Friday, 8 July 2016

A New EFTA-EU Relationship Post-Brexit?

Nat O'Connor: Trying to imagine a “perfect” agreement for the UK to enjoy a stable, friendly and mutually beneficial trading relationship with the EU is problematic. A better solution would be to envisage this future relationship as an ongoing process rather than a final agreement or compact. The best candidate for this process would be a new relationship between the European Free Trade Association (EFTA) and the EU, based on respectful ongoing dialogue on the best way to organise trade with the EU’s neighbourhood. This would involve strengthening the EFTA into something more than it is today. If done right, such a process could provide the EU with a valuable mechanism for trading and co-operating with its close neighbours.

Today, the UK is still in the EU, and in many likely future scenarios the UK will continue to have a close and amicable working relationship with the EU. It is certainly in Ireland’s best interest to use whatever influence it has within the EU to help bring this about.

One major problem is the uncertainty about the details of that future arrangement, and the worry that there might be a period of years where the UK is completely outside the EU—i.e. operating according to WTO trade rules, tariffs and all. This would impose restrictions on Irish citizens’s ability to work and live seamlessly in the UK, which has been taken for granted as part of the informal Common Travel Area since Ireland's independence.

Once the UK-EU relationship is stabilised again, most people seem to be contemplating one of four outcomes, most of which are conceived of as agreements or settlements that would result from years of negotiations: (1) the EFTA-EEA option; (2) the WTO option; (3) remaining in the EU after all, with or without special concessions; and (4) some kind of new arrangement where the UK is able to trade freely with the EU but gains all sort of concessions.

The fourth option is implausible, as the EU is not going to give the UK all the benefits of EU membership without also giving it most of the obligations and its share of costs.

The third option looks like wishful thinking from some who are still struggling to come to terms with the referendum result. The UK would be allowed—and indeed welcomed by many—to stay in the EU, but irreversible damage has been done that will take time to repair. And the unhappiness of so many people in the UK, especially in its poorest regions, has been exposed to full view. Regardless of everything else, both the UK and the EU must recognise the need for much more socially-caring economic policies if they are to redress the inequalities that have been brought to the fore.

The second option is dreadful for Ireland, because all trade between Ireland and the UK would be subject to tariffs, with no exemptions permitted for Ireland as the EU is treated as a whole under these rules. It would not be good for the UK either, as it is a trading economy that relies on having favourable access to its markets.

The first option is the one being explored here, which is for the UK to rejoin the European Free Trade Association (EFTA) and to possibly trade with the EU under the European Economic Area agreement  (EEA). There are different possible versions of this outcome.

In version 1.1, the “Norway” model means that the UK joins the EEA and trades in exactly the same way as Norway, Iceland and Lichtenstein. However, that means free movement of people, and it also means that the UK would have to implement EU rules without having a seat at the table when EU member states agree those rules. Unquestionably, this would be a worse position than EU membership from the perspective of many who voted for the UK to leave the EU.

In version 1.2, the “Swiss” model means that the UK becomes a member of the EFTA but is not a member of the EEA. Instead, a broadly similar trading arrangement is agreed with some special opt-outs or exceptions. However, recent signals suggest that Switzerland will be put under pressure to accept free movement of people if it wants to keep free trade, rather than allow an exception of this nature for the UK.

Nonetheless, some kind of hybrid EFTA arrangement—call it version 1.3—that represents a unique compromise between the UK and the EU seems the most plausible outcome. But this isn’t the real answer either.

Having brought the argument this far, a deep problem is exposed with the focus on achieving any kind of agreement, as if such an agreement could be set in stone. The UK must change on foot of the deep social divisions that have been exposed. The EU must change as similar social and economic divisions are rife across Europe and are fuelling nationalist political projects that threaten the union’s future. Both must change over time for countless reasons. How can there be a stable agreement between the UK and EU when both sides are moving targets? Even if such a mammoth document could be negotiated—and it would take years—future changes could put that agreement under pressure if one side wanted to change its policies in a way that imposed major changes on the trade agreement.

The head-wrecking complexity inherent in any such UK-EU agreement—and the knowledge that a comprehensive new agreement would take years and still be vulnerable to future changes—is at the heart of the economic uncertainty surrounding the UK’s referendum result.

