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Britain and the EU: are there alternatives to membership?


Britain has been a member of the European Economic Community, and now the European Union, for over 30 years.  In 1975, the question of whether Britain should stay a member was decided by a two-to-one majority in a national referendum, yet the debate about Britain’s membership continues.


For many years “Eurosceptics” argued that they did believe in Britain’s membership of the EU, they just wanted different terms.  When the euro was introduced, Britain decided not to take part, and the financial crisis affecting the eurozone has strengthened that position.  Now, such has been the shift in the political debate in the UK, many are less shy of advocating withdrawal.  They argue that there are perfectly acceptable alternatives to membership that would bring both political and economic benefits to the UK.  This paper examines those alternatives.


The European Free Trade Area & the European Economic Area 

The current members of EFTA are:

Iceland                                        296,737
Liechtenstein                                  33,717
Norway                                    4,593,041
Switzerland                               7,489,370

In population terms, Iceland is smaller than the London Borough of Croydon and Norway and Switzerland are both smaller than Greater London.  Although there are a number of small states in the EU (for example, Cyprus, Estonia, Luxembourg and Malta), none has a population as small as that of Iceland or Liechtenstein.


It is sometimes suggested that Britain should leave the EU and rejoin the European Free Trade Area.  The UK was the initiator of EFTA, was a founder member in 1960 and chose to leave it in 1973 to join the EEC/EU, a decision that was supported at the time by all the main political parties.  The majority of the original EFTA members have now left and also joined the EU.  While EFTA does serve as a free trade area, it has neither the political nor the economic clout of the EU.  Unlike the EU, it is not a single market and it has only a limited capacity for joint action.


When the EU began the creation of the world’s largest Single European Market in the 1980s, the remaining EFTA countries became concerned that they would be left out of the world’s largest single market. As a result, it was decided to establish the European Economic Area from 1 May 1992 (EEA).  Although the EEA was regarded in some quarters as a means of keeping EFTA countries out of the EU, it proved in fact to be a kind of ‘launch-pad’ for Austria, Sweden and Finland who soon joined the EU.  Today, the EFTA states Iceland, Liechtenstein and Norway are members of the EEA together with the 27 EU states.  Switzerland remains in EFTA but has not joined the EEA. Iceland has applied to become a member of the EU; if it does so, it will leave EFTA and join the EU side of the EEA.

The purpose of the EEA is to allow the free movement of goods, services and people between the member countries.  The EEA-EFTA members are consulted about proposed EU Single Market legislation but they cannot participate in the EU’s legislative process. EU legislation relating to the Single Market automatically applies in the EEA-EFTA countries (including decisions of the European Court of Justice).  Certain other EU legislation, for example relating to the environment or consumers, also applies to EEA-EFTA countries.


The EFTA countries have contributed since the establishment of the EEA to the EU’s efforts to reduce economic disparities in Europe.  In practice this has meant the wealthier EFTA countries providing substantial sums to the benefit of EU Member States.  Between 1994 and 2003 Northern Ireland was one of the beneficiaries of this €650 million in EFTA funding and from 2004 the new Member States of the EU in Central and Eastern Europe benefited from a further €672 million of support.  A total of €998.5 million has been allocated by EFTA for the period 2009-14.  Norway and Switzerland make additional payments to poorer EU Member States (see below).



It is important to understand how special a case Norway is.  Norway is the one of the largest exporters of oil and gas in the world, selling over two million barrels of oil a day overseas.  Norway derives so much income from energy that the Norwegian government has established a fund – now valued at $525 billion – to invest the proceeds abroad in order not to distort the Norwegian economy and so as to be prepared for the exhaustion of its energy reserves.  Although oil production has been declining for several years, Norway is still the world’s third largest exporter of crude oil and natural gas production has expanded through the exploitation of new fields.


Approximately 70 per cent of Norway’s exports go to the EU and over 80 per cent of her imports come from those countries.  Over half of Norway’s exports are in the form of energy; EU countries import almost 100 per cent of Norway’s natural gas exports. 


Norway has implemented the EU Single Market legislation and continues to incorporate EU decisions into its domestic law.  This has led to criticism in Norway that the country has become – as its Prime Minister Jens Stoltenberg described it in February 2001 – a “fax democracy”, where Norwegian legislators await their instructions by fax from Brussels.  


Norway pays an annual fee of €199 million to the EU budget and while it benefits from the work of the EU programmes and agencies in which it participates, it is not a general recipient of EU expenditure (such as the CAP or the cohesion funds).  As mentioned above, in addition to its contributions towards reducing economic disparities in the EU through EFTA, Norway has its own substantial grants programme.  This will provide €800 million in funding for new Member States and for Portugal and Spain between 2009 and 2014.


Norway participates in many aspects of the EU’s work – including the Schengen area, the European Defence Agency, the borders agency Frontex and in Europol; it has no voting rights in any of the agencies.  Twice Norwegian governments have concluded that Norway would be better of in the EU and terms of accession have been negotiated but on both occasions a referendum resulted in a negative outcome.


Although the EEA largely excludes agriculture and fisheries, in practice these industries cannot ignore the EU and its rules.  Norway negotiates annually a bilateral fisheries agreement with the EU, not least because many of its traditional fishing grounds are off the coast of EU Member States (such as Britain).  At the time of the establishment of the EEA Norway and Iceland had to agree to partial access to their waters for EU fishing fleets.


As the EEA is not a customs union, goods going to or from EU countries are subject to customs controls, with all the delay and expense that means for importers and exporters.



