Debate – is it time to ditch the ‘Norway Option’ for good?
3 August 2018
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5 August 2018
The so-called ‘Norway Option’ (a form of Brexit under which the UK would leave the European Customs Union, but remain in the Single Market for the time being) is a bit like Michael Myers, the villain in the horror movie ‘Halloween’: every time you think it has finally been killed off, it pops up again. Like Myers, it just stubbornly refuses to die.
It died for the first time in January 2017, when Theresa May clearly ruled it out in her Lancaster House speech. But it did not remain dead for long.
The Chequers statement was supposed to kill it off for good. But last month, it has been advocated again by a number of relatively prominent commentators (most of them committed Brexiteers), including David Smith, Jeremy Warner, Philip Johnston, Tim Stanley, Nick Timothy, Paul Goodman, James Cartlidge MP, and Rupert Darwall.
The IEA was divided on Brexit before the Referendum, and while we all respect the Referendum result, we remain divided on the type of Brexit we want. We asked two of our staff members, Julian Jessop and Kristian Niemietz, for their take on the Norway Option.
Julian and Kristian are both liberal economists. They do not disagree on fundamental principles, and they do not have fundamentally different visions of what kind of country they want the UK to be. But they differ on whether that vision is best achieved inside or outside of the European Economic Area (EEA).
Should we ditch the EEA model?
Julian Jessop, the IEA’s Chief Economist and Head of the Brexit Unit, says YES
The UK’s departure from the EU is a once-in-a-lifetime opportunity to create a more flexible and dynamic economy and to lead the world again in free trade. Like most investments, it involves costs, many of them upfront, as well as benefits, which may appear less certain and take longer to come through. But the aim should be to maximise the potential upsides while minimising the downsides, rather than viewing the whole thing as a ghastly exercise in damage limitation.
What does that mean in practice? In my view, this vision requires the UK to leave both the Single Market and the Customs Union, and not simply replicate them. This would deliver the most scope to optimise regulations for the needs of our own economy and lower barriers to trade outside the EU. This knocks out the Norway Option (which ties us to the Single Market), and other hybrids such as the Jersey option (which tie us to a customs union and continued regulatory alignment).
It’s also hard to see how these alternative models respect the result of the 2016 referendum. Yes, this only asked whether we should leave the European Union, without specifying the form that the future relationship should take. But Leave campaigners were clear that this was ‘a vote to take control of our borders, laws and money’. If they’d been asked, I’m sure they’d have included ‘trade policy’ too.
Nonetheless, I don’t believe these political arguments are enough. Remainers have a point when they argue that the 2016 vote was very close, and the politics could of course change. I certainly wouldn’t feel comfortable arguing that a large and sustained hit to the economy would be a ‘price worth paying’ for a particular interpretation of sovereignty, or ‘the will of the people’.
It is therefore important for Leave-supporting economists to make the case that our vision of Brexit would also leave people better off. I am happy to do so. Most mainstream analysis – such as the leaked Whitehall briefing I critiqued here – suggests that the net effect will be more negative the further we diverge from the Single Market and the Customs Union. But these studies also have one other thing in common: they consistently overstate the likely costs of additional barriers to trade with the EU, and underestimate the potential benefits.
We should also challenge the calls to maintain ‘frictionless trade’ with the EU. If that were all that mattered, we should also join the euro, which would reduce transactions costs and increase price transparency. In reality, most people now accept that these benefits would be offset by the loss of independence on monetary policy and exchange rate flexibility. Of course, we should listen to businesses (including those led by Leave supporters), but we should also question what they say.
So, what’s the alternative? Labels are important here. I prefer something like ‘Clean Brexit’, rather than ‘Hard Brexit’ which implies something bad. (Indeed, its simply wrong to claim that the IEA, which has no corporate view, backs one form of Brexit over another.) But if there is a consensus among Leave-supporting economists, myself included, its probably in favour of a comprehensive free trade agreement with the EU, with streamlined customs arrangements and some form of mutual recognition covering both goods and services, following a transition period. Until recently this happened to be government policy too.
