Can Britain join Norway in the EEA?

Insight
John Springford , Charles Grant
09 June 2016

This week pro-European MPs signalled that they might try to force the UK to accept membership of the European Economic Area – the ‘Norway option’ – if Britain votes to leave the EU. Charles Grant and John Springford debate whether this is likely.

Yes – Charles Grant

If the British people vote to leave, they will do so mainly because they want fewer immigrants from EU countries coming into the country. They also object to the loss of sovereignty that membership of the union entails, and to Britain’s payments into the EU budget. Yet if the Leave campaign wins on June 23, the British may have to accept free movement of labour with the rest of the EU, comparable budget payments and even less sovereignty than they enjoy today. This is because Parliament could impose the ‘Norwegian option’ on a post-Brexit government.

Norway, like Iceland and Liechtenstein, is part of the European Economic Area (EEA). These countries don’t take part in the EU farm or fishing policies but they are in the single market. When the EU makes rules for the single market, these three are consulted. But they have no vote since they lack representatives in the Commission, Council of Ministers or European Parliament. Norway has to accept free movement of labour (it hosts almost three times as many migrants as the UK, per capita) and pay into the EU budget (about 90 per cent of what the UK pays, per capita). And Norway cannot – as Britain now can – veto a country that wishes to join the EU, though it must let in the workers of every new member.

Most of the serious economic institutes that have analysed the Brexit options have concluded that the EEA would be less damaging to the UK economy than the alternatives, such as a free trade agreement (the ‘Canada model’) or reliance on World Trade Organisation rules. It is the only model that would not be disastrous for the City: banks from EEA countries enjoy “passporting” rights in the single market, meaning that they can be regulated in London and then do business across the EU without the need for regulatory approval from other countries. However, the EEA would still leave the City in a strange position: financial firms there would have to implement rules on which Britain had had no vote.

Suppose that the British decide for Brexit. About 70 per cent of MPs in the House of Commons favour Remain. That doesn’t mean that MPs would ignore the referendum result. But pro-EU Conservatives, Labour and the SNP might well force a government led by Michael Gove or Boris Johnson to seek the least damaging model for the British economy. The government would be under enormous pressure from big business and the City to choose the EEA. The EU would be quite happy if the UK went for the EEA: the institutions are already in place, and the negotiations would be quicker and easier than those required by the alternatives.

Evidently, if the government bowed to the Commons’ desire for the EEA, there would be a massive row. A lot of people would have voted for Brexit in order to prevent EU immigration. But the question on the ballot paper is about EU membership and does not rule out the Norwegian model of non-membership. In any case, Gove and Johnson are economic liberals, even if both have sounded like anything but in recent weeks. I have discussed the EU with both of them (occasionally in the case of Gove and more often in the case of Johnson) and reckon that in their hearts they do not oppose EU migration. Perhaps they would not shed too many tears if Parliament forced them to plump for the EEA.

No – John Springford

Whoever succeeds David Cameron as prime minister after a vote for Brexit is guaranteed to fail. Neither Boris Johnson’s charm nor Theresa May’s cunning would suffice to reconcile the interests of the electorate, Westminster and other European countries.

The EEA – in its current form – would satisfy the British electorate least. If Parliament imposed this solution on it, voters would have to accept free movement. We are being asked to imagine that MPs, many with UKIP at their heels, would ask their constituents to sign up to the very EU policy they had rejected in the referendum. Some moderate Brexiters argue that this referendum is just about Remaining or Leaving – and therefore not about what sort of relationship comes after. But that is unconvincing. Polls show that voters are focussed on the choice between the economy and immigration. If voters decide that they are ready to sacrifice some prosperity for the ability to cut immigration, it would be hard to defy them. And by leaving the EU but joining the EEA, Britain would neither be able to veto any new EU enlargements, nor to stop citizens of new members working in the UK. Turkey is not going to join for decades, but the right-wing press would be apoplectic.

Politicians would also hate it – even if it meant less disruption than leaving the single market altogether. In the EEA, Britain’s financial services industry would be run by the EU. As part of the EU, the government has succeeded in changing boring but important rules (like the Capital Requirements Directive and the Alternative Investment Fund Managers Directive) to the City’s advantage. It is very hard to imagine the UK ceding sovereignty over one of its flagship industries – especially considering that David Cameron expended a lot of time and political capital on securing some safeguards for the City in his renegotiation, to stop the eurozone ganging up on Britain in negotiations over financial regulation in the future. As an EEA member, Britain would not have these safeguards. 

The EU would also not let Britain join the EEA without some reforms to the current agreement. Currently, Norway, Liechtenstein and Iceland may pull an emergency brake on free movement if they suffer from “serious economic, social or environmental difficulties of a sectoral or regional nature”. They also have a right of reservation, meaning that they can reject an EU rule that they find unbearable. But the brake has never been used, while the right of reservation has only been used once, and only temporarily. Norway refused to sign up to the Postal Services Directive in 2011 but eventually gave in to the EU’s wishes in 2013. It has good reasons to hesitate before using the right of reservation: the EU has the right to suspend market access in a particular sector if an EEA country refuses to sign up to that sector’s rules. 

Would the EU let Britain, a larger and more assertive country, have these rights as an EEA member? Surely not. There are already rumblings in the Commission about reforming the EEA agreement because of Norway’s unusual burst of defiance in 2011. If Britain applied to join the EEA, the EU would be likely to demand that EU law be downloaded automatically into UK statute books, and that the ECJ, not the shadow EFTA court, enforces EU law in Britain. (The EFTA court is modelled on the ECJ and must take account of ECJ case law, but has judges nominated by the three EEA members.) Good luck getting the British Parliament to continue to submit to the ECJ. The UK would be less sovereign than it is now.

If not the EEA, what is the more likely scenario? The answer is a collapse of the Conservative government and a general election. Let us indulge the fantasy that May or Johnson (or whoever) did present the EEA option to parliament. Pro-Europeans in the Labour and Scottish National parties would have a strong incentive to cause trouble. Labour did not campaign for Brexit, and would surely refuse to vote to join the EEA in order to bring down the government. The SNP would advance their cause for another referendum on independence by creating some mayhem in Westminster. The Conservatives are split down the middle on the EU, and it is not unreasonable to speculate that the europhobe wing would rather their own government fell than continue with free movement and “rule from Brussels”. Perhaps the government that followed would promise a second referendum – on remaining in the EU, on joining the EEA, or withdrawing completely. The middle choice would be almost certain to get the fewest votes. 

Britain is not Norway. It would not obediently sidle to the wings of the European stage. 

An earlier version of Charles Grant’s piece appeared in the Times Red Box on June 8th, click here to read.

Charles Grant is director and John Springford is senior research fellow at the Centre for European Reform.