PAPER: EEA & EFTA

In his sixth Brexit Challenge paper, Nick Clegg sets out alternatives to a hard Brexit, the EEA and EFTA.

By Nick Clegg, Jan 16, 2017 11:01

1. Introduction

The Prime Minister has been clear that she is seeking a “bespoke” rather than an “off the shelf” Brexit. She has recently rejected the idea that we may be able to hang on to “bits of EU membership”. On the face of it, these statements are incompatible with continued UK membership of the European Economic Area (EEA) via accession to the European Free Trade Association (EFTA).

Our analysis in this paper shows that while the government may not want to contemplate EFTA/EEA membership, the scant prospect of securing the bespoke agreement they are looking for within the two-year window available for negotiations means that EFTA+EEA will rapidly emerge as the most likely fallback option, at least during a transitional period before a bespoke agreement can be negotiated, ratified and implemented.

2. EFTA

The European Free Trade Association (EFTA) was founded in 1960 as an alternative to the then European Economic Community (EEC). Spearheaded by the UK, EFTA was conceived as a way for its members to remove barriers to trade and enjoy the benefits of economic cooperation without accepting the overtly political and integrationist aspects of the European project. Alongside the UK, its seven founder members were Austria, Denmark, Norway, Portugal, Sweden and Switzerland.

Despite its anti-federalist beginnings, in practice EFTA served as a ‘waiting room’ for several countries which went on to join the larger European project. The UK and Denmark left EFTA for the EEC in 1973; Portugal followed in 1986; and Finland, Sweden and Austria did the same in 1995. EFTA nevertheless survived, and now comprises four countries: Norway, Iceland, Switzerland and Liechtenstein.

The EFTA Convention removed barriers to the trade in goods, services and investment between EFTA members. Unlike the EU, however, EFTA is not a customs union: there is no common external tariff, and members are free to decide their own level of import duties. In turn this means that each EFTA country is free to negotiate its own Free Trade Agreements with third countries (as for example Iceland has done with China). In some instances, EFTA states have chosen to come together to negotiate joint trade agreements with third countries. EFTA currently has 27 Free Trade Agreements covering 38 countries, including Canada, Israel, Mexico, South Korea, and Singapore, but no access to EU-negotiated FTAs.

3. The EEA Agreement

The nature of the EFTA club changed dramatically in 1994, when the EEA Agreement came into force. The EEA extends the EU’s single market to three of the EFTA countries, binding Norway, Iceland, and Liechtenstein in a close partnership with the EU, and overcoming many of the differences which divided the two bodies in the early years.

The process leading up to the founding of the EEA began at the first EEC-EFTA meeting in Luxembourg on 9 April 1984, where the assembled ministers from both blocs agreed to pursue the creation of a ‘European Economic Space’. Initially discussed as a scheme to improve cooperation in the trade in goods, it took on a much larger aspect with the European Commission's adoption in 1985 of far-reaching proposals for the completion of the Internal Market (as it was then termed), paving the way for the harmonisation of laws, regulations and other policies that stood in the way of trade between EU member states. This new ‘Single Market’, which was, of course, largely a product of UK policy, represented a step-change in European integration.

The pace and ambition of these changes presented a challenge for EFTA. The more integrated the EEC became, the greater the risk that the EFTA countries would miss out on the benefits. Several EFTA members had had or were close to having debates about whether they could apply for full EEC membership.

The idea that the EFTA countries might participate themselves in the Single Market was initially rebuffed by the European Commission. A key sticking point was the absence of any guarantee that the EFTA countries would abide by the legal obligations of the Single Market, as there were no institutions responsible for oversight and enforcement on the EFTA side comparable to the European Commission and the European Court of Justice (ECJ).

The initiative for the creation of the EEA came from the then President of the European Commission, Jacques Delors, in a speech to the European Parliament on 17 January 1989, where he addressed the relationship between the EEC and EFTA and floated the possibility of a new form of association, with a more structured institutional framework including common organs for decisions and administration. Formal negotiations ensued, and an EFTA Surveillance Authority and EFTA Court were created to meet the concerns expressed in Brussels. The Agreement on the European Economic Area was finally signed in Oporto in May 1992.

All the then members of EFTA apart from Switzerland (Austria, Finland, Iceland, Norway and Sweden) become part of the EEA in 1994. Switzerland held a referendum on EEA membership and rejected it. While Switzerland remains a member of EFTA, its relations with the EU are governed by a complex web of sectoral agreements that provide only partial access to the Single Market. There are currently 31 members of the EEA (28 EU + 3 EFTA).

