Article 50: a trump card or joker?

We have today published the full report assessing the implications of our EU ‘wargame’ which simulated the negotiating dynamic under two scenarios: first, a UK-EU renegotiation from within and, second, under ‘Brexit’. As we’ve stressed before, the fact is that unless the UK wants to simply fall back on WTO trading rules and unilateral free trade, renegotiation and withdrawal will both require a negotiation with other EU states and the EU institutions.

The only formal way to the leave the EU is via the so-called “Article 50” exit clause of the EU Treaties, which stipulates a two-year timeframe within which to potentially conclude a continuity deal. In our simulation, after their initial hostility, all other member states recognised the need to strike a new trade deal with the UK with economic incentives trumping political rhetoric. Britain is unlikely to face the ‘worst case scenario’ of having to fall back on World Trade Organisation rules.

However, as our simulation showed, the initial new deal would likely fail to replicate the full access to the EU single market currently offered by full membership:

• A Norway-style deal – effectively single market membership but with no formal political influence – is likely to be rejected by EU partners and is in any case a bad deal for the UK as it amounts to “regulation without representation”.
• While a reciprocal trade agreement for goods, where the UK has a sizeable trade deficit of £56.2 billion (2012) with the EU, would be relatively easy to strike, access to the EU’s services market – where the UK has a trade surplus of £11.8 billion (2012) – will be far more difficult.
• Access for UK financial services would be a particular concern since a third of the UK’s trade surplus in financial and insurance services in 2012 came from trade with other EU member states – of the total £46.3 billion UK financial and insurance services trade surplus, £15.2 billion was with the EU and £14.5 billion with the US. Perhaps over time, further bilateral deals on market access could rectify this but the political resistance from France and some others could be high.

While Article 50 of the EU treaties has the benefit of definitely triggering negotiations – which isn’t guaranteed under Cameron’s renegotiation plan – it comes with several drawbacks:

• Article 50 is a one way street – once it is triggered, and even if the deal available at the end of the process proves unsatisfactory to the UK, there is no way back into the EU except with the unanimous consent of all other member states.
• It is likely to put the UK on the back foot in any negotiation. The remaining EU member states would be in charge of the timetable and the European Parliament would have a veto over any new agreement. Therefore, while having to fall back on WTO rules entirely is unlikely, it would remain a possibility.
• As the UK will not take part in the final qualified majority vote on whether to accept the new deal, protectionist-minded member states could have greater influence on the degree of market access the UK could secure post-exit – particularly on services (see graph below).

Compared to renegotiation from within, Article 50 therefore cedes more control than what is often thought.

Ultimately, though, while a high transaction cost is undeniable, the big question is if there is a point – and if so when – at which the high one-off cost of Brexit would be outweighed by the long-term benefits of more economic and political independence over areas such as financial regulation, agricultural policy or criminal justice, particularly if the eurozone comes to dominate the wider EU and the necessary reform proves unattainable.

EEA plus: a model for the future of the UK in Europe?

For all the noise about Europe in the UK, British sceptics (with some exceptions) aren't necessarily great at thinking outside the box. 

We have previously looked at the existing models used by countries that have decided against/been refused EU membership (i.e. Norway's EEA membership, Switzerland's Free Trade Agreements, Turkey's customs union with the EU, or simply the WTO) and concluded that they would all have drawbacks for a country and economy as large and diverse as the UK. In particular, the Norwegian model is pretty much a non-starter.

However, there is another hypothetical model, which we will set out in a forthcoming briefing, that could be more attractive if it could be secured: let's call it 'EEA plus'.

Now, we don't necessarily advocate this particular option and this is only a blogpost, but intellectually and politically, it's far more attractive than anything we've seen so far in terms of a fundamental replacement for the current EU structure. 

Over the last decade, several figures, including Jacques Delors, former EU Commission President, and Valery Giscard d’Estaing, former French President and author of the EU Constitution, have suggested the UK be given ‘associate membership’ or ‘special status’. Neither concepts have been fully fleshed out, but Giscard d’Estaing suggested that a ‘special status’ could allow the UK to opt-out of future EU policies, which could allow it to continue to vote on policies it took part in but not on those it didn’t. Lord Owen has made a similar argument - which he will expand on in a speech today.

From where we sit, there is one absolutely vital element that has to be added if this is going to work for the UK: voting rights. The great weakness of the EEA model at the moment is that a country like Norway, as we have noted repeatedly, is out of the EU but run by the EU. It just wouldn't work for the UK (which is home to 36% of the EU's wholesale finance market, for example).

