Only sane route for Brexit is taking the Norway option

The number of newspaper comments calling for, or even predicting a revocation of Brexit is close to an all-time peak. The one prediction I am confident to make is that their number will rise as we approach March 30 2019.

I think this is a shame. Pro-Europeans are wasting their energy on a futile tactic. A much more fruitful strategy would be not to try to undo Brexit itself but Theresa May’s Brexit blueprint: the departure from both the single market and the customs union.

It is far from clear, in any case, whether it is possible to revoke Brexit. Even if it was, the EU would attach conditions that would be hard to accept for the UK – such as a permanent end to the British rebate, and a political commitment from the two largest parties not to invoke Brexit until the end of the next parliamentary term.

Blueprint

Revoking the blueprint is no easy exercise either, but not nearly as onerous. If the UK were to ask to join the European Economic Area, otherwise known as the Norway option, the EU would without a doubt accept it – even during the transition period after Brexit.

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The dynamics of events in the next few months might open up such a discussion. I have no doubt that the EU will agree in December that sufficient progress has been made, so that the Brexit discussions can move on to the transition period and trade.

The main issue about the transition will be its length, and whether it can be renewed. Trade talks, by contrast, will be really tough. One of the things that will become apparent early on is that there will be no such thing as a Canada-plus trade deal. The EU’s agreement with Canada covers trade with an investment component. The UK wants that, plus a specific section on services, and a wider co-operation agreement.

Once the reality of a limited trade deal sinks in, we are left with only two logical strategies: either join the EEA, or go for a minimalist agreement

There are legal complexities, as EU officials keep on pointing out. There always are. But the real obstacle to Canada-plus is not legal but political. From the EU’s point of view, the single market is binary and non-divisible. You are either in the whole of it or in none of it. There is no such thing as the Swiss option unless you are Switzerland. I always cringe when I hear UK politicians talk about access to the single market. There is no such thing. You are either a member or not.

Agreement

The EU wants a trade agreement, similar to the one it reached with Canada, Japan and South Korea. And it wants an association agreement that would preserve political co-operation in foreign and security policy, the fight against crime, and maybe nuclear materials.

I can see sectoral transition agreements above and beyond the overall two or three year transition. Nobody has an interest in an immediate collapse in air travel, but at the same time I cannot see UK airlines enjoying preferential access rights to EU airports forever. Nor can I see a deal on financial services, energy or other big-ticket items relating to the single market.

The binary choice is even more stark once you think about the likely political reaction to it. As part of the Article 50 exit deal, the UK will be asked to fork out £20 billionn, £40 billion or more to settle its liabilities to the EU. All the UK will get back in return is a rather lousy trade deal, and one that covers only manufactured goods. What makes it worse is that the EU27 runs a large trade surplus with the UK. No doubt somebody in the UK will make the point that the EU should pay money to the UK for such a deal, not the other way round.

Deal

Once the reality of a limited trade deal sinks in, we are left with only two logical strategies: either join the EEA, or go for a minimalist agreement and focus on making that work.

I am not saying that Mrs May’s plan to leave both the single market and the customs union is necessarily wrong. But for this strategy to be carried out successfully, the UK government would require unity and strategic thinking. These qualities are largely absent.

The problem is not the short-term economic effects. Naturally, the more radical the Brexit, the greater the frictional cost. But this should not be a factor in a decision as fundamental as whether to stay or leave the EU. The trade-off between long-term economic costs and benefits, on the other hand, matters. This will depend on future policies. If the UK manages to extricate itself from the rentier economy model it has pursued while an EU member, and adopt an industrial policy based on innovation and rising productivity growth, that could work. The trouble is, I see no signs of that happening.

There is no sane alternative to joining Norway, Iceland and Liechtenstein in the EEA.

Copyright The Financial Times Limited 2017