The benefits of EEA membership for EFTA states are significant. They enjoy full participation in the EU’s ‘four freedoms’: freedom of movement for goods, services, capital and persons, with the exception of agriculture and fisheries which are exempt from the EEA Agreement. So-called flanking policies (which cover areas such as transport, competition and state aid rules, social policy, consumer protection, environment, statistics and company law) are also covered, as are some specific EU programmes such as the Horizon 2020 fund for research and innovation.

There are also some substantial downsides to EEA membership when compared to full EU membership. EFTA states sit outside the EU customs union, which means some border checks are necessary in order to check the origin of imports to the EU, and to distinguish agricultural and fisheries products from other goods.

More importantly, EFTA countries have to make do with very few institutional rights within the EEA. While it is possible for them to exercise some influence over the development of EU legislation, this is very limited (see below). There are also some significant areas where EEA EFTA countries have no right to participate at the EU level: notably foreign policy, and police and crime cooperation (although as explored in our previous paper, Norway and Iceland both participate in the Schengen system and have secured bilateral agreements on extradition and Europol).

Those EFTA countries that participate in the EEA are required to make financial contributions in return for their membership. The bulk of these payments are through bilateral grants to individual EU member states (largely those former Soviet states with lower per capita income). Direct payments into the EU budget are required for access to specific EU programmes, but there is no equivalent to the membership fee which EU countries have to pay.

4. How does the EEA bridge the gap between the EU and EFTA?

The EEA Agreement is unique in being a ‘dynamic’ trade agreement which incorporates regular updates. These are essential because, unlike a conventional free trade agreement, the aim is to achieve regulatory conformity across member states.

The Agreement is updated almost every month so that trading rules and product standards in the EEA EFTA countries are kept up-to-date with rules in the EU. This system ensures uniformity of legislation across the EEA and allows there to be barrier-free movement of goods, services, capital and persons between all EEA countries.

An analogy employed by some who are close to the EFTA system is to think of the EEA Agreement as a smart phone that receives regular software updates so that its users can download the latest apps. If this doesn’t happen, the phone gets slower and stops working properly.

Switzerland tries to be in the Single Market without these updates, which impedes the ability of Swiss people and companies to benefit from all the freedoms afforded by full Single Market participation. The dynamic nature of the EEA Agreement enables far more interoperability for people and companies in Norway, Iceland and Liechtenstein than is available to Switzerland, and substantially more than is enjoyed by Canadians and South Koreans, whose countries have much more basic (static) trade agreements with the EU.

5. EEA/EFTA institutional arrangements

The EEA Agreement operates through a two-pillar structure, as illustrated in the EFTA Secretariat’s diagram above. The EFTA pillar is on the left and the EU pillar is on the right. For every EU institution there is an EFTA body that corresponds with it, even though the EFTA equivalents are much smaller and less complex.

It is important to keep in mind that EFTA is not a supranational organisation. The EEA EFTA States have not transferred any legislative powers to the EEA Joint Committee. The EFTA States decide everything, and unless all of them agree to do so, a decision cannot be adopted. In other words, no country in EFTA can be legally compelled to do anything by the other countries. Unanimity is required for all decisions, including whether to adopt EU laws into the EEA Agreement.

The EEA Joint Committee comprises the European Commission (represented by the European External Action Service) on one side, and the three EEA EFTA States (usually at ambassadorial level) on the other, together with an observer from the EFTA Surveillance Authority. The Joint Committee is responsible for the ongoing management of the EEA Agreement and for decisions concerning the incorporation of EU legislation into the EEA Agreement.

The EEA Council comprises members of the European Council and Commission alongside Foreign Ministers of the EEA EFTA States. It meets twice a year and provides political oversight of the development of the EEA Agreement.

The EEA Joint Parliamentary Committee comprises Members of the European Parliament and Members of the national parliaments of the EEA EFTA States. It contributes to the development of the EEA Agreement through dialogue and debate.

The EEA Consultative Committee comprises the Economic and Social Committee of the EU alongside members of the EFTA Consultative Committee. This is a forum for cooperation and consultation between ‘social partners’ (trades unions and other professional groups).

On the EFTA side there are a number of bodies involved in the management of the EEA Agreement:

The Standing Committee of the EFTA States comprises the ambassadors of Iceland, Liechtenstein and Norway, plus observers from Switzerland. This is a forum in which the EEA EFTA States consult each other and arrive at a common position before meeting with the EU in the EEA Joint Committee. The Committee has five subcommittees made up of representatives of the foreign ministries of the EEA EFTA States, each of which in turn are responsible for working groups which consist of national experts in different fields. They are responsible for processing all EU legislation to be incorporated into the EEA Agreement.