So what 'EEA plus' would involve is single market access but with votes on all laws which are EEA relevant. For EU geeks, it would be a bit like EEA-EU co-decision over single market laws. There are several ways in which this could work. For example, an "EEA council" already exists with members from both the EU and EEA states. This could be expanded to be the effective decision-making body for the EU as a whole in the fields that apply to both constituencies. Alternatively, a majority could be needed in both the EU Council of Ministers and a comparable EEA body for it to become law in both. A range of other issues, such as an arbitrage mechanism and ECJ jurisdiction, would have to be thought through. Also, it would have to be designed so that only genuine single market measures made it into the agreement - not the add-ons such as employment laws (which Norway has to accept) - whilst the UK may wish to stay inside the EU customs union (which Norway and Switzerland are not part of). The UK may also want to be part of other areas, such as crime and police cooperation (perhaps on a bilateral opt-in basis) and there would also need to be consideration about the merits of retaining its veto over EU foreign policy for example.

But, crucially, such an arrangement would get around the massive drawbacks inherent in the Norwegian model. Another great advantage of this model is that it could provide an institutional wrapping for all those countries that for one reason or another cannot be full EU members, and certainly not eurozone members: the UK, Norway, Switzerland and maybe even Turkey. It would be a new mode of European membership - and, if the UK can get its act together, very much the "economic growth" tier.

If you think this is far-fetched, you might be right, but it's actually not a new idea. In 1989, ahead of the negotiations that would establish the EEA agreement, Delors mooted a “more structured partnership with common decision-making and administrative institutions”, which would have potentially given those countries market access and decision making powers, rather than the limited right of refusal that EEA countries currently have.

In a speech in 1989, discussing the potential approach to those countries who had remained in the European Free Trade Association (EFTA), Delors said:

“There are two options:

(i) we can stick to our present relations, essentially bilateral, with the ultimate aim of creating a free trade area encompassing the Community and EFTA;

(ii) or, alternatively, we can look for a new, more structured partnership with common decision-making and administrative institutions to make our activities more effective and to highlight the political dimension of our cooperation in the economic, social, financial and cultural spheres.

It would be premature to go into the details of this institutional framework. I have my own ideas, but they need to be discussed by the new Commission and then informally, without obligation, with the countries concerned. It should be noted however that the options would change if EFTA were to strengthen its own structures. In that case the framework for cooperation would rest on the two pillars of our organizations. If it did not, we would simply have a system based on Community rules, which could be extended — in specific areas — to interested EFTA countries and then perhaps, at some date in the future, to other European nations.

But if we leave the institutional aspect of such a venture aside for a moment and focus on the substance of this broader-based cooperation, several delicate questions arise. It becomes clear in fact that our EFTA friends are basically attracted, in varying degrees, by the prospect of enjoying the benefits of a frontier-free market. But we all know that the single market forms a whole with its advantages and disadvantages, its possibilities and limitations. Can our EFTA friends be allowed to pick and choose? I have some misgivings here.”

This option could probably qualify as both "in" and "out". For one, it would be very similar to the Single Market plus deal that Boris Johnson has argued for in the past and, could be defined as staying in the EU, although on a radically different basis.

A final sobering thought: the final result of the EEA talks only granted EEA states ‘decision-shaping’ powers through representation on non-legislative committees and consultation with the EU Commission and a right of refusal that is relatively weak becuase it can result in loss of market access – giving an indication that this will be a challenge to achieve.

Who said EU federalists don't get headlines in UK media (but 'associate membership' for Britain is hardly a revolutionary thought)

The Union of European Federalists – an umbrella group of federalist organisations and lobby groups – got a pretty good hit in the UK media on New Year’s eve when the Times (and later other papers) picked up on a forthcoming paper by the group, which is expected to argue that the UK be granted “associate status” in the EU, a few days after Jacques Delors made similar comments.

So EU federalists can make headlines in the eurosceptic UK press after all, although we would hasten to add that an intervention by a few MEPs and retired politicians can’t qualify as a “Brussels plot” – you at least need to have some scheming Commission bureaucrats on-board for that. Apparently, the paper, which will come in the form of a draft “EU Treaty”, will be based on a report by Andrew Duff, the Lib Dem MEP.

According to Duff, the UK would be given “membership based on trade and the single market”, with a UK judge at the ECJ but no Commissioner and no MEPs. The objective is clear: Given that the UK is a perceived as a  “continual impediment” to greater EU integration, associate membership of the EU would be devised “to prevent a British veto of the constitutional evolution needed and desired by its partners”. Curiously, and perhaps testament to the world view of the author, there’s no mention of what would happen to the UK’s voting weight/rights in the Council of Ministers, the forum where national governments are represented. They might want to work that one out before publishing their draft EU treaty.

