Tuesday, July 10, 2012

Britain should not go Swiss

British eurosceptics want to renegotiate the UK’s relationship with the EU. They divide into two camps. There are those who want Britain to stay in the EU, but win opt-outs from social and employment legislation and from justice and home affairs policy. This includes most Conservative government ministers. A second group, which includes many Conservative backbenchers, wants a looser relationship still. This camp seeks a British withdrawal from the EU.

The second group is vaguer about the terms on which the UK would carry on its trade with continental Europe after withdrawal. Some speak of a Norwegian arrangement, which would involve the UK joining the European Economic Area (EEA). Alternatively, the UK could sign a bilateral free trade agreement, under which Britain would be free to regulate its own markets as it sees fit. For most people in this camp, EU membership burdens the UK with too many regulations. If the UK left the EU, British products would still be in high demand, and the UK could carry on trading, but free of the EU’s supposedly constraining rules. And without those rules, the UK could concentrate on chasing growing demand in Brazil, China and the rest. The UK could become Norway or Switzerland – that is, in Europe but not in the EU, and freer and more prosperous as a result.

There are three flaws in this analysis, which arise from confusion about the nature of the single market, a failure to be hard-headed about its costs and benefits, and a lazy assumption that the UK can become Norway or Switzerland.

To take the last point first: Norway and Switzerland have a semi-detached relationship with the EU. But they are more attached than some eurosceptics imagine. As a member of the European Economic Area, Norway (along with Iceland and Liechtenstein) has access to the EU’s single market, and Norwegian citizens have the right to travel and work in the EU. Norway, moreover, has opt-outs from EU policies it does not like – like the EU’s common fisheries policy. But Norway’s special arrangements come at a price: the country must implement the EU’s single market legislation – including the social policies so disliked in Britain – but is excluded from decision-making on the rules. Norway must also contribute to the EU budget for structural funds and regional development.

If Britain withdrew from the EU and joined the EEA, it would be able to opt out of the common agricultural and fisheries policies. This would save a modest amount (around £1.1 billion a year, or 0.07 per cent of GDP) because Britain pays more into these programmes than it gets out. But Westminster would still have to sign all single market legislation into law, including social and employment policies.

What about Switzerland’s arrangements with the EU? Switzerland is not in the EEA, but has negotiated a series of bilateral agreements to get access to some areas of the single market. Switzerland must largely accept EU legislation pertaining to the markets it wants access to.

But is this not precisely the relationship the eurosceptics want? Could the UK, like Switzerland, have its fondue (the ability to sell to the rest of Europe) and eat it (avoiding those Brussels directives it dislikes)? Unfortunately, the answer is no. Switzerland signed up to the EU’s customs union in 1972, which abolished subsidy and tariff barriers. Since then, it has also decided to sign up to the majority of the single market: it is a full member of the single market for goods, a signatory to the Schengen agreement, and it has signed up to most of the single market for capital. In many areas, therefore, Switzerland is effectively a member of the single market. But like Norway, it does not have the ability to affect the rules that govern it.

Swiss firms are asking for further integration, too. Switzerland decided not to sign up to a range of financial services legislation in the 2000s, and was frozen out of some EU markets as a result. Swiss fund managers were prevented from offering asset management across the EU. Swiss banks are now starting to put pressure on the government to sign up to the EU’s post-crash financial rules.

All of which brings us to what the single market is, and why the UK needs it. Among developed countries, the biggest remaining obstacles to trade are non-tariff barriers like different national regulatory regimes. Eliminating tariffs and subsidies will only get you so far: if drugs have not been licensed for sale in another country, they cannot be exported. The single market aims to eliminate non-tariff barriers to trade by establishing common minimum standards, then forcing member-states to open their markets to foreign firms.
Yes, the EU’s approach to this has created some economic costs in the form of regulation (partly to soothe workers’ fears of competition run amok). But it is hard to argue that they are particularly large: under the working time directive, people have the right not to work more than 48 hours, and if they want to work more they are allowed to do so. Meanwhile, the benefits of single market membership are enormous. In principle, British firms have access to a huge market for their products, without 27 different sets of national barriers getting in the way. And foreign firms can enter our markets, forcing domestic companies to improve their performance.

It is difficult to imagine that the rest of the EU would cheerily say goodbye to Britain, but then let it have access to the single market without keeping the rules it has already signed up to, and agreeing to sign future rules into national law. And unlike Norway, the UK is a big and diverse trader. It does not specialise in oil: the UK is a big trader in many services, including telecoms, business consultancy, software and computing, law, financial services, publishing, design and much else. It also exports many high-technology goods, especially pharmaceuticals, chemicals and photographic equipment. Common regulations in each of these sectors allow UK firms to export without adapting their products and services to meet the rules of every country. This is not to suggest that foreign imports are not also good for the UK economy. British firms that cater for domestic markets are challenged by other European firms, forcing them to be more productive and innovative. Therefore, if it left the EU, it would still be in the UK’s interest to sign up to many of the EU’s rules.

In any event, it is almost certain that Britain’s eurosceptics will not get what they want: access to the single market without having to respect the common rules that make it work, or the policing of those rules by the Commission and the Court of Justice. Britain’s partners do accept its opting out of the single currency and some justice and home affairs policy. But they will not let Britain have something for nothing.

John Springford is a research fellow at the Centre for European Reform

1 comment:

Jacqueline said...

A strong point the article makes is certainly that the EU would not tolerate just to say goodbye to Britain and then let it renegotiate access to the single market. It is simply not realistic for the UK to negotiate a relationship similar to that of Switzerland, after having been a member of the EU for nearly 40 years. After all, Switzerland's bilateral relationship with the EU developed over a period of several decades and resulted in as many as 20 main- and 100 side-treaties. One of the reasons why the extremely complicated relationship between the EU and Switzerland works, is that it is an exception. The EU simply could not manage such a relationship with several of its neighbors, and might even regret having accepted it for Switzerland.

It should also not be forgotten that the EU-Swiss relationship has a range of disadvantages. Just to name two:
1. Although Switzerland is in most ways effectively a member of the single market, its decision-making power is more limited than that of the EU and the EFTA states.
2. Every time Switzerland wants access to a new area of the single market, a new treaty has to be negotiated. In the energy sector for example, Switzerland (and the EU) is clearly interested in a new bilateral treaty. Negotiations are however in a stalemate, because underlying institutional questions have not been clarified. Until these have been solved, no further bilateral treaties will be negotiated.

In short, although the Swiss case has some interesting aspects, it is neither desirable to copy it, nor is it in any way realistic.