This blog is a reply to the write up by Pam, in which he argues that Norwegian model of association with European Union (Hereinafter EU) is the best for Britain once it decides to implement Article 50 of the Lisbon treaty and exit the EU. He says that the “ “Norway-plan”, sets out as the most attractive option for the United Kingdom, even if it were to serve as a temporary measure. The Norway option would essentially mean that the United Kingdom remains a part of the EFTA and EEA the association agreement between the EU, Norway, Iceland and Liechtenstein, without being a part of the European Union. This will ensure that UK retains access to the single largest market in the world.” He also says that the Norwegian model firstly, ensures legal security of exports between the two trading blocks, secondly, EEA membership would ensure that UK has access to the single largest market while still having freedom to decide its own policy with respect to non-economic concerns, thirdly, application of environment and labor safeguards will be ensured as they are a part of the EEA and fourthly, UK’s financial contribution under Norwegian model will be less than what it is under the current mode. However, he agrees to the fact that under Norwegian model UK will lose all voting power (consequently political and negotiating power) and 11,500 odd EU act will be still be applicable to UK. Further he also says that most of the only level at which Norwegian model is better than the Swiss model is because Norwegian model allows for Britain to exert ‘soft power’ on EU.
Hence, we can conclude that pam basically argues that it’s important for Britain to secure access to the single largest market in the world while still having some form of negotiating power. We are also safe in concluding that pam presumes that UK will be willing to trade away its current political position in EU for saving a couple of million pounds in contribution to the EU budget and settle for exerting some form of soft influence. Lastly, from what pam has to say, we may conclude that UK will be willing to allow migrants, subject its corporations to taxing EU legislations etc. perhaps not considering on ground political realities!
In this blog I will argue that Norwegian model is not the best for post-Brexit trade relations between UK and the EU. I will show this to be true in economic as well as political context. I will further argue that the economic relations should be based on political reasons for Brexit and political aspirations will play a major role determining the future economic relations between UK and the EU.
It should be noted that the basic limitation of this post it that it does not consider possible market fluctuations, employment data etc. while arguing drawbacks of the Norwegian model and proposing a different model. It simply relies on legal arrangement in the models and established political discourse with respect to Brexit campaign. However, it’s perhaps reasonable that most of the market forces have some form of political presence in terms of interests groups and their interest are reflected in laws and treaties governing economic setup.
Drawbacks of Norwegian Model
As per Pam’s write up and in general, Norwegian model provides for access to EEA via EFTA while being subjected to a whole bunch of EU laws. These laws are the internal trade laws of EU and are applicable to the internal trade laws of the country. However the country in question has no say, whatsoever, in drafting of these laws.
It is unquestionable that UK needs an access to the EU’s single market in order to prosper There is no question that EU also requires trade ties with UK and parting away of UK will result in substantial losses to EU in terms of its budget contributions and access to market. Hence, both need one another in the most constructive manner. However, Norwegian model fails to include requirements of both the parties. This is perhaps on two counts:
There are three main drawbacks of this model. Firstly, pplicability of such a model to an economy of the size of UK is itself serves multiple challenges. The issues and challenges of managing a small economy are different to those of a large country like the UK. As anyone in business knows, smaller organisations tend to be simpler and less diverse – which makes them easier to manage. Hence, when Norwegian model, designed for smaller economy, is copied to the British economy, shear diversity, size and complexity of the British economy will result in failure of such a model.
Secondly, for the UK, following this Norwegian model would involve accepting all the EU rules and continuing to make substantial budget payments. In fact, UK’s payments to the EU budget could increase, because we risk losing the benefit of past rebates negotiated by Margaret Thatcher and others while we have been an EU member. This model makes no sense for the British economy – accepting all the obligations of the EU with no influence.
Thirdly, agreeing with EU provisions asking for allowing migrants will have implications over the British jobs. Further, Norway has very large supplies of energy in relation to the size of their population and economy. Switzerland’s great advantage is its location – at the heart of Europe and at the crossroads between the three biggest continental European economies: Germany, France, and Italy. The Swiss have sought to capitalise on this advantage by keeping government spending and hence tax rates relatively low – making it an attractive central European location for major international businesses and high value-added individuals.
