The European Economic Area opens an opportunity to the United Kingdom

The agreement between the European Union and the United Kingdom on mutual access to the markets after Brexit may be conditional upon the establishment of a fund supporting EU countries similar to the one financed by Norway.

The entrance ticket to the European market would cost the British EUR18.5bn. It is highly unlikely that they would agree to such a hefty price. “The negotiations on the new relationship between the United Kingdom and the European Union will not begin until Brexit has been completed,” says Janusz Lewandowski, a Member of the European Parliament and a former European Commissioner.

Lewandowski believes that this is an unprecedented situation. The European Union has gone through many negotiations concerning association agreements and free trade agreements. They usually involved a gradual elimination of barriers, while the talks between the EU and the UK will involve the introduction of barriers. This is a new situation for the European Union.

To stay with the Union without being in the Union

Brexit could mean the United Kingdom’s withdrawal from the European Economic Area (EEA), of which it is a member like all the other countries of the European Union, though it does not necessarily have to happen.

In 1992, seven member states of the European Free Trade Association (EFTA) – Austria, Finland, Sweden, Switzerland, Norway, Liechtenstein and Iceland – negotiated an agreement on close cooperation with the just being created European Union. The EFTA was established in 1960, with the aim of building a free trade area between its member states.

The United Kingdom also belonged to the EFTA before joining the European Economic Community (EEC) in 1973. The membership of the EFTA declined when subsequent countries joined the EEC or the European Union: Austria, Finland and Sweden. Currently only four countries belong to the EFTA – Norway, Switzerland, Liechtenstein and Iceland. They are all a part of the Schengen area, which does not include the United Kingdom.

The European Economic Area is the European Union plus the EFTA and minus Switzerland. The ten new member states that joined the EU in 2004 automatically became the members of the EEA, as well as Bulgaria and Romania after their accession to the EU in 2007, and Croatia in 2013.

The EEA agreement goes beyond the provisions of traditional free trade agreements, since it extends all the rights and obligations of the EU internal market to the EFTA member states (with the exception of Switzerland). The EEA covers the four freedoms of the internal market – the free movement of goods, persons, services and capital, and the related policy areas: competition, transport, energy and economic and monetary cooperation. The agreement covers, among other things, social policy, consumer protection policy, environmental protection policy, issues concerning statistics, company law, scientific research, and the development of technology.

However, the EEA agreement does not cover a number of other regulations that apply in the European Union, including:

  • the common agricultural policy and the common fisheries policy;
  • the Customs Union;
  • the common commercial policy;
  • the common foreign and security policy;
  • justice and home affairs (even though all the EFTA member states are part of the Schengen area, which does not include the United Kingdom).

There is a body known as the EEA Joint Committee, which consists of the representatives of the EU and the representatives of the three EFTA countries belonging to the EEA. It meets every month and decides which laws in force in the EU will be incorporated into the EEA Agreement. Another EEA body is the EEA Council, made up of the representatives of the EU Council and Foreign Ministers of the three EFTA countries. Council meetings are held at least twice a year and are used to prepare political guidelines for the Joint Committee.

Fee for access to the market

In 1994, the EFTA countries belonging to the EEA established the Norwegian Financial Mechanism and the European Economic Area Financial Mechanism (i.e. the so-called Norway Grants and the EEA Grants). Initially, the countries participating in the creation of the grants included Austria, Finland and Sweden, which left the EFTA and joined the EU in 1995. Today the main sponsor of both funds is Norway, which fully finances the Norway Grants and covers 94 per cent of the EEA Grants, while Iceland contributes 5 per cent, and Liechtenstein just 1 per cent of the funds. In return, the EFTA countries benefit from access to the internal market of the European Union.

The money from these grants are allocated for non-repayable financing of various projects in the less affluent EU countries. Prior to the enlargement of the European Union in 2004 (when among others Poland joined the community), the beneficiaries of the EEA Grants and Norway Grants were Greece, Portugal, Spain, Ireland and Northern Ireland. Currently the EEA Grants are received by the new EU countries as well as Greece and Portugal (Spain received them in 2009-2012), while the Norway Grants are only received by the new EU countries.

The budget perspectives of these grants differ slightly from the EU budget perspectives. The current perspective covers the years 2014-2021 and the total value of the grants will be EUR2.7bn (in the previous perspective it was EUR1.8bn). The biggest beneficiary of both grants is Poland – in 2014-2021 Poland will receive a total of EUR809.3m from these funds. They will be allocated for the improvement of energy efficiency, promotion of innovation in cooperation with Norwegian companies, improvement of environmental monitoring, improvement of access to public health care services, research cooperation between Polish and Norwegian companies, and improvement of the efficiency of the judiciary. The projects financed from the EEA Grants and Norway Grants are negotiated between the donors and beneficiaries.

Reshuffle

It can be assumed that the agreement between the European Union and the United Kingdom on mutual access to the markets of both parties will also be conditional upon the creation of a similar assistance fund – the British Grants – providing non-repayable assistance to less affluent EU countries.