An immediate exit on WTO terms is the fall back, and perhaps only a temporary one, if the EU won’t play ball. However, it would still be preferable to any option, Norwegian or otherwise, that locks the UK into Brexit in name only.
NO, argues the IEA’s Head of Health and Welfare, Dr Kristian Niemietz
If the IEA had one tenth of the influence that a lot of our opponents think we have, I would probably back a Hard Brexit. If we had a realistic chance of becoming a ‘Singapore-on-Thames’ outside of the Single Market, I would be on board. But the truth is that we do not have anything like that influence. The Zeitgeist is very much against us. Britain is a country where free-market liberalism is an unpopular, and politically unsuccessful fringe opinion.
Post-Brexit Britain will not be governed by people who believe in free markets. It will be governed by people who believe in a very large and a very activist state.
And that’s just the Conservatives.
This is what we need to bear in mind when we compare different Brexit options. You cannot benchmark the EFTA/EEA Option or ‘Norway Option’ – safe, but admittedly not very exciting – against a hypothetical Singapore-on-steroids Hard Brexit. You have to benchmark it against the kind of Hard Brexit that we are likely to get, not the kind that you would like to see.
This is why I cannot share the enthusiasm of some of my colleagues for a Hard Brexit. They talk about the opportunities of deregulation and liberalisation, as if all the domestic political constraints would simply evaporate on 29 March 2019. They seem to believe that the act of leaving the European Union will magically turn Britain into a nation of Hayekians and Friedmanites.
As with most things, there are costs and benefits associated with leaving the Single Market. The problem is that while the costs are dead certain, the benefits are highly speculative. More precisely, the benefits would only materialise if we adopted a really ambitious free-market reform agenda. (Spoiler alert: we won’t.) Let’s talk about the costs. As you’ll remember, before the Referendum, the vast majority of empirical assessments which tried to estimate the medium-term economic impact of Brexit concluded that it would make Britain poorer. This year, the government’s own impact assessment concluded the same thing.
It is important to note that this is not an argument against Brexit per se. These models do not show the cost of leaving the EU as such. What they really show, in the main, is the cost of leaving the Single Market. The cost of leaving the EU, on its own, is trivial. Even the cost of leaving the Customs Union is not huge (as we can see in models which include an EEA Option). The part that really matters is the Single Market.
You could argue that economic modelling is unreliable, and that economic models have been wrong before. But the point is that they don’t usually err so overwhelmingly in one direction.
You could also argue that these models have all been compiled by people who have a vested interest in staying in, or at least close to, the EU. But then, you would sound suspiciously like the people who scream “WHO FUNDS YOU?!?” at IEA authors, without engaging with the arguments.
Or you could argue that the problem is not Brexit, but the fact that our own political class and civil servants do not believe in it. But then, you would sound suspiciously like the ‘Real socialism has never been tried’ crowd: Real Brexit has never been tried.
Alternatively – you could just admit that the overwhelming evidence is against you, that you have been chasing a rainbow, and that a Hard Brexit is just not worth the gamble. The Norway Option does not have to be a permanent arrangement. But for now, it is the safest, quickest and easiest way out.
It died for the first time in January 2017, when Theresa May clearly ruled it out in her Lancaster House speech. But it did not remain dead for long.
The Chequers statement was supposed to kill it off for good. But last month, it has been advocated again by a number of relatively prominent commentators (most of them committed Brexiteers), including David Smith, Jeremy Warner, Philip Johnston, Tim Stanley, Nick Timothy, Paul Goodman, James Cartlidge MP, and Rupert Darwall.
The IEA was divided on Brexit before the Referendum, and while we all respect the Referendum result, we remain divided on the type of Brexit we want. We asked two of our staff members, Julian Jessop and Kristian Niemietz, for their take on the Norway Option.
Julian and Kristian are both liberal economists. They do not disagree on fundamental principles, and they do not have fundamentally different visions of what kind of country they want the UK to be. But they differ on whether that vision is best achieved inside or outside of the European Economic Area (EEA).
Should we ditch the EEA model?