The EFTA Surveillance Authority (ESA), based in Brussels, is EFTA’s equivalent of the European Commission, tasked with fulfil their obligations under the EEA Agreement. In addition to compliance, the ESA has powers in relation to competition, state aid and public procurement.

The EFTA Court, based in Luxembourg, deals with infringement actions brought against EEA EFTA States with regard to the implementation, application or interpretation of EEA law, and gives advisory opinions to courts in the EEA EFTA States on the interpretation of EEA rules.

6. Are EEA EFTA countries able to influence or reject EU legislation?

EEA EFTA States are generally speaking the passive recipients of Single Market rules made in the EU. Although the EEA EFTA States are able to attend and speak in many of the key EU meetings, they have no opportunity to amend legislation during its development or to participate in formal votes. However, some opportunities do exist for “decision shaping” prior to the adoption of new legislation by the EU, and some limited discretion exists over the way that legislation is translated into domestic law in the EEA EFTA countries.

The EEA EFTA States provide input to the EU legislative process via:

  • Participation in European Commission regulation and programme committees, where the EU is obliged to consider input from EEA EFTA experts on an equal footing to those from EU member states
  • Submission of written comments to EU legislative and other policy initiatives
  • Placement of national experts in key policy units of the European Commission
  • Participation in EU agencies, and
  • Intergovernmental cooperation.

Once a new EEA-relevant measure has been adopted by the EU, the EEA Joint Committee begins the process of translating it into the EEA Agreement and so into national law. As the objective of the EEA is to provide regulatory uniformity, the vast majority of single market legislation is incorporated into the EEA Agreement unchanged. However, the Agreement does allow the parties to agree substantive adaptations, including derogations and transitional arrangements where appropriate.

In extremis, the EEA EFTA countries can refuse to implement EU legislation. This “right of reservation” is enshrined in Article 102(4). In practice it is hardly ever used, as the EU can suspend the relevant part of the EEA Agreement in response. EFTA has invoked 102(4) on two occasions, for the Anti Money Laundering Directive in 2004 and the Union Citizenship Directive in 2007. In both cases a solution was found within the 12 month deadline, so suspension of the affected part of the agreement was avoided.

The EEA Agreement also includes a number of ‘safeguard measures’ under Article 112 which can be triggered in the event of “serious economic, societal or environmental difficulties”, allowing the EFTA states to depart temporarily from agreed EEA rules. Any measures have to be “restricted with regard to their scope and duration to what is strictly necessary in order to remedy the situation". The mechanism cannot be invoked unilaterally without triggering consequences. The EEA Agreement makes it clear that as soon as measures are taken, the EFTA countries have to enter into negotiations with the EU in order to find a “commonly acceptable solution.” It has never been used by Norway, but has been tested by Iceland (which restricted free movement of capital following the 2008 financial crisis), and by Liechtenstein, which secured an agreement to impose quotas on free movement in the late 1990s (although the small size of Liechtenstein’s population means that it should not be assumed that a larger economy could easily do the same).

Finally, unlike the European Court of Justice, whose rulings have direct effect in EU member states, the EFTA Court in principle has no primacy over domestic law. As the President of the Court, Carl Baudenbacher recently noted: “Our setup is more sovereignty friendly than the EU’s. There is no written obligation on any court of last resort to make a reference to us, and our rulings in these reference cases are strictly speaking advisory. There is no direct effect and no primacy of EEA law, and if you do not implement an infringement judgment there is no possibility to impose a penalty payment”. While this indicates a degree of flexibility, in practice the EFTA Court’s rulings are adhered to by member states in order to avoid a situation where parts of the EEA Agreement are suspended as a result.

7. Could the UK remain in the EEA by default after Brexit?

The EEA Agreement makes no explicit provision for countries to be members of the EEA except via their membership of the EU or EFTA. Some have argued that the UK could remain in the EEA by default post-Brexit. A legal challenge on this point is pending, but the decision will ultimately be a political one for the other EEA states to take. What is likely is that the UK will have to issue a withdrawal notice under the terms of Article 127 of the EEA Agreement, giving 12 months notice of its intention to leave the EEA at the same time that it leaves the EU.

8. EFTA + EEA as a model for Brexit transition

The government claims to be confident that it can conclude both the negotiations on the terms of the Brexit ‘divorce’ and the details of our new relationship with the EU (including the ratification by national and regional parliaments in 27 member states) within 2 years of triggering Article 50. Our analysis (see previous Brexit Challenge papers) is that this is likely to be unachievable.