In 2016 the GDP of Norway at current prices amounted to EUR334.9bn, and that of the United Kingdom stood at EUR2,366.9bn. If the United Kingdom were to participate in grants for EU states to an extent similar to that of Norway, then its entry ticket to the European Union’s market would cost EUR18.5bn, which is roughly the same as its current membership fee. The difference is that now the United Kingdom is also receiving funds from the EU budget, which means that its net contribution amounts to about EUR10bn. These are purely hypothetical considerations – it is highly unlikely that the United Kingdom would agree to such a hefty fee for access to the European market.

The case of Switzerland

Another example for the United Kingdom in terms of sorting out its relations with the European Union may be Switzerland. As an EFTA member, this country signed the EEA Agreement on May 2nd, 1992 and only 20 days later, on May 22nd, applied for accession to the EU.

However, in December 1992, in a referendum the Swiss voters opposed the country’s involvement in the EEA and the Swiss Federal Council decided not to pursue accession to the EU and the EEA. Switzerland has retained the status of an observer in the EEA. It is also a part of the Schengen area.

The country has concluded more than 120 bilateral agreements with the European Union, among others, a free trade agreement in 1972, and two large packages of sectoral bilateral agreements. These agreements resulted in the adaptation of Swiss law to EU regulations. The first package signed in 1999 (it entered into force in 2002) consisted of seven agreements. They concerned:

  • the freedom of movement;
  • land and air transport;
  • scientific and technical cooperation;
  • public procurements;
  • trade in agricultural products;
  • mutual recognition of standards and conformity assessments.

The next package signed in 2004 (effective from 2005) concerned closer economic cooperation, issues of asylum and the free movement of persons within the Schengen zone.

One weak point of the Switzerland-EU relationship is the lack of a mechanism for the adaptation of the agreements to the changing EU legislation. Such a mechanism has been provided in the Agreement on the European Economic Area.

Negotiations between the EU and Switzerland on a framework institutional agreement began in 2014. The agreement is supposed to provide a mechanism for the adaptation of the Swiss legislation to the legislative developments in the EU. An institution resolving disputes between Switzerland and the EU is also supposed to be established. The European Union has made the further extension of Switzerland’s access to the common market (e.g. for electricity) conditional upon the conclusion of such a framework agreement.

Negotiations were put on hold for over two years because of the referendum in February 2014, in which Swiss citizens voted by a small majority for the introduction of quotas to limit the settlement of foreigners. The European Union decided that this was in contradiction with the agreement on the freedom of movement. The inflow of foreigners from the EU increased significantly after the conclusion of the 2004 agreement on freedom of movement and residence. An average of 80,000 people migrate each year to this country of 8 million inhabitants. The talks were resumed this year, because in December 2016 the Swiss parliament passed a law allowing EU citizens to settle and work in Switzerland. However, Swiss citizens have employment priority where unemployment is high.

Switzerland, like Norway, is financing projects in countries that joined the European Union in 2004 and afterwards. Its contribution, however, is significantly lower. Since 2008 Swiss taxpayers have paid CHF1.3bn to the new member states of the European Union. Poland received CHF489m for the implementation of 58 projects.

Future relations of the secessionist

If the United Kingdom were to remain in the European Economic Area, it would have to retain a large part of the legislation in force in the European Union, and pay the “entry fee” negotiated with the EU – probably relatively lower than the one paid by Norway (in relation to GDP). In return, it would have full access to the EU market for its goods, services and capital. The free movement of people, which is also a basic principle in the EEA, might be a problem for the United Kingdom. The main reason why the British were in favor of leaving the European Union was the uncontrolled influx of immigrants from the poorer EU countries, mainly from Poland, who automatically became entitled to work in the United Kingdom. The British government may attempt to resolve this issue through a separate agreement, but it would most likely prevent the United Kingdom’s membership in the EEA.

A more likely outcome is a solution similar to the European Union’s relations with Switzerland. The two key issues are the movement of persons and the right to work in the United Kingdom (this is also a contentious issue in the relations between the European Union and Switzerland), as well as the free movement of services, which is especially important to the United Kingdom, given its highly developed financial services market.

If no agreement is negotiated, the relations between the United Kingdom and the EU will be regulated by the general rules applicable in the framework of the World Trade Organization (WTO). Although the customs tariffs on most goods are low, access to the markets is impeded by non-tariff barriers, such as standards and certificates, which enable the sale of certain goods on a given market. This will, of course, work both ways, also by limiting Polish entrepreneurs’ capacity to export to the United Kingdom.

Before its accession to the European Union, the United Kingdom used a different system of measurement than the one used on the continent. The British gradually switched to the continental metric system (the Act of 1995 requires that all measuring tools apply the European system of measurement). If the British were to return to their inches, gallons and pounds, that would be an additional complication in trade relations.

On 29 April during an extraordinary meeting of the European Council, the EU leaders adopted the guidelines setting out the framework for negotiations with the United Kingdom. The European Council emphasized that a country which is not a member of the European Union, which does not fulfil the same obligations as a member state, cannot have the same rights and enjoy the same benefits as member states. At the same time the European Council expressed its satisfaction with the fact that the British government recognized that the four freedoms of the single market (movement of goods, services, capital and persons) are indivisible, i.e. cannot be treated selectively. That is a good starting point for negotiations.