The Tories’ poor showing in the general election has revitalised those who favour some form of ‘soft Brexit’. In particular, there is growing support for a Norwegian-style arrangement as a means to retain the UK’s membership of the Single Market – at least during a transitional period. But a closer look reveals many potential dangers.

Stepping back a bit first, there is of course no compelling reason why the outcome of this election has to change the course of Brexit. The Conservatives lost their Commons majority but still won the most votes and the most seats and will continue to govern, albeit with the support of the DUP. Even Labour acknowledged that a meaningful Brexit has to involve greater restrictions on the free movement of people and therefore leaving the Single Market. Altogether, around 85% of votes were cast for parties that backed this element of a so-called ‘hard Brexit’. The Prime Minister may now be a ‘lame duck’, but no-one gained a mandate for an alternative model either.

That said, it would be daft to deny that the election result has strengthened the position of ‘soft’ Brexiteers, including leading Conservative figures such as Ruth Davidson, Philip Hammond and Damian Green, only partly offset by the return of Michael Gove to the cabinet. The fact that the government failed to win a majority may also embolden opponents of any form of Brexit in the House of Lords too. And increased political uncertainty has added to the headwinds facing the economy, increasing the appeal of a more cautious approach.

This is where some think that the Norway option comes in. Norway is not a member of the EU but has negotiated tariff-free access to most of the Single Market (as have other members of the European Free Trade Association [EFTA], namely Iceland, Liechtenstein and Switzerland). However, this requires Norway to accept the free movement of people, take on board most EU laws and regulations, and make sizeable financial contributions to EU programmes – with little or no say on how the EU is run or the money is spent. What’s more, while not directly subject to the control of the European Court of Justice (ECJ) in quite the same way, Norway must submit instead to the EFTA Surveillance Authority and EFTA Court, which follows ECJ case law closely.

There are two other important aspects of the Norwegian model which may or may not appeal. First, Norway remains outside the EU’s Customs Union. This means that there are still customs checks on Norway-EU trade, which is not as frictionless as the UK currently enjoys as a full member of the EU. This is a potential sticking point for the DUP, in particular, given its desire to maintain an open border with the Republic of Ireland, and for sectors such as the car industry which rely heavily on imported components. What’s more, Norway does not benefit from the EU’s free trade agreements with the rest of the world.

Against this, being outside both the EU and the Customs Union means that Norway has the right to negotiate its own independent trade deals. Admittedly, Norway currently has fewer deals with the rest of the world (all in concert with other EFTA members) than does the EU. But global trade is more important to the UK and the UK economy is much larger (six times the size of Norway’s GDP), making it easier to push to the front of the queue.

Second, Norway is excluded from the Single Market in agriculture and fisheries, meaning that its exports in these sectors do face EU tariffs. But it is surely significant that Norway has taken the view that it is still better off outside the constraints of the Common Agricultural Policy (and its equivalent for fisheries). Indeed, it is remarkable how many Remainers assume that the interests of UK farmers (and, at least as importantly, UK consumers) are best served by remaining a member of the CAP. The Norway option would certainly give Michael Give something meaningful to do at Defra.

In summary, the Norway option does have some (limited) appeal. It would retain tariff-free trade with the EU while allowing the UK breathing space to negotiate its own trade deals with the rest of the world – a process which will clearly take some time. It would also mean retaining free movement of people, but this may also be desirable during a transitional period.

However, it is clearly not a permanent solution, given the ongoing requirement to pay into EU budgets and submit to EU laws. In other words, the Norway option amounts to EU taxation, jurisdiction and regulation – all without representation. We can argue about exactly what the British public did vote for, but this is clearly not it.

What’s more, if the aim of the Norway option is to avoid a cliff edge, this is not the only way that this can be achieved. In particular, WTO rules already allow for interim agreements lasting many years. In practice, this means that the UK and EU may be able to continue with current tariff-free trade arrangements without being obliged to offer the same terms to other WTO members, provided this is only a stepping stone towards a formal deal. This bespoke deal could be tailored to the UK’s specific needs and interests in a way that copying Norway’s EFTA membership is not.

Finally, even if the Norway option is initially adopted only as transitional arrangement, there is no guarantee that politicians and bureaucrats (or a future Labour government) would ever get around to replacing it. Indeed, the Norway option is arguably a good example of a ‘bad deal’ where ‘no deal’ would be better. For example, remember that if the UK did want to maintain free movement for a few years after Brexit it could do so unilaterally without a deal.

To be clear, there are no easy solutions here. But the UK shouldn’t swim for the perceived safety of the Norway option without considering all the alternatives first. Above all, we should not be too quick to weaken our bargaining position by ruling out the option of simply walking away before negotiations even begin.

Julian Jessop is Chief Economist at the IEA. He has thirty years of experience as a professional economist in the public and private sectors, including senior positions at HM Treasury, HSBC and Standard Chartered Bank. Prior to joining the IEA in March he was a Director and Chief Global Economist at the leading independent consultancy, Capital Economics. Julian has a First Class degree in economics from Cambridge University and post-graduate qualifications in both economics and law.

1 thought on “Beware the siren voices calling for the ‘Norway option’”

  1. Posted 16/06/2017 at 15:19 | Permalink

    There has been some modeling on the ‘no deal’ option by private sector firms. (Probably EC has done similar work internally). This predicts that the negative economic impact of ‘no-deal’ is 3.5 times greater on the UK than on the EU. In which sense does the ‘threat’ of ‘no-deal’ increase the UK leverage?

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