Hence, we can conclude that Norwegian model is applicable only to an economy with particulars similar that of Norway, for instance Switzerland. If the model is applied to an economy like UK, consequences will be undesirable.
Major political drawback of the Norwegian model is that it does not address the basic issues on which British voted in favour of Brexit. For instance, under EEF there are provisions that ask for mandatory applicability of four basic freedoms that are a part of the EU’s basis of association. This also includes freedom of movement. This would mean that individuals form other EU countries are allowed to work in Britain. Further, there are a whole bunch of EU laws that apply within the EEA region.
During the Brexit campaign much of the discontent among the British businesses was with respect to the increased cost of doing business due to implementation of EU legislations. These basically include labour, environment, competition and other market regulations. It is increasingly the opinion in Britain the EU regulations impose more costs than benefits. For instance, the Bank of England has found that capping bankers’ bonuses at 100 per cent of their annual salary has increased risk in the financial system: banks find it more difficult to slash salaries than bonuses in a downturn, which makes them more fragile. Most of the business community in Britain is of the opinion that EU regulations have done more harm than good. Such regulations also extend to other sectors, particularly two of the Britain’s largest sectors i.e. Financial Markets and Banking industry. If Britain adopts a model similar to Norwegian, it is highly likely that similar internal regulations will continue to be apply to British businesses.
Another cause of contention, as has been used to influence the voter’s behaviour in Brexit referendum is the extraordinarily high British contributions towards the EU budgets. As per the data, UK contributes €7.3bn, or 0.4% of GDP toward EU budget. However, there have been other claims that suggest that UK pays as much as €13bn towards the EU budget. Even if most conservative claims are taken, it is clear that the contributions of EU toward UK are no more than € 4bn.  Hence, EU’s spending when compared to UK’s contribution, run a deficit of € 8.7bn. This extra contribution is often thought of as being able to be spent in UK for welfare of its own home economy. However, being a part of the EEA would also requires Britain to make such budgetary contributions towards EU’s annual budget. Even though such contributions may not be of present magnitude, they will certainly result in overall deficit for Britain.
The above mentioned facts clearly show some or the other form of political discontent and consequent exit of Britain from EU. It also shows that Norwegian model will not address the above mentioned discontent. Hence, the likelihood of adoption of such a model is quite low.
What would post-Brexit relations depend on?
Interesting thing about invocation of Article 50 by the British parliament is that the procedure and subsequent outcome is unclear, for the article has never been invoked before. Under such circumstances a lot will depend on system variables. These system variables are composed of Political and Economic considerations of different interest groups in Britain and EU. Post-exit negotiations and relations between EU and UK will be governed by the relative power and influence of groups associated with these variables in the power corridors of EU and UK. These variables, backed by their respective interest groups, will drive the negotiations for new economic and trade relations between UK and the EU.
Analysis in the above sections clearly shows that these variables are most likely to be composed of economic and political considerations. Further, it is also clearly evident that circumstances in this case represent a system of variable like ones that have never existed before. Predicting the outcome of two years negotiations after invocation of Article 50 of the Lisbon treaty will involve assessing the relative strength of different system variables. However that extends beyond the scope of this post. Fundamental reason for understanding the presence of these variables is to show that the manner and volume of presence of these variables is dissimilar to any pattern notices before. Hence, the argument that a model similar to that of Norway will best suit to structure and regulate future relations between EU and UK is void.
We see a high degree of similarity between economic and political reasons for inapplicability of Norwegian model. It’s clear that pam and whosoever argues for adoption of Norwegian model, has failed to take into account system variables that exist in this case. From the nature of system variables in the instant case, it’s clearly evident that Norwegian model cannot be adopted for future relations between EU and the UK. Further, it has also been successfully shown that future relations will be determined by relative strengths of different system variables. Hence, Norwegian model is not the best for post-Brexit trade relations between UK and the EU and political aspirations will play a major role determining the future economic relations between UK and the EU.
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 Picture available at http://www.euractiv.com/wp-content/uploads/sites/2/2016/06/shutterstock_442002598.jpg