Julian Jessop, the IEA’s Chief Economist and Head of the Brexit Unit, says YES
The UK’s departure from the EU is a once-in-a-lifetime opportunity to create a more flexible and dynamic economy and to lead the world again in free trade. Like most investments, it involves costs, many of them upfront, as well as benefits, which may appear less certain and take longer to come through. But the aim should be to maximise the potential upsides while minimising the downsides, rather than viewing the whole thing as a ghastly exercise in damage limitation.
What does that mean in practice? In my view, this vision requires the UK to leave both the Single Market and the Customs Union, and not simply replicate them. This would deliver the most scope to optimise regulations for the needs of our own economy and lower barriers to trade outside the EU. This knocks out the Norway Option (which ties us to the Single Market), and other hybrids such as the Jersey option (which tie us to a customs union and continued regulatory alignment).
It’s also hard to see how these alternative models respect the result of the 2016 referendum. Yes, this only asked whether we should leave the European Union, without specifying the form that the future relationship should take. But Leave campaigners were clear that this was ‘a vote to take control of our borders, laws and money’. If they’d been asked, I’m sure they’d have included ‘trade policy’ too.
Nonetheless, I don’t believe these political arguments are enough. Remainers have a point when they argue that the 2016 vote was very close, and the politics could of course change. I certainly wouldn’t feel comfortable arguing that a large and sustained hit to the economy would be a ‘price worth paying’ for a particular interpretation of sovereignty, or ‘the will of the people’.
It is therefore important for Leave-supporting economists to make the case that our vision of Brexit would also leave people better off. I am happy to do so. Most mainstream analysis – such as the leaked Whitehall briefing I critiqued here – suggests that the net effect will be more negative the further we diverge from the Single Market and the Customs Union. But these studies also have one other thing in common: they consistently overstate the likely costs of additional barriers to trade with the EU, and underestimate the potential benefits.
We should also challenge the calls to maintain ‘frictionless trade’ with the EU. If that were all that mattered, we should also join the euro, which would reduce transactions costs and increase price transparency. In reality, most people now accept that these benefits would be offset by the loss of independence on monetary policy and exchange rate flexibility. Of course, we should listen to businesses (including those led by Leave supporters), but we should also question what they say.
So, what’s the alternative? Labels are important here. I prefer something like ‘Clean Brexit’, rather than ‘Hard Brexit’ which implies something bad. (Indeed, its simply wrong to claim that the IEA, which has no corporate view, backs one form of Brexit over another.) But if there is a consensus among Leave-supporting economists, myself included, its probably in favour of a comprehensive free trade agreement with the EU, with streamlined customs arrangements and some form of mutual recognition covering both goods and services, following a transition period. Until recently this happened to be government policy too.
An immediate exit on WTO terms is the fall back, and perhaps only a temporary one, if the EU won’t play ball. However, it would still be preferable to any option, Norwegian or otherwise, that locks the UK into Brexit in name only.
NO, argues the IEA’s Head of Health and Welfare, Dr Kristian Niemietz
If the IEA had one tenth of the influence that a lot of our opponents think we have, I would probably back a Hard Brexit. If we had a realistic chance of becoming a ‘Singapore-on-Thames’ outside of the Single Market, I would be on board. But the truth is that we do not have anything like that influence. The Zeitgeist is very much against us. Britain is a country where free-market liberalism is an unpopular, and politically unsuccessful fringe opinion.
Post-Brexit Britain will not be governed by people who believe in free markets. It will be governed by people who believe in a very large and a very activist state.
And that’s just the Conservatives.
This is what we need to bear in mind when we compare different Brexit options. You cannot benchmark the EFTA/EEA Option or ‘Norway Option’ – safe, but admittedly not very exciting – against a hypothetical Singapore-on-steroids Hard Brexit. You have to benchmark it against the kind of Hard Brexit that we are likely to get, not the kind that you would like to see.
This is why I cannot share the enthusiasm of some of my colleagues for a Hard Brexit. They talk about the opportunities of deregulation and liberalisation, as if all the domestic political constraints would simply evaporate on 29 March 2019. They seem to believe that the act of leaving the European Union will magically turn Britain into a nation of Hayekians and Friedmanites.