This view is now shared by a wide range of experts including Jean-Claude Piris, the former head of the EU Council’s legal service, who has said a substantive new settlement will involve “thousands of pages and hundreds of articles”, with no chance of completion before 2019. Sir Ivan Rogers, until recently the government’s senior diplomat in Brussels, recently warned that it could take up to 10 years and might ultimately fail. And former cabinet secretary Sir Gus O'Donnell has said negotiating a final deal will take "at least five years”.

The complexity of the task is compounded by the fact that European elections and the process of agreeing a final deal with member states will significantly reduce the time available. The European Commission’s chief negotiator, Michel Barnier, has warned that the talks will need to be concluded within a 15-month window. Moreover, the fact that the UK faces a cliff edge means it will be in the EU’s interests to push substantive decisions until later in the process when their leverage will be greatest.

The inescapable conclusion is that some form of transitional agreement will be necessary. There are three broad ways in which this could be achieved:

    1. An agreement could be struck to extend the length of the Article 50 talks, prolonging our existing terms of membership to allow time for a deal to be fleshed out and for preparations to be made for the transition. An extension to the 2-year timescale is envisaged in Article 50(3), but requires the unanimous agreement of the 27 other member states. While this option may be desirable, it is unlikely to enjoy sufficient support within EU states. At the same time it would require the Prime Minister to go into the next general election with the UK still a full member of the EU, which is politically very hard to imagine given her public statements.
    2. A ‘phased transition’ deal could be constructed in which the UK’s existing privileges and responsibilities are maintained for a period after we cease to be members of the EU, and then gradually phased out, while our new trading terms are gradually phased in. This is possible in theory, but requires clarity about the final destination. That would be as difficult to negotiate as a full permanent settlement, and so is unlikely to be achievable in the time available.
    3. The UK could look for an existing ‘off-the-shelf’ model that would satisfy the requirement to leave the EU while creating a minimum of disruption. The only model available is EFTA + EEA. By joining EFTA on a temporary basis, the government could buy time to conclude a comprehensive Free Trade Deal with the EU.

EFTA+EEA would have a number of political and practical advantages for as long as we retained that status:

  1. EFTA is an intergovernmental body, unlike the EU. Its members retain the autonomy to say no to any collective decision, including the adoption of new EU laws (although in practice, the latter would invite retaliatory measures).
  2. The UK, as a non-member of the EU, would remain in the Single Market. The free movement of goods and services between the UK and the EU would continue, avoiding a loss of regulatory equivalence, key benefits like the financial services passport, and the imposition of trade tariffs (except for agriculture and fisheries).
  3. The UK would retain the EU workforce which is vital to numerous sectors including agriculture, food processing, logistics and hospitality.
  4. The UK could, in theory, invoke the EEA Agreement ‘safeguard measures’ to bring about a temporary suspension of free movement to deal with very high levels of migration. The UK would have to show material damage, not just public concern, and the EU might well take retaliatory action. While this would be practically challenging, it is nevertheless an option that is unavailable in any form to members of the EU.
  5. The UK would gain the ability to negotiate its own trade deals. This means that new FTAs (e.g. with the US) could be negotiated while we maintained our current Single Market access, allowing UK trade policy to be re-calibrated in an orderly fashion.
  6. We would be removed from the Common Agricultural Policy and the Common Fisheries Policy, creating new opportunities for independent policy in both areas.
  7. We could gain access to a set of established EFTA trade deals with important non-European markets, rather than starting from zero having lost access to EU FTAs (though in practice some trade partners might seek to renegotiate elements of those deals if the UK was to be party to them).
  8. We would retain partial access to key EU programmes, including Horizon 2020 and Erasmus.
  9. EFTA+EEA membership is the preferred option of the Scottish government, and would most likely avoid the possibility of a second referendum on Scottish independence.

But the EFTA+EEA option would also present a number of disadvantages (depending on one’s viewpoint):

  1. The UK would leave the EU Customs Union and lose access to EU FTAs, triggering WTO tariff negotiations, and leading to red tape for exporters to the EU who would have to comply with complex ‘rules of origin’.
  2. Free movement would continue as before unless Article 112 was invoked, leading to criticism that the government had failed to “take back control”.
  3. The UK would still need to make financial contributions to the EU. Although the amount would depend on negotiations with the EEA, it is possible that they would be lower than at present, and would not be paid directly to the EU budget.
  4. The UK would have no automatic participation in EU Justice and Home Affairs or foreign and security policy. These would need to be the subject of separate agreements in order to maintain the UK’s ability to combat terrorism and organised crime; and to retain its international influence more generally.
  5. The UK would still have to apply Single Market rules in most sectors, including the rulings of “European courts”. It would have very little influence over the content of new laws, becoming essentially a ‘rule taker’ rather than a ‘rule maker’.
  6. Some tariffs would be inevitable on agricultural and fisheries products.

