[...] Staying in the single market, perhaps along the lines of Norway in the European Economic Area (EEA), is unlikely. The EU would insist on free movement of labour – a price that a majority of Conservative and Labour MPs would not want to pay. Nor would other aspects of the EEA – making substantial payments to the EU budget, accepting (indirectly) the adjudication of the European Court of Justice and adopting all EU single market rules without having a vote on them – appeal to many MPs. British politicians keep imagining that the EU is about to drop its insistence on free movement as the price for membership of the single market, but there is scant evidence for this. Others argue that Articles 112, 113 and 114 of the EEA agreement enable its members to restrict free movement. In practice that is untrue: Norway has never wanted to use these clauses since the EU would then have the right to retaliate by restricting trade. So unless the British public abandons its hostility to unrestricted EU migration, there is little chance of Parliament voting to stay in the single market.
But that is a question for the long term. A softer Brexit will mean a serious transitional phase, to cover the years that will elapse between when the UK leaves the EU and when its future free trade agreement (FTA) takes effect. Before the election, May was reluctant to commit to a transition, believing (bizarrely) that the FTA could be negotiated in less than two years; she merely agreed to an ‘implementation phase’, while the provisions of the FTA were being phased in. But the Treasury, spurred on by business leaders, is now pushing hard for a proper transition, and it is winning the argument.
The transition will probably look rather like the EEA (but would not be the EEA, since for the UK to remain in the EEA once it had left the EU, it would have to accede to the EFTA treaty). The Treasury hopes that the 27 will tweak the transitional arrangements to make them a bit more palatable to the British than the EEA. In particular, might the EU grant the UK an emergency brake that really could be used against a sudden influx of EU migrants?
As for the longer-term relationship, a softer Brexit could mean some combination of four things. One would be to introduce only modest curbs on free movement. The controls will probably be softer than those initially envisaged by May and her recently-sacked chief adviser, Nick Timothy. This is because many leading Leavers – including David Davis, Foreign Secretary Boris Johnson and International Trade Secretary Liam Fox – advocate only limited restrictions on migration. Access to EU labour is probably the number one concern of businesses in the UK; the Treasury, representing their views, may well win much of the argument.
The second characteristic of a softer Brexit would be staying in some EU regulatory agencies – certainly in the transition, and possibly in the long term. The Confederation of British Industry has identified 34 key agencies covering agriculture, energy, transport and communications. Britain will have to either stay in these or create new bodies. The European Aviation Safety Agency, for example, authorises British aircraft to fly. The European Medicines Agency advises the European Commission on which drugs should be licensed for sale across the EU. Euratom regulates the trade of nuclear materials. The European Securities and Markets Authority oversees the regulation of securities markets – and so on. Setting up new agencies, or expanding existing national ones would be expensive and time-consuming. Does it really make sense for the UK to build up its Civil Aviation Authority into a full aviation safety agency, when EASA works perfectly well? Yet if it wishes to stay in EU agencies it will have to submit itself to the jurisdiction of the European Court of Justice, as do, for example, the non-EU members of EASA.
Indeed, the third characteristic of a softer Brexit would be a less dogmatic rejection of any role for the ECJ. If May continues to make this an indelible red line, she will severely limit the scope of the agreements that cover the future relationship. Thus if (as its airlines hope) the UK wants to stay in the single market for aviation, it will have to accept ECJ rulings, as do Norway and Iceland. The same dilemma applies to many other areas, like financial services, electricity, data flows and security co-operation.
The EFTA court, which polices single market rules in the non-EU members of the EEA, could offer a possible way forward. If a new court to adjudicate on disputes between the UK and the EU were modelled on the EFTA court, it would include British judges, broadly respect the rulings of the ECJ and have the freedom to develop its own jurisprudence where the Luxembourg court had not ruled or not ruled recently. The EU’s governments and institutions could live with that kind of compromise – if the UK could swallow it.
The fourth and most controversial aspect of a softer Brexit would involve a customs union between the UK and the EU. Britain will have to leave the customs union of the EU, but could, like Turkey, create a customs union with the EU’s customs union. That would mean maintaining the common external tariff and accepting any changes made to it by the EU. Goods would then move easily across frontiers, as today, without the need for checks to see that tariffs had been paid, rules of origin respected or customs forms filled in. This would be hugely beneficial to firms that use just-in-time systems, notably those making cars and aircraft, and many retailers; to small businesses that have grown used to exporting to the EU without any paperwork; and to farmers who need to move food across frontiers speedily.
Britain should continue to benefit from the 50-odd FTAs that the EU has negotiated with other countries (though concerning the EU’s future FTAs, the UK would have to ask for special arrangements so that it was included; given the size of the UK economy, both the EU and the third country concerned would probably want to include the British). One major dividend of an EU-UK customs union would be to obviate the need to re-establish a hard border between Northern Ireland and the Republic of Ireland; without a customs union, it is hard to see how border controls of some sort can be avoided.
If Britain opted for a customs union, it would have to sign mutual recognition agreements with the EU, in order to avoid border checks for compliance with EU standards. But an FTA between the EU and the UK would in any case require Britain to agree to EU standards. An EU-UK customs union would have to have a dispute settlement mechanism, but this need not involve the ECJ (to all intents and purposes, the ECJ plays no role in the EU-Turkey customs union).
The main disadvantage of a customs union with the EU would be that Britain could not negotiate new FTAs covering goods with other countries (since customs unions do not cover services, Fox would be free to negotiate services agreements with other countries). Many eurosceptics, including Johnson and Fox, have honed a narrative about ‘global Britain’, in which FTAs with ‘Anglosphere’ and BRICS countries dynamise the British economy as it breaks free from the shackles of the moribund eurozone.
Though retaining a customs union with the EU would madden the Tory right, there is a strong macroeconomic case for doing so. According to the Treasury’s unpublished analysis, the economic benefits of future FTAs would be significantly less than the economic cost of leaving the customs union.
Furthermore, as the Treasury points out, the costs of leaving the customs union are immediate, while the benefits, via future FTAs, would not become visible for many years. That is why the transitional arrangements will almost certainly include a link to the EU’s customs union. As Hammond said in his recent Mansion House speech: “We’ll almost certainly need an implementation period, outside the customs union itself, but with current border arrangements remaining in place, until new long-term arrangements are up and running”. He has not yet risked war with the eurosceptics by stating in public that linking to the customs union is a long-term option, but in private he is reported to be in favour. [...]
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