As with most things, there are costs and benefits associated with leaving the Single Market. The problem is that while the costs are dead certain, the benefits are highly speculative. More precisely, the benefits would only materialise if we adopted a really ambitious free-market reform agenda. (Spoiler alert: we won’t.) Let’s talk about the costs. As you’ll remember, before the Referendum, the vast majority of empirical assessments which tried to estimate the medium-term economic impact of Brexit concluded that it would make Britain poorer. This year, the government’s own impact assessment concluded the same thing.
It is important to note that this is not an argument against Brexit per se. These models do not show the cost of leaving the EU as such. What they really show, in the main, is the cost of leaving the Single Market. The cost of leaving the EU, on its own, is trivial. Even the cost of leaving the Customs Union is not huge (as we can see in models which include an EEA Option). The part that really matters is the Single Market.
You could argue that economic modelling is unreliable, and that economic models have been wrong before. But the point is that they don’t usually err so overwhelmingly in one direction.
You could also argue that these models have all been compiled by people who have a vested interest in staying in, or at least close to, the EU. But then, you would sound suspiciously like the people who scream “WHO FUNDS YOU?!?” at IEA authors, without engaging with the arguments.
Or you could argue that the problem is not Brexit, but the fact that our own political class and civil servants do not believe in it. But then, you would sound suspiciously like the ‘Real socialism has never been tried’ crowd: Real Brexit has never been tried.
Alternatively – you could just admit that the overwhelming evidence is against you, that you have been chasing a rainbow, and that a Hard Brexit is just not worth the gamble. The Norway Option does not have to be a permanent arrangement. But for now, it is the safest, quickest and easiest way out.
3 thoughts on “Debate – is it time to ditch the ‘Norway Option’ for good?”
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Is smell a rat in this mock debate. Mr Jessop argues his case so poorly and even contradicts himself in his first sentence. If an opportunity can present itself more than once, then how can it only present itself only once in a lifetime?
I wonder if the Greenpeace fake expose has resulted in the IEA having to pretend that they have seriously differing views on Brexit just to back up the defence against accusations of Brexit bias that they have mounted. I also note that neither commentator has mentioned the biggest item in the EU budget, and the number one feature of the Customs Union, which leads into the biggest opportunity of Brexit which is to amend or even abolish farm subsidies, and perhaps replace them with a devolved system of environmental subsidies. Based purely on this pretendy debate, the IEA is in the pay of Big Farm Owners, and they are part of a neoliberal plot to hide their true loyalties.
Kristian is absolutely right. In fact, one of the reasons I voted Remain in spite of my longstanding contempt for the EU was my conviction that there was no political support for the Singapore-on-Thames model which is, as Kristian argues, the obvious way to thrive in a post-Brexit world (and the threat of which is the only way to get a good deal out of the EU). As he says, the Zeitgeist is against free trade on both sides of the Atlantic, especially given the election of Trump and the other populists, which was unforeseen at the time of the referendum.
Incidentally, Jessop’s comparison with the Eurozone is wrong – joining it would save few if any transaction costs. The argument that dealing with a floating exchange rate represents a cost is largely spurious. Hedging is free. By contrast, there is no way of avoiding the costs of dealing with nontariff barriers, regulatory regimes etc etc
In what lunatic world can Brexit possibly be described as an investment?
Economically, every form of Brexit on any time horizon leads to higher trade friction (thus cost), not only with the EU but its other trade partners as well. True, gravity weighted, our 2 highest ranking potential partners are the USA and Russia/EEU. The EU does not have FTA’s with these but the chances of the UK negotiating a better or earlier agreement with either of these is too small to be worth discussion. The G20 covers 85% of world GDP. The EU has most of the big ones covered already either in place, Turkey, Japan, South Korea, Canada or in discussion such as Australia. India is difficult for a reason. It will take us decades to settle with the G20 as the UK alone.
EEA+EFTA gives us some free trade beyond Europe and need not be a permanent resting place. It also better reflects the result than various Brexits proposd by Ward 8. There may even be wiggle room to incorporate non EU treaties administered by the ECJ, as a form of arbitration, such as Euratom or ESA.