9. Is temporary membership of EFTA+EEA politically deliverable?

An EFTA+EEA transition would offer stability and certainty to business and citizens concerned by the economic and political implications of a chaotic ‘hard’ Brexit.

Some Leave campaigners have nevertheless opposed the idea of EFTA+EEA as a transitional strategy on the grounds that it might become permanent. In order to allay such fears, a ‘sunset clause’ could be inserted into the transitional agreement to specify that EFTA membership should lapse after a reasonable period of time (say between 5 and 7 years). During this time, the government could realistically hope to conclude and receive parliamentary approval for a comprehensive new relationship with the EU, assuming that the decision to leave the EU is not reversed.

From the perspective of our trading partners, it is of course not certain a UK application to join EFTA+EEA would be accepted. Assuming that the UK would have to follow the procedures for new members of both institutions, there could be a number of practical and political hurdles, including ratification by national parliaments. For this reason, an early indication of the UK’s intentions would minimise the chances of the Article 50 ‘clock’ running out before EFTA+EEA membership could be agreed.

One concern is likely to be scale: the UK population alone is 4 time the size of the existing EFTA states and 13 times larger than the EFTA States which are also members of the EEA. They may be concerned that the UK would ‘unbalance’ an arrangement that works well. On the other hand, the addition of the UK would give EFTA greater economic weight in international negotiations, and in its dealings with the EU.

The EU-27 will want to avoid a situation where the UK appears to get a ‘better deal’ than we currently have. Some may argue on this basis against the UK having full participation in the Single Market while at the same time paying less for the privilege. However, the 27 could highlight the loss of power and influence over Single Market decision making and others areas of EU policy, and paint the decision as a significant step down for the UK.

10. Is long-term membership of EFTA+EEA desirable?

The EEA Agreement offers economic rewards while addressing some of the concerns that have been expressed about sovereignty. However, it offers its members very little power over decision-making in the Single Market. With no seat at the table, the inaccurate critique of the Leave campaign that the UK has no say over laws made in Brussels would suddenly become true.

This has in the past been a cause for concern among the EFTA states, who note that Jacques Delors appeared to promise a substantive role in the decision-making process in his 1989 speech which started the ball rolling on the EEA talks, where he envisaged “a new, more structured partnership with common decision-making and administrative institutions.”

Whether the agreement in its current form is a suitable long-term arrangement for an economy of the size of the UK is debatable. The idea nevertheless enjoys support from some pro-Brexit organisations, including the Adam Smith Institute.

Could the UK conceivably seek to join EFTA, and then push for the reform of the EEA Agreement from the inside? In theory yes, but as Open Europe notes in its analysis of the EEA option, “this would require the EU (and other EEA members) to agree to sweeping changes to a model that appears to have suited its parties relatively well to date.”

However, it seems implausible that EFTA would not undergo any change as a result of the UK’s re-accession and the consequent change to the composition of the organisation. Some within the EFTA system seem open to the idea that the UK might lead reform for the benefit of EFTA as a whole. Michael-James Clifton, Chef de Cabinet to Carl Baudenbacher, President of the EFTA Court, observed in a recent paper:

“The current EEA/EFTA States do not have a co-decision right in the creation of new Single Market legislation. They do not have a vote. […] Would the UK be able to negotiate the creation of such a co-decision right? It is plausible and would certainly be in the interests of the current EEA/EFTA States as well as Switzerland.”

11. Conclusion

We continue to believe that leaving the EU is against the national interest, and therefore a referendum on the terms of the final deal is imperative. If, however, the UK ends up leaving the EU, it is vital to minimise the inevitable economic disruption.

EFTA+EEA offers an ‘off-the-shelf’ status for the eventuality (which we judge highly likely) that the government fails to secure a substantive new trade deal with the EU in the 24 months allowed for the Article 50 talks. Faced with the prospect of losing all trading privileges and reverting to WTO rules in 2019, we believe the government has a duty to explore the option of re-joining the organisation which the UK founded in 1960 as an alternative to the EU, and then re-joining the EEA as an EFTA member state. It is far from a perfect arrangement, but there are few if any other options.

Practically, UK membership of EFTA+EEA - at least on a temporary basis pending further negotiations - appears to be the only lifeboat available to the UK in stormy seas. Politically, it would be a fitting solution for a government that has to find an accommodation between opposing camps, in a country which remains starkly divided.

 

 

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