Switzerland’s position is even more special and even more complex.  When the Swiss government lost a referendum on joining the EEA in 1992 it suspended its application for membership of the EU and has subsequently negotiated bilateral agreements with the EU on areas of common concern; over 30 such treaties have been signed between the two parties, requiring the implementation by Switzerland of much EU legislation.  Switzerland, like Norway and Iceland, participates in the EU’s Schengen Agreement on border controls.  The negotiation of the bilateral agreements has not always been easy.  Switzerland, for example, wanted to benefit from the EU’s internal market in financial services but found that in order to do so it had to abandon some of its traditional banking secrecy before the EU would agree.  Switzerland also provides a high level of subsidy to its farmers - direct payments to farmers are enshrined in Article 104 of the Swiss constitution – which is greater than that provided in the EU.   


Like Norway, Switzerland has a scheme for supporting the EU’s 12 new Member States since 2004.  The programme will provide grants totalling €1.031 billion over the period until 2017 (2019 in the case of Bulgaria and Romania).


The EFTA countries (Switzerland, Norway, Iceland and Lichtenstein) are thus in a curious, half-in, half-out situation; not members of the EU but with much of their domestic law being made by the EU.  These countries contribute to the EU’s budget and have to incorporate as much as 89 per cent of all EU directives into their domestic law whilst having little or no influence in Brussels.  Without Ministers, MEPs and officials to represent them in the decision-making bodies of the EU, the EEA-EFTA states have to run an extensive and by no means always effective lobbying exercise in all 27 Member States as well as in Brussels.  As the Confederation of Norwegian Business and Industry puts it:

“The EEA secures market access legally, but the EU decides the policy and Norway has to implement it without having participated in the policy-making process”.


Although the EFTA-EEA states benefit from being part of the Single Market, their influence in Europe is marginal.  To illustrate this point, Norway’s Prime Minister Jens Stoltenberg has sarcastically described Norway as a “superpower in EFTA” to make the point that the country has little influence in the EU.  It is instructive that Norway was once a world leader in the debate about environmental protection but now finds that it is the EU that makes the running on this as so many other issues.  The Norwegian government has set up an independent enquiry into the political, legal, social and economic consequences of the EEA for Norway, and its report is due by summer 2012.


With the majority of the former EFTA states now in the EU, and others considering joining, for the UK to leave the EU to rejoin EFTA would be a bizarre and retrograde step.  Given that over half our trade is with other EU countries, why would we want to put ourselves in the position of having no control over the regulations governing our largest trading markets?  We would be walking away from our ability to influence EU decisions and placing ourselves on the margins of Europe outside the largest centre of power in Europe, and we would still be asked to make a contribution to the EU budget.  Our influence in the wider world would diminish and our economy would be further threatened by our being outside a powerful trading bloc capable of negotiating with the United States, Japan and China in the World Trade Organisation.


North American Free Trade Area

The North American Free Trade Area (NAFTA) is a free trade organisation established in January 1994 and to which the USA, Mexico and Canada belong.  The NAFTA members intend to eliminate tariff barriers between them over a period of time; agricultural tariffs were phased out by 2008.


The US Government regards NAFTA as a success because trade between the three nations has doubled since 1993.  But NAFTA has been criticised by many in the US agricultural sector who believe that they have lost markets to lower-cost competitors from the other countries.


The idea of the UK joining a north Atlantic trading area has been around for longer than NAFTA itself.  The British Government considered the idea of establishing a free trade area with the US and Canada as an alternative to joining the EEC in the early 1970s.  The idea was rejected then because the US would be the dominant partner in any such body and because successive US Presidents preferred Britain to join the EEC.   


Although Britain (like every EU member) does do substantial trade with the United States, at around 15 per cent of our total trade it is far less than we do with other EU Member States.  It would be economically dangerous to turn our back on our major trading partners in order to concentrate on markets where our position is far weaker.


Although the NAFTA is a market covering 400 million people, it has only three members and each of them shares at least one land border with another member state.  Britain would be an offshore member, thousands of miles from the other members.  In any case, it is not certain that the other NAFTA members would want us to join.


The Commonwealth

The UK is one of 54 countries that belong to the Commonwealth and one of three EU Member States that is also in the Commonwealth (Cyprus and Malta are the others).  The decision to apply for EC membership in 1961 was partly driven by the belief that the Commonwealth could not provide either the economic opportunity that EC membership would offer nor did it have the kind of political influence that the EC was developing.


Has the situation changed 50 years on?  Some critics of the EU suggest that with the world economy shifting towards Asia, it would make sense for the UK to develop a relationship with the Commonwealth as an alternative.  Whilst it is true that the developing world is becoming more significant economically, it remains only a small part of British trade.  The UK does more trade with Ireland than with all the leading developing countries – Brazil, India, China and Russia – combined.  And of course only one of those countries, India, is in the Commonwealth. 


Many Commonwealth countries are small and 94 per cent of population of the Commonwealth is in Africa or Asia; it is unrealistic to imagine that the other Commonwealth countries would have the capacity to trade with the UK at the level on which our economy depends.  The bulk of the UK’s trade is with countries in the EU whose economies have far greater similarity to our own than those of the Commonwealth.  The Commonwealth no longer has any provisions for preferential trade amongst its members.  It is also important to note that the Commonwealth does not participate in trade talks as an entity – unlike the EU, which is able to exercise considerable leverage in trade negotiations because of its size and position.



The global debates of the 21st century are about issues such as energy, climate change, the environment, security and our relationship with the developing world, issues which are larger than any nation state and which require common endeavour to find solutions. The European Union is the most powerful body in Europe and one of the most powerful in the world in dealing with these cross-border issues.  For a country of the UK’s size, population and history, it would be hard for us to leave an organisation to which most other European nations wish to belong and which provides us with a greater share of power and influence in the world than we could hope to have on our own.


October 2011

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