Either way the idea is for the UK to effectively be given access to the single market but with little say - like Norway but with some twists and without the EEA-wrapping. This is hardly revolutionary stuff and the author, though an interesting guy, isn’t exactly the go-to guy in key national capitals. So don’t expect this to become policy any time soon. To view the UK as an “impediment” - ignoring the moving goal posts created by the eurozone crisis - is also predictably simplistic.

In addition, there are massive obstacles to more EU integration also amongst “EU partners” and European public opinion – from joint and several liabilities in Germany, to Bundesbank-style budget controls in France to banking union in Sweden. But Duff’s contribution is nonetheless welcome as it does remind us of the need to develop a new model for EU integration in light of changing economic, political and economic circumstances – one that is better at reconciling different democratic decisions in member states with EU cooperation. This is a debate that should be in everyone’s interest to have under way.

Britain should not ape Norway - but new EU membership terms are fully possible

In today's Telegraph, we argue,

During Prohibition in America, the bootleggers and Baptists found themselves in an unholy alliance. One liked Prohibition for commercial reasons, the other backed it due to religious conviction. The alliance proved short-lived. A similar union has now grown up between certain Europhiles and Eurosceptics. Both say that renegotiating new EU membership terms for Britain is impossible: one group because it thinks the status quo in Europe should prevail, the other because it thinks the UK should leave the EU altogether. Both positions miss the point.



From Open Europe "Trading Places" report.

The argument the Eurosceptics make is that Britain should “become like Norway”, i.e. leave the EU and join its more detached cousin, the European Economic Area. But this would actually be a much worse deal than the existing relationship. First, Norway is almost as much of an EU member as Britain is, implementing roughly 75 per cent of all EU laws, from labour market rules (such as the working time directive) to crime and policing measures.

Second, despite being forced to accept all these laws, Oslo has no representation in the EU’s institutions and virtually no way of influencing the decision-making process to reflect its national interests. Should Britain “become like Norway”, it would be home to 36 per cent of Europe’s retail finance market, but with no say over huge swathes of regulation governing that market. And it would have to accept EU employment law – currently costing UK employers £8.6 billion a year – but with no way of influencing it. The net effect would be less opportunity to hold Brussels to account, not more.

Finally, Norwegian companies face extra costs when selling manufactured goods to Europe, stemming from the EU’s arcane “Rules of Origin”, which impose a tariff on any imports that contain components from outside the EU, and lots of extra paperwork. This has been acceptable to Norway, since 62 per cent of its goods exports come in the form of fish or natural resources, which are not affected by these rules. Applied to the UK – its car manufacturing or pharmaceuticals industries – it would bring sudden additional costs and a competitive disadvantage.

In return for its deal, Norway gets control over its farming and fishing industries. This has economic benefits and helps the country manage and maintain its heritage. But fishing and farming only account for 0.7 per cent of UK GDP. As maddening as the EU’s policies covering these two areas are, would the trade-off really be in the UK’s interests? Pursuing a “Swiss model” – based on a cobweb of bilateral agreements – might be a slightly better fit, but it would present similar problems, for example limited access to the Single Market for the UK’s large services sector.

Europhiles are equally wrong in thinking that the status quo is an option. Whether the eurozone integrates further or breaks up, the rules of the game will change. It is clear that the British public will never accept being dragged deeper into a centralised EU.

As the newly launched Fresh Start group of Tory MPs argued yesterday, Britain should set out a new vision for its place in the EU. This should allow countries to integrate with each other to different degrees. To avoid the pitfalls of the Norwegian model, Britain must not only maintain access to the internal market for goods and services, but also a vote on making the rules, and therefore remain an EU member. But it could take a pick and mix approach in other areas, including retaining its opt-in arrangement on EU policing laws, while participating in a better-targeted EU budget and some environmental measures.

As Europe goes through profound political changes in the wake of the crisis, Britain will have plenty of opportunities to advance this position, including in budget talks and future treaty negotiations, over which it will have vetoes. Once new terms have been agreed, they could confidently be put to the electorate in a referendum.

But to show he can be trusted on Europe – and to avoid a stinging defeat at the 2014 European elections at the hands of Ukip – David Cameron must get to work right away. First, in the ongoing talks over the EU’s long-term budget, he should use his veto to insist on UK economic support being limited to the poorer member states, ending the irrational redistribution of money among richer countries. This would save taxpayers billions. Second, under a loophole in EU law, he could instantly bring more than 100 crime and policing laws back under the control of MPs. Last, as the eurozone presses ahead with a “banking union”, he is right to explore safeguards against its 17 members writing rules for all 27 EU states.