An alternative, simpler and quicker solution would be to envisage a new mode of engagement between the EU and its close neighbours. The European Free Trade Association (EFTA) is perfectly placed to be the vehicle for this. The solution is to focus on establishing a good, ongoing mechanism for dialogue as opposed to trying to thrash out all the details of trade and co-operation in one go. The EU will always have neighbours, and now is a good opportunity to build a stable process for respectful and constructive dialogue with them.

The EFTA would have to change. Indeed, it will have to be seriously upgraded to cope if the UK rejoins it. There are many British public servants working in Brussels who might be a valuable addition to EFTA in this context.

It is currently unfair and undemocratic that Norway, Switzerland, Iceland and Lichtenstein do not have a formal seat at the table for EU policymaking that affects them. The EU gets away with it because it is large (population 508 million, combined GDP 16.8 trillion USD PPP) and the four EFTA members are small (population 12.7 million, combined GDP 893 billion USD PPP). In other words, the EU population is 40 times larger and the EU’s economic output is 18.8 times larger.

But when the UK is taken out of the EU and moved across to EFTA, the numbers change significantly. The EU (-UK) will have a population of 444 million and GDP of 14.1 trillion USD PPP, and EFTA (+UK) would have a population of 76.8 million and combined GDP of 3.6 trillion USD PPP.

In this new context, the EU population would be less than six (5.8) times larger and the EU’s economic output would be less than four (3.9) times larger. The difference between the two sides would be far less asymmetric than the current EU-EFTA relationship.

It's a big difference. The question is whether the EFTA could be transformed by UK membership into something more than an antechamber to EU membership. Is there a possibility of EFTA becoming more political—albeit not integrationist—so that the EU would be willing to sit down and negotiate trade policy on an ongoing basis with such an entity? A political EFTA could have more democratic legitimacy, and the UK is likely to find common cause with the Norwegians and Swiss, who surely do not enjoy being handed EU Directives to implement without a seat at the negotiating table.

Another advantage of this approach is that it is not just about the UK’s relationship with the EU, but it is an investment in building institutions that will involve and benefit all of the EU’s close neighbours.

Agreement to a establish a stable process of ongoing EFTA-EU dialogue could be agreed much more simply and quickly than attempting to negotiate an enormous trade agreement that will be out of date as soon as the ink dries.

An ongoing partnership and process of dialogue between the EU and a strengthened EFTA could provide for stable, friendly and mutually-beneficial relations between the EU and its close neighbours, without the need for a long period of uncertainty about the UK’s future relationship with the EU—and indeed, about the future of the EU itself.

Shifting the focus to a stable process of dialogue would mean that the UK (and other EFTA states) keep their current agreements with the EU, with changes agreed on an issue by issue basis over time, rather than trying to solve everything in one go. Any temptation to use the all-or-nothing negotiating tactic—that nothing is agreed until everything is agreed—should be ruled out by both sides as unworkable and not constructive.

This would not work if the EFTA was seen as a serious rival to the EU; one that threatened the political project of ever-closer integration of the people and institutions of EU member states. Any super-EFTA model needs to include a sufficient political package—like commitments around rule of law, democracy, human rights, climate and so on—to avoid undermining the social benefits of the EU.

A super-EFTA model would be preferable to the UK retreating from international engagement on issues like climate change and human rights, and it would also preserve mostly free movement across Europe. Crucially for Ireland, it would move the UK-EU relationship towards close co-operation sooner rather than later.

And, of course, such a solution permits the remaining EU to press ahead with further integration. When the UK leaves, the EU will be dominated by social market economies and social democratic market economies, which makes cohesion and integration easier to do. This poses challenges to the liberal market system in Ireland and in some of the more recent accession states too, but that’s nothing new as we’re already embarked on the journey of European integration as EU members.

If EU expansion is to be halted for a while, a strengthened EFTA could provide a destination for countries in the Balkans or for Turkey and other countries that want a closer relationship with the EU.

The people of the UK and EU will continue to have good relations. Governments on both sides should work towards a new ongoing process of partnership to provide people with certainty and peace of mind as soon as possible.

Nat O'Connor is Lecturer in Public Policy and Public Management at Ulster University, and a member of TASC's Economists' Network

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