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Brexit Without Tears, Norway-Style

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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"No cherry-picking," German Chancellor Angela Merkel warned the U.K. on Tuesday: As far as the European Union's informal leader is concerned, the renegade shouldn't get any special deal that lets it keep the advantages of being an EU member without the responsibilities. It's premature to assume, though, that the leading advocate for Brexit, Boris Johnson, wants to negotiate anything special. There is a path of least resistance that wouldn't reverse the referendum vote but would essentially neuter the result.

There are a limited number of models for the U.K. to follow once it finds the resolve to start the secession talks. In March, the U.K. government published an analysis of five options: no deal with the EU at all and a relationship based on membership in the World Trade Organization; a Turkey-style customs union; a deal like the EU's free-trade agreement with Canada, still being negotiated; a series of bilateral agreements like those the EU has with Switzerland; and the so-called Norway option -- membership in the European Economic Area but not in the union.

QuickTake Britain and the EU

Most of these options are unacceptable to the U.K, the EU or both. WTO terms are far worse than those the U.K. now enjoys with its main trading partners in Europe. The Turkish customs union limits that nation's ability to do trade deals with other countries and it doesn't cover important areas, such as agriculture. The Canadian deal doesn't give Canadian banks the right to operate in the EU, a disastrous outcome for the City of London. Switzerland has 120 agreements with the EU that are a hassle to administer, and its deal is still incomplete because a 2014 Swiss vote to establish immigration quotas has put the entire package in danger of being rescinded.

Then there's Norway. In its analysis, Prime Minister David Cameron's government highlighted the disadvantages of this kind of arrangement. Norway, along with Iceland and Liechtenstein, is a member of the European Economic Area, but not of the EU's customs union, which means its exports to the EU are subject to customs checks. Norway, Iceland and Liechtenstein cannot take advantage of the EU's 53 trade agreements with third countries. They pay for some common programs with the EU. They don't vote on any EU rules, but they have to follow them to stay in the economic area (crucially, they must allow the free movement of people with the EU -- an issue that may have tipped the balance of the Brexit vote toward "leave").

From a Brexiteer's point of view, however -- and now from the EU's point of view, too -- this style of deal has significant advantages. The first is that the current impasse could be resolved quickly: The EEA agreement is fairly standard. The influential blogger Richard North wrote in his detailed "Flexit" plan

The UK will have to adopt an "off-the-shelf" solution and the best one on offer is the EEA agreement. To prevent it falling apart, the UK will have to "swallow the lot". Should they attempt to open it up, U.K. negotiators could still be sitting at the table five years later – or even longer.

"Swallowing the lot" would mean allowing free movement to the citizens of other EEA members -- but the EEA agreement has something the U.K. didn't have as a EU member: an "emergency brake" allowing it to suspend the the EU's "four freedoms" -- the free movement of people, goods, services and capital -- "if serious economic, societal or environmental difficulties of a sectorial or regional nature liable to persist are arising." Tiny Liechtenstein has used the brake to limit immigration, and Iceland imposed capital controls after the 2008 crisis. Norway could do so, too.

Cameron failed to negotiate this when he obtained concessions from the EU in February. Johnson or a like-minded politician could sign an EEA agreement and declare victory, perhaps even activate the brake to show it can work.

It would also be easy to spin the continued application of many EU regulations as necessary to keep trade benefits. The U.K. would simply pursue its economic interest rather than submit to the "evil Brussels bureaucracy." Mark Stanford of King's College, London, showed how it could be done in a Telegraph column: The Norwegian model

Would fulfill many key Leave demands. Britain would be free of Brussels bureaucracy, and free from the stifling effects of the EU’s Common Fisheries and Agricultural Policies. We would remain a participant in the single market, without any of the trappings of political union. No longer bound by the EU’s VAT treaty, Britain would have the power to choose its own low rate of VAT to stimulate the economy—a power exercised by both Liechtenstein and Switzerland.

And the common programs Norway has financed have been useful -- they include, for example, the Erasmus student exchanges and the Frontex border agency -- and relatively inexpensive: Norway's net contribution to them amounts to about 90 million euros ($99 million) a year.

There are signs that a "Norway-style" deal is brewing. In his column in the Telegraph on Monday, Johnson maintained that the U.K. would keep its trade advantages and that Britons would still be able to work and study in the EU. He has been called delusional for this, but both promises, as well as the possibility of immigration curbs, albeit temporary ones, are consistent with an EEA agreement.

Leave campaigner Daniel Hannan has said the U.K. might have to agree to the free movement of people as a condition of staying in the common market. 

And, last but not least, City financial institutions may employ their formidable lobbying power in support of the Norwegian option because it will allow them to keep operating throughout Europe.

Iceland's President Olafur Ragna Grimsson said the "Norwegian option" for the U.K. appeared to be a foregone conclusion:

Iceland and Norway will now, in a totally new way, become participants in negotiations that must take place between the European Union and the United Kingdom, and the European Union and member states of the European Economic Area with this new triangle of countries in the North Atlantic.

Yet, as part of this northern "triangle," the U.K. would be almost as closely linked to the EU as it is today. It has rarely agreed with the continental powers on anything; it has been the most frequently outvoted country in EU bodies; it opted out of essential parts of the European projects, such as common borders and a common currency. Its power in the EU was an illusion: It was an eternal dissident rather than a decisive force.

The effects of Brexit may have been overstated. In practice, it may end up meaning a switch to a slightly more arm's length model of economic cooperation between the EU and the U.K., not a vengeful, nasty divorce with tragic economic consequences. The EU would be glad of it: Its leaders love fudges and incremental change. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net