Contrary to what reform-sceptics on both sides say, Britain has leverage in Europe. If the choice is between the UK leaving or getting some powers back, liberal, northern EU countries in particular may – after a lot of posturing and negotiation – go for the latter. The alternative would be losing a key ally in upholding a rules-based system of liberal trade as Europe goes through a highly defensive phase. Germany fears a Mediterranean-dominated EU as much as anyone.

Britain is one of the world’s largest economies, and therefore a major market for other member states, a huge contributor to the EU budget, a powerful military force and a global leader in finance. It lends clout and reach to the EU in world affairs. If it makes the effort, it will most certainly achieve a better deal for both itself and for Europe as a whole.

EU Referenda games: staying in, leaving or renegotiation - it's all complicated

With Europe as fluid as ever, talk of some sort of EU referendum is heating up in the UK (well at least in the Westminster bubble).

The always excellent James Forsyth of the Spectator argued in the magazine yesterday that London Mayor Boris Johnson’s support for a referendum and UKIP’s rise taken together “make it highly likely that Britain will have its first vote on Europe since 1975 within the next five years."

He also notes that,

"The popularity of Cameron’s EU veto made his circle realise how much of a political asset Euroscepticism could be, if used in the right way. There is also concern in No. 10 that if the Tories don’t offer the public a vote, Labour will."

He goes on to say that,

"One source intimately involved in Tory electoral strategy told me recently that a referendum in the next manifesto was ‘basically a certainty’...My understanding is that, at the moment, the favoured option is to propose renegotiation, followed by a referendum on the new arrangements within 18 months. During the campaign, the Tories would argue for staying in if new terms could be agreed but leaving if the rest of Europe refused to play ball." 

The equally excellent Paul Goodman over on Conservative Home today echoes Forsyth, listing a range of reasons why a referendum draws nearer.

And Forsyth's colleague Alex Massie also picks up on this on the Speccie's Coffee House blog, looking at all the complications involved in trying to square an EU renegotiation with a referendum (the "on what?" question always looms large). We've looked at the various options for a referendum in detail before, so this is all familiar (if you're interested in the different options, we strongly recommend reading this piece).  Massie makes a good point though. An EU referendum is too often seen in Tory leadership ranks as being about "a matter of party morale, discipline and tactical positioning", not getting something that actually works for the UK.

We agree. The thing is, this is far too complicated an issue to make a matter of mere party management. It will be part of the equation, of course, but making it subject to pure party politics will reduce the discussion to the usual Westminster back-and-forth on vague concepts such as "influence", "isolation" or "sovereignty" - it will be Mandelson land.

But where Massie - and a whole range of other commentators and politicians - get it wrong is when they say that in contrast to the renegotiation option, "an in/out plebiscite at least offers a choice between easily-grasped options."

No it doesn't. Staying in raises a whole range of complicated questions - what does the UK do if the eurozone takes that quantum leap towards further integration? What happens if the EU merely becomes a political extension of the eurozone (which Britain can't join)? In other words, if we want things to stay as they are, things will have to change.

And the "out" option? It sounds easy at a superficial glance, but in a serious discussion, it would raise far more questions than answers. In fact, there's virtually no "out" option (save perhaps one) - all options to withdraw from the EU treaties (which is what 'out' must mean, though it is rarely defined), involves joining something else. Doing a "Norway" would be suicide for UK, i.e. accepting 2/3 of EU laws but with no say over them; a Switzerland would be slightly better but still immensely complicated. A different type of Free Trade Agreement altogether involving business paying hefty fees or facing new admin burdens on exports to the EU, which contain some imported components? A customs union a la Turkey meaning being stuffed on market access on services? Simply falling back on the WTO's Most Favoured Nation (MFN) rules, with a range of costly barriers to trade and movement?

Answers anyone? The truth is that most of the complications that apply to renegotiation, also apply to the "out" option, including the need for some sort of "approval" from other countries for whatever alternative arrangement the UK enters into (apart from the WTO option) possibly. The truth is that all three options: staying in on current terms, renegotiation or withdrawal from the EU treaties are massively complicated. To whet your appetite, we're about to publish a comprehensive report looking at the different options for the UK was it to vote to decide to leave. And trust us, it's complicated.

What we do know is that both Britain and the eurozone will simply have to move. It's therefore right that No 10 is now considering different options.

But again, it should be for the right reasons.

Three big 'excepts'

Except for fishing, farming, and the euro, Norway is practically speaking already part of the EU’s inner market. The only thing it lacks is the right of co-determination.

- Norwegian Conservative MP Nikolai Astrup takes issue with polling-results showing that a record 65.9% of his fellow countrymen are giving thumbs down to Norway joining the EU (only 22.5% in favour).

There are arguments for and against Norway joining the EU. But fishing, farming and the euro are three pretty big 'excepts'...