay directly into the EU budget. Instead, they contribute to EEA grants, which are used to offer financial assistance to less developed EU countries. However, as we noted before, these contributions are not significantly lower in per capita terms than the UK’s budget contributions: for instance, in 2015, Norway’s per capita net contribution was 88% that of the UK – £100.03 compared to £113.79. Non-EU EEA members also directly finance their participation in EU programmes, such as Horizon 2020.

Post-Brexit EEA membership: costs outweigh benefits long-term

There are many problems with post-Brexit EEA membership that make it unsuitable as a long-term arrangement. Most have concluded that maintaining membership of the EEA would hamper the government’s ability significantly to lower or control immigration. This is clearly a key concern for the public, and should factor into the government’s consideration for a future deal with the EU.

But, more importantly, post-Brexit EEA membership poses a huge constraint on the UK’s regulatory and economic sovereignty.  For one, it would be politically unsustainable for the UK to be de facto reduced to EU satellite status, where it continued to sign up to EU legislation without having a formal hand in the decision-making process.  Furthermore, while EEA membership would allow the UK independently to negotiate simple FTAs with third-countries – relating mostly to trade in goods – it would significantly constrain the UK in discussions on regulatory and other non-tariff barriers. The effect of this would be to hinder the UK’s ability to establish comprehensive trade deals in services, its clear area of comparative advantage, and a sector of ever-growing importance in terms of global trade.

The EU would also have far less appetite to negotiate bespoke membership of the single market for the UK, as is clear from the member states’ unified rejection of “cherry picking.” The UK would likely find it easier to negotiate a comprehensive free trade agreement with the EU once it has “paid the price” of full withdrawal.

Could EEA membership be a suitable interim arrangement?

The strongest recommendation for maintaining membership of the EEA is to minimise the disruption of withdrawal. It now looks more unlikely that the government will be able to achieve their ambition of a ‘deep and special partnership’ in the two-year time limit set by Article 50. Beyond the government’s vague discussion around ‘implementation periods’, more attention must now be paid to how to ensure the softest landing to Brexit.

In this light, temporary EEA membership following the UK’s withdrawal would be one way of mitigating the immediate-term risks of leaving the EU. It would allow the UK the necessary breathing space to decide its future relationship with the EU, while ensuring minimal uncertainty and economic disruption as we leave. It would also provide the UK the flexibility to begin negotiating new free trade deals upon its exit.

But maintaining interim EEA status would not necessarily be easy – it would need support from across the political spectrum in parliament. On one hand, this would mean convincing some Brexit-supporting MPs that temporarily retaining (at least some) free movement and the judicial oversight of a European court is an acceptable arrangement that upholds the referendum vote. On the other, it would require convincing those who support permanent membership of the single market that the long-term costs of EEA membership – in terms of obligations and constraints – outweigh the short-term benefits of certainty and continuity.

How easy would it be for the UK to join the EEA?

After its withdrawal from the EU, the UK could not necessarily automatically “fall into” the EEA, as a fully functional member, without any further political or legal action. Brexit Secretary David Davis said at the start of this year, “Once we leave the EU, the EEA Agreement will no longer be relevant for the UK. It will have no practical effect.”

Beyond this, there is less clarity on how the UK could achieve EEA membership. One argument suggests that the two-pillar institutional framework of the EEA agreement requires all members to be party either to the EU or EFTA. Post-Brexit, this would mean the UK would need to (re)gain membership of EFTA before subsequently applying to rejoin the EEA agreement.

Another interesting argument, put forward by Lord Owen, suggests that although the UK is currently represented in the EEA agreement by the EU and its institutions, it is a contracting party in its own right. Therefore, even after its withdrawal from the EU, the UK would maintain residual rights under the agreement – although amendments would need to be made in order to realise these.

A legal case launched earlier this year sought to answer the question of whether the UK remains party to the EEA agreement after Brexit. However, the case failed to take off – the court decided judicial review would be premature given the government had not yet come to a decision on its EEA withdrawal mechanism. This will be something to keep a close eye on in the future.

Where do the parties stand on an EEA-style Brexit?

The Conservatives are generally not in favour of a long-term EEA-style arrangement for the UK, with Prime Minister Theresa May ruling out continued membership of the single market on a number of occasions.

The question seems a little less clear at the regional level. Scottish First Minister Nicola Sturgeon has long called for Scotland to maintain its position in the single market. Scottish Conservative leader Ruth Davidson also recently advocated an “open Brexit,” adding, “It is about making sure that we increase freedoms rather than increase barriers, it is about making sure that put free trade at the heart of what it is we seek to achieve as we leave.”

Labour’s position is perhaps most unclear. Shadow Chancellor John McDonnell said this weekend, “I don’t think [continued membership of the single market is] feasible…I think people will interpret membership of the single market as not respecting that referendum,” adding, “It’s access. Access to the single market on a tariff-free basis.” But Labour’s Shadow Brexit Secretary, Keir Starmer, has since cast doubt on this position, saying, “It’s not that the government doesn’t want membership of the single market, it’s that they’ve been told that you can’t have that with freedom of movement. It seems to me that would be a good place to start discussions, start negotiations, rather than simply taking it off the table.”

To add to the confusion, while Labour formally supports ending free movement of EU citizens after Brexit, it has failed to offer a clear picture of where it stands on the jurisdiction of the ECJ. Starmer has said agreeing to the ECJ as the guarantor of EU citizens’ rights in the UK post-Brexit would not be “a workable solution.” But he added that the ECJ could have a role in settling future trade disputes between the UK and the EU.

The EEA model remains unsuitable as a long-term position for the UK

There is certainly an argument for EEA membership to form a time-limited, transitional arrangement for the UK as it withdraws from the EU – above all to minimise immediate-term economic disruption. However, the costs of EEA membership outside the EU – limited regulatory control, constrained right of action in trade, and a marginal global status – should rule this option out as a long-term model for UK-EU relations.