Opinion

The difficulties of defining EU-UK economic relations

Negotiations on the UK's exit from the EU have not yet begun, but the UK leadership needs to find a balance between single market access and free movement. There are also tensions between the demands of voters and what EU partners can plausibly agree. Guntram Wolff doubts the likelihood of a Norway- or Switzerland-style deals, and urges caution on all sides.

By: and Date: July 19, 2016 Topic: Macroeconomic policy

This op-ed was originally published in El Economista, Manager Magazin, Nikkei Veritas, Nikkei Asian Review, and O Globo.

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UK voters’ decision on June 23 to leave the EU raises profound questions about the future relationship between the UK and Europe. But a Norway- or Switzerland-style deal would not suit the UK. Negotiators will find it hard to define a solution that satisfies both parties.

With the announcement of Theresa May as conservative leader and prime minister, it looks like the UK will seek an agreement that limits the movement of labour. May, who has a tough stance on migration and a softer stance on the single market, has declared that “Brexit means Brexit.” But negotiating a special deal that is materially different to any existing models will be a long and difficult undertaking.

Negotiations on the terms of divorce will dominate European discussions in the coming years. First, negotiators will have to decide about the exit itself. How and when will the UK stop contributing to the EU budget? How will civil servants’ pensions be dealt with?

Then they will have to determine the future economic relationship between the EU and the UK. The European Commission has said it cannot open negotiations on a new trade agreement before the UK has left the EU. And the UK foreign minister has announced that it may take six years to finish Brexit.

Informally, however, backroom negotiations will play a part in decisions on whether the UK will be allowed full access to the single European market.

There are several conceivable models for the future economic relationship. But arguably none of them is satisfactory. If the UK follows the Norwegian model, it would be subject to EU rules but have little influence over them. The UK would have to fully accept all EU regulation, EU competition policy, EU jurisprudence on single-market matters and almost full payment into the EU budget. It would still have to accept the free movement of labor.

This option would indeed be very favourable to British and European business compared to leaving the single market. But it would break promises made during the referendum and it would diminish, not strengthen, the UK’s sovereignty, compared to the UK being a member of the EU.

The Swiss model is equally under pressure. Switzerland also wants to restrict worker mobility, and may in fact become the first “victim” of the Brexit negotiations as the European Commission seeks to make it clear that no country can expect to be in the single market without also accepting the free movement of labor.

So neither of these options would work for the U.K. Many of those who voted for Brexit did so on the assumption that Brexit would reduce immigration from the EU, and that the UK would get rid of the “shackles of EU membership” and not seek access to the EU’s single market. The choice of Theresa May to succeed David Cameron reinforces these priorities.

But the more isolationist the approach taken by the UK, and the more punitive the mood on the continent, the bigger the economic losses will be for both. A cooperative solution would be advantageous. Still, some may fear this would lead to other countries following the UK example and cherry-picking the union they want. Energy would be better spent on showing the benefits of membership.

The conundrum of defining a new deal will last